MANILA/TOKYO -- Philippine conglomerate Ayala plans to exit coal-fired power generation by the end of the decade, becoming the first major power company in Southeast Asia to quit the fossil fuel.
The move by Ayala's energy unit reflects a broader shift in the region toward renewable energy, whose cost is now on par with that of fossil-fuel power generation. The trend will be a blow to Japanese plant exporters that relied on the region, including Mitsubishi Heavy Industries.
Mitsubishi Heavy, which makes large power turbines, made about 60% of its annual consolidated operating profit from its power systems segment in fiscal 2019. About half of the segment sales comes from coal-fired generation, and Southeast Asia is a key market.
As Southeast Asia reduces its dependence on coal, Japanese exporters of fossil-fuel plants, too, will have to adapt to the trend, such as by offering technologies that greatly reduce carbon footprint.
Fernando Zobel de Ayala, the tycoon atop the Ayala empire, made the case for a exit from coal in a late-April speech for the shareholders meeting of AC Energy Philippines, where he is chairman.
"The company is committed to provide reliable, affordable and sustainable energy," he said. "We're making a commitment to transition to lower-carbon portfolio by rebalancing our generation portfolio to grow our renewable energy assets."
Coal makes up 55% of AC Energy's power generation mix. The plan is to shift to solar and other renewable sources.
AC Energy has already taken action. In May 2019, it sold off partial stakes in two coal plants in the island of Luzon to a business partner in a roughly $570 million deal. One plant was still under construction.
That July, AC Energy announced the divestment of its entire interest in a coal plant on the island of Mindanao.
One coal plant owned by AC Energy can be repurposed for other fuel. The company acquired a 20% stake owned by a partner. The plant could be converted into a facility that runs on biomass or other renewable resources.
"We are all highly committed to work towards our aspiration of becoming the leading renewables company in the country," AC Energy President John Francia said in a message to the shareholders meeting.
Ayala, whose core business is in real estate, is a latecomer to power generation. Since entering in 2010, it has built up a business profile nearly 30% the size of the combined portfolios of three rival conglomerates: San Miguel, Lopez and Aboitiz.
But its generating capacity came to no more than 1.2 million kilowatts at the end of March, putting Ayala in an easier position than rivals to go coal-free.
Ayala put forth a groupwide sustainability policy in 2012 that has been reflected in operations ever since. The group's components-manufacturing arm expanded its business in Europe in recent years. The global trend toward environmental, social and governance reforms also pushed Ayala toward quitting coal.
"Power generation is still small in scale within Ayala's diversified business portfolio, but it receives a high degree of attention from investors," said Minoru Isaji, president of consultancy WCL Solutions (Phil), who is well-versed in the Philippine stock market.
Coal accounts for nearly 40% of the Philippines' power generation mix. Although the government has pledged to reduce dependence on fossil fuels, the country has no choice but to turn to coal to meet energy demand.
While the U.S. and the European Union have decreased their coal use each year, the Philippines and the rest of Southeast Asia only increased their dependence. Ayala will take a head start on the government to reduce its carbon footprint.
Ayala's rivals are shifting toward renewable energy as well, even if they will not completely divest of carbon. In Indonesia, a major producer of coal, state utility PLN revealed last October plans to build no new coal-fired plant from 2028, according to local media.
In the first half of 2019, the addition of solar power capacity throughout Southeast Asia exceeded approvals for coal-fired capacity for the first time, according to the International Energy Agency.
Driving this trend is the lower costs to generate renewable energy. The price of solar panels has dropped amid a price war between Chinese manufacturers and other players that stepped up production.
In the Philippines, it costs 6.5 cents to generate 1 kilowatt-hour of solar power, according to the Renewable Energy Institute, which bases its finding on data from BloombergNEF. The rate is on par with the 6.4 cents for coal-fired energy.
That global financial groups have grown reluctant to invest in companies involved with coal has contributed to the shift toward renewables.
There are some hurdles facing the mass rollout of renewable energy projects. Power generation often depends on the weather, so grids will need sophisticated technology for adjusting electricity supply.
It remains an open question whether renewables will fully satisfy the sharply growing demand for energy. The IEA estimates Southeast Asia's power demand will double to more than 2,000 terawatt-hours over the next 20 years. The pace of growth is double that of other regions.