Philippines: The Proposed Wholesale Electricity Spot Market in Mindanao

Philippines: The Proposed Wholesale Electricity Spot Market in Mindanao

The EPIRA of 2001 states in Section 30: "Within one year from the
effectivity of this Act, the DOE shall establish a wholesale electricity
spot market composed of the wholesale electricity spot market participants."
And in Section 37, defining the powers and functions of the Department of
Energy, the EPIRA mandates the DOE to "establish the wholesale electricity
spot market and formulate the detailed rules governing the operations
thereof".

Noticeable in these statements, and in all references to the WESM in the
EPIRA and in its Implementing Rules and Regulations, is that the EPIRA
envisions only one wholesale electricity spot market for the Philippines.

There was no idea of establishing WESMs in various places in the country.
Thus, the mandate given to the DOE by the EPIRA is the establishment of only
one WESM, and, consequent to this, it is the mandate of the DOE to EXTEND
the WESM to Mindanao, or to INTEGRATE Mindanao into the WESM, when the
conditions are favorable for doing so.

It is not the mandate of the DOE to establish an isolated WESM in Mindanao,
or in Palawan, or in Batanes or in Siquijor, or in any other island big or
small that is not connected to the Luzon-Visayas grid, which hosts the one
and only WESM in the Philippines.

Before taking any action to extend the WESM to Mindanao the DOE will have to
find out whether the conditions exist that would make it economically
feasible for the WESM to be extended to Mindanao.

A necessary condition for the extension of the WESM into an isolated
electric power system is for that power system to be physically connected to
the Luzon-Visayas grid through an interconnection with adequate capacity to
enable the transport of the expected amount of electric power.

In the case of Mindanao, a Visayas-Mindanao interconnection with a capacity
of at least 400 MW must be constructed before Mindanao could be integrated
into the WESM. Because the VisMin interconnection does not yet exist, it is
absurd on the part of the DOE to consider any proposal to extend the WESM to
Mindanao, purportedly to fulfill its mandate under the EPIRA.

But maybe the present officials of the DOE believe that they are responsible
for the establishment of isolated WESMs in any of the islands of the
Philippines, regardless of the intentions of the EPIRA.

Or maybe they have decided to amend the EPIRA in order to give DOE the
mandate to establish isolated WESMs in all islands where a WESM would be
economically beneficial to the populace.

Or maybe they want to empower each state under a federal system of
government to establish autonomous WESMs, even in the absence of electrical
interconnection with any of the other regions. In any such scenario, the
question still has to be answered whether the conditions exist that would
make it beneficial for the citizens of the island or the state to establish
an autonomous WESM.

Isolated WESM in Mindanao: Anti-Consumer and Pro-Oligarch

Would it be economically beneficial for the people of Mindanao to establish
an isolated WESM? No. An isolated WESM in Mindanao under the present
conditions of the electric power industry would only result in the transfer
of money from power consumers to the owners of the generating companies,
while at the same time increasing the rates that would be paid by consumers,
without any compensating benefit to the consumers in terms of electric
services that would be better than that available without a WESM.

The rates for electricity will have to be increased to pay for the costs of
establishing an isolated WESM.

Around five billion pesos will be needed to establish a WESM in Mindanao
with functional capability equivalent to the existing Philippine WESM. And
it would cost around one billion pesos annually to operate the WESM.

The initial capital investments and the annual operating costs would
translate to an increase in the rate for power consumers in Mindanao in the
amount of around twenty centavos per kilowatt-hour. This is peanuts in
comparison with the Mt. Apo geothermal power plant getting an illegal
approval from the Energy Regulatory Commission to increase the rates by more
than two pesos per kilowatt-hour. But it would be almost impossible on the
part of the electric cooperatives to get an increase of more than ten
centavos per kilowatt-hour for their distribution rates. So the increase in
rates due to the establishment of a WESM in Mindanao is significant.

The increase in rates due to the WESM could be compensated for by a
reduction in the prices of power supply from the generating companies,
resulting from the competitive regime established by the WESM.

In Mindanao, however, there are only five significant bulk power suppliers:
the Aboitiz Group, the Alcantara Group the Ayala Group, the FDC group of the
Gotianun family, and San Miguel.

It is easy for such a small group of power corporations to collude and
dictate the price of electricity in the WESM. The price of intermediate and
peaking power supply in Mindanao would rise to at least twenty pesos per kWh
(the price of generation from modular diesel generating plants) with the
operation of a WESM in which all energy would be priced at the highest bid
accepted by the WESM.

Thus, there could be no economic justification for the establishment of an
isolated WESM in Mindanao. And one could conclude that the DOE, the PEMC,
and the Mindanao Development Authority are endorsing the establishment of
the WESM only because they have been prevailed upon to do so by the
oligarchic generating companies, which are the only players in the electric
power industry that would benefit from an isolated WESM in Mindanao.

Recommendation for the Philippine Electricity Market Corporation

The Mindanao Coalition of Power Consumers has recommendations for better
things that the PEMC and the DOE could do for the electric power industry in
the Philippines instead of wasting their time and resources in the
establishment of a WESM in Mindanao that would be harmful to power consumers
and the general public.

The PEMC should work on restoring the confidence in the WESM that the
players in the electric power industry had in the years immediately
following the establishment WESM in June 2006.

The WESM is a distinctively valuable institution for a developing country
like the Philippines, and it should be valued and supported by EPI players
and power consumers. But the weaknesses of the WESM were exposed in the
aftermath of the price spikes in the LuzVi grid in December 2013, and the
WESM has now reached a low point in public acceptability.

It seems that no one in the power industry cares anymore for the WESM, and
the gencos are just using it to make money, while the distribution utility
companies are just trying to avoid paying the price spikes in the WESM that
result during inevitable periods of power shortages.

For a start, the PEMC should carry out the economically beneficial
recommendations that were made in the reports titled "Wholesale Electricity
Spot Market (WESM) Design Study", dated November 2013, by the Intelligent
Energy Systems and the SW Advisory of Australia.

The most significant recommendation in the reports is for the PEMC to
replace the existing Market Management System with a new MMS costing around
two billion pesos. (Use your money on this new MMS, instead of wasting it on
the ill-conceived WESM in Mindanao.)

This would result in economic benefits with a net present value of more than
ten billion pesos in seven years. That would redound to reductions in the
rates paid by power consumers and increases in the profits of generating
companies from the operation of the WESM.

Recommendation for the DOE

The Department of Energy should work on the establishment of an Independent
Market Operator (IMO) for the Philippine WESM. The EPIRA states: "Not later
than one year after the implementation of the wholesale electricity spot
market, an independent entity shall be formed and the functions, assets and
liabilities of the market operator shall be transferred to such entity with
the joint endorsement of the DOE and the electric power industry
participants." The establishment of an IMO for the WESM is part of the
mandate of the DOE, according to the EPIRA.

It is now more than ten years after the establishment of the WESM, and the
market operator is still the Philippine Electricity Market Corporation,
which is a GOCC.

While the PEMC did a good in its management and operation of the WESM in
the early years of the WESM, it has done a bad job in recent years, and the
WESM has reached the lowest point of acceptability to the players in the
electric power industry and to power consumers.

Perhaps more important is that the prospective investors in the electric
power industry no longer consider the WESM significant in making investment
decisions. Trust in the market is essential to the efficient operation of
any market, and the WESM no longer has that trust under the present
management. The establishment of an Independent Market Operator by the DOE
will help the WESM regain the trust and confidence that it has lost.

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Link to Original Article:
http://www.kagay-an.com/proposed-wholesale-electricity-spot-market-mindanaop
art-2/

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John Diecker
APT Consulting Group Co., Ltd.

www.aptthailand.com