First Gen Integrated Report 2023 - The External Environment

The External Environment

This section discusses significant factors affecting the external environment, including aspects of the legal, commercial, social, environmental, and political context that affect the organization’s ability to create value in the short, medium, or long term. They can affect the organization directly or indirectly (e.g., by influencing the availability, quality, and affordability of capital that the organization uses or affects).

Transition to Renewable Energy and Threats to Energy Security

As greenhouse gas emissions produced by the energy industry continue to increase, the push towards decarbonized energy has become a more urgent concern for energy providers and stakeholders. The Philippines’ transition to mostly renewable energy (RE) as highlighted in the Philippine Energy Plan (PEP) 2020-2040 is being encouraged by the government through various initiatives, which present opportunities for RE developers such as First Gen ¹. Through these programs, the country aims to grow its supply of gas and renewable energy sources, which are critical to enabling our clean energy transition in a more secure manner.

Aside from this, the volatility of macroeconomic and geopolitical conditions that we have experience recently also highlights the need to ensure energy security as reported in various sources ². Furthermore, the increase in power demand fueled by economic growth emphasizes the need to build reliable power supply, especially considering the intermittent nature of RE sources. As such, the country constantly needs to continue diversifying its power sources, as well as balance the increasing RE dependence with energy security. The introduction of LNG into the Philippines in 2023 was a critical milestone that helped ensure more consistent natural gas supply in the wake of the declining Malampaya Gas Field ³, allowing us to continue supporting our growing renewable energy ambitions.

Implications for First Gen:

First Gen’ s growth strategy, focused on gas and renewables, underlines the Company’s continued commitment to balance meeting growing energy demands with our responsibility to move towards eco-friendly energy solutions. This ambition is in line with the Philippine Energy Plan’s outlook of a significant increase in gas and renewables between now and 2030⁴

In line with this, our growth will be driven by an increasing proportion of RE, complemented by natural gas, which is currently the best possible option for a transitory energy source to support increasing RE generation. As such, First Gen’ s now-operational Batangas LNG terminal supports the Malampaya pipeline with stable supply, enabling the country’s secure transition to a cleaner energy future.

Social Environment

Corporate social responsibility (CSR), sustainability initiatives, and ESG, have all become prominent concerns for businesses and their stakeholders, with many companies addressing these concerns through accountability systems like integrated reports. Reporting standards are also changing, with the SEC integrating the International Financial Reporting Standards (IFRS) into its Sustainability Reporting (SR) Guidelines. All these support a more prominent focus on sustainability and good business practices.

Moreover, customers are also showing an increased preference for more responsible goods and services, including clean energy solutions as reported by International Energy Agency (IEA) and other sources ⁵. Buoyed by an increased awareness of the climate change risks associated with coal-derived sources, the power sector is at the forefront of this transition in awareness. Energy providers must now be transparent about the full impact of their operations on the environment and assure their stakeholders that the generated supply does not tax the surrounding natural resources.

Outside climate change, there is an increased awareness on the impact of businesses and industry to the environment, society, and other various stakeholders - creating urgency for companies to become more responsible corporate citizens.

As a country at risk of being drastically affected by the worsening effects of the climate emergency, the Philippines must grow in a direction where it can still meet the demands of its citizens while also moving towards an eco-friendly future.

Implications for First Gen:

First Gen reinforces our purpose of creating symbiotic, mutually beneficial relationships with nature and society that benefit more than just our shareholders. We believe that businesses today must urgently become a regenerative force that elevates everything that they touch—customers, employees, suppliers, contractors, the environment, communities, and investors.

We are aware that, as we grow and evolve as a company, our impact on the climate, environment, and communities will also grow. Guided by the Pentad framework, which serves to harmonize needs of different stakeholders and the environment, First Gen continues to focus on developing total stakeholder value, particularly on improving our impact on the environments and people we work with.

First Gen will continue to build strong partnerships with local communities, our stakeholders, and shareholders in pursuit of a harmonious relationship with nature while still meeting the demands of our customers.

Environmental and Planetary Context

The United Nations Climate Change Conference (COP 28) upholds that the rapid decarbonization of energy systems is key to lowering emissions and that clean energy sources are the best way of achieving this goal. However, this transition towards clean energy should also keep the energy security of customers in mind.

The Philippines currently has an INFORM Risk Index rank of 29 out of 194, marking it as highly vulnerable to the effects of climate change despite not ranking highly in overall emissions. This translates to high risks to the country’s different commercial and industrial sectors, necessitating a reliable energy supply as a cornerstone of climate change mitigation and response.

Implications for First Gen:

As an energy provider, First Gen is keenly aware of our responsibilities to meet customer demand while still adhering to the push towards RE sources. Understanding that the Philippines and, by extension, First Gen’s material assets and facilities are uniquely vulnerable to the effects of climate change is key to crafting the ideal response to meet these responsibilities.

First Gen is committed to our chosen path, in which we will lead the transition to a decarbonized energy system in line with the UN IPCC target of limiting global warming to 1.5°C. Our efforts focus on building our platform of renewable and low-carbon energy assets and complementing them with flexible generation and storage technologies. This commitment to clean energy (among our other efforts to also mitigate our emissions and overall environmental impact) will remain paramount as we aim to grow and expand our operations.

First Gen also supports our own internal response to these climate risks by improving our disaster resilience and preparedness programs and providing our employees with the needed knowledge and training on how to respond to climate threats.

Political and Regulatory Environment

The political landscape of the Philippines has increasingly shifted its attention to a push for RE solutions, with a clear emphasis on giving customers the capability to choose more environmentally conscious energy providers ⁷. A good example of this is the PEP, which outlines the national goal of 35% RE power generation by 2030 and 40% by 2040⁶ . There are several ongoing programs to support this goal, including:

Green Energy Auction Program (GEAP): currently finished Round 2 in 2023 and set installation targets for 2024–2026 with a total of 11,600 MW
Green Energy Option Program (GEOP)
Ongoing update for the PEP 2050

Regulatory driving forces also push the industry toward a more retail-centric market. Part of this is the Retail Competition and Open Access (RCOA), which is now in Phase 3 and has increased the number of end-users by 3,227 as of July 2023. This will create more choices for consumers, evolving the Philippine energy market into a more customer-centric and fragmented customer base.

The current administration continues to express support for the clean energy transition, including support for additional gas development (e.g., via Malampaya exploration) and renewable progress.

Implications for First Gen:

First Gen’ s plan for growth is in line with this landscape, as our growth corresponds with the PEP’ s ambition of a cleaner energy mix. Moreover, the Company keenly participates in the markets that are available, as we aim to deliver value to the evolving Philippine energy consumer base.

Technological Advancements

2023 saw the resurgence of investments in climate technology and clean energy, including hydrogen and Carbon Capture, Utilization, and Storage (CCUS) solutions ⁸ . The rapid development and adoption of these technologies are key to achieving a net-zero future. These advancements represent a global shift towards more environmentally-friendly technologies to meet the aforementioned customer demand and address growing concerns about climate change.

Implications for First Gen:

First Gen is constantly monitoring the progress of these technologies and the possibility of adopting them to help achieve our growth and decarbonization goals as well as reduce the carbon footprint of our assets.

COVID-19 Pandemic Recovery and Hybrid Work Set-ups

As the Philippines continues to move towards a new normal beyond the COVID-19 pandemic, businesses are increasingly implementing Return-To-Office (RTO) and hybrid work setups. This translated to elevated Wholesale Electricity Spot Market (WESM) prices in 2023 and even outage incidents earlier in the year due to the supply ’ s inability to keep up with the surge in demand as reported in local media throughout the year⁹.

Implications for First Gen:

Despite these changes and surges in demand, First Gen was able to maintain reliable operations while also continuing with our own health and safety protocols. Our internal operations also implemented a flexible work-from-home (WFH) setup to help our employees better manage their time and workloads, in addition to supporting their mental health. Moving forward, our additional investment in RE solutions can help sustain the growing energy demands of our customers as their work schedules normalize.

As an energy provider, First Gen remains committed to helping the Philippines move towards sustainable and regenerative energy via its investments in RE solutions. With the joint operation of our zero-carbon plants and our newest natural gas facilities, we recognize and uphold the role the Company plays in steering the country’s energy sector toward a future that can support the energy needs of the nation.

Source: ¹Department of Energy, Philippine Energy Plan 2020-2040 (updated 2023) ²World Bank, Commodity Markets Outlook, April 2022 ³ABS-CBN News, Malampaya gas deposit pressure going down: Prime exec, August 2023 ⁴Department of Energy, Philippine Energy Plan 2020-2040 (updated 2023) ⁵World Bank, Atlas of Sustainable Development Goals 2023 ⁶6Department of Energy, Philippine Energy Plan 2020-2040 (updated 2023) ⁷Philippine News Agency, Marcos administration prioritizes cheap, renewable energy, January 2023 ⁸PWC, State of Climate Tech 2023 ⁹Inquirer, Red alert raised in Luzon grid – NGCP, May 2023