Its Time to Make Power Grid Systems and Market Operations Independent, (Part I)

by David Celestra Tan

an original blog post

I don’t know if I learned much from my economics professor but one of the few things I remember is him asking “what is the most important part of the pushcart?”. The wheels, the frame, or the push bar? This is much like the ongoing debate on what has gone wrong with our power system? The generators, the distributors, the regulators, the WESM market, the negotiated prices?

As in the pushcart, the most important part is the PLAN that dictates how all the pieces will work together.

In the power sector, behind the visible players are four (4) rule makers of which only two are being commonly discussed. The DOE, for its supposed power development, planning, and strategy function and the ERC for its regulatory function that gives price signals to all sectors.

Two other rule makers that underpin many of the workings of the power sector are subterranean but very profound in their impact not only on the efficiency of the system but also the consequent costs to the consumers.  Those are the Systems Operator (SO) and the Market Operator (MO).

The Market Operator (MO)

It makes the rules on how the Wholesale Electricity Spot Market will work and the trading and consumer safeguard rules. This is currently being performed by the Philippine Electricity Market Corp. which although headed by a DOE appointee as President is actually dominated by the “stakeholders” who are composed of the power generators as inserted in the Epira Law of 2001 specially during the critical times in its inception when the trading rules were being established.  Nonetheless, the Epira law provided that this is temporary and an Independent Market Operator must have been appointed long time ago.

For all the things being said about new Energy Secretary Carlos Jericho Petilla as a politician and as a newbie in the power sector,  compared to his last three predecessors, he  is at least thinking outside the box looking for solutions and making do with what he has at the DOE and PEMC Bureaucracy. It is refreshing that he is at least pushing for the appointment of an Independent Market Operator (IMO) so that the trading rules of WESM can be balanced for the consumers and not be dictated totally by the “stakeholders” who benefit from the rules.  (where did that P62 per kwh market cap come from?) It is only through the appointment of an IMO that the WESM rules can be made reasonable. It is currently so stacked against the electricity consumers.

The Systems Operator (SO)

According to the WESM website,” In simple terms, the MO is responsible for coordinating all the commercial aspects of WESM transactions while the SO takes care of the physical implementation of these market transactions”. The roles of the MO and SO in scheduling and dispatching power are defined in Chapter 8 of the Philippine Grid Code.

If the IMO is being at least discussed, the appointment of an Independent Systems Operator (ISO) is not  commonly brought up.  The Systems Operator dictates how the grid will function including the rules of grid connection.  That is currently performed by the concessionaire National Grid Corp. of the Philippines, which is dominated and managed by State Grid Corp, of China.

The economic and efficient dispatching of power supply to the national grid needs to be operated by a truly independent system operator to assure the fair and competitive access and the transmission of power in the most cost effective manner. Allowing the transmission services provider to also act as the system operator, who makes the access and competition rules and establishes metering points as revenue-gates, creates a conflict of interest that lead to profit-motivated systems decisions that cause higher charges to consumers.

NGCP has been observed by generators and distribution utilities to be making rules that appear to be motivated by a desire to retain and expand service coverage and hence revenue for the transmission company NGCP.

The independent systems operator is supposed to implement rules of connection for generators and distributors in ways that will be economically and technically efficient. The Epira Law also mandates that it must provide access to all users and promote competition in the power marketplace.

NGCP however has been overreaching its transmission service coverage using its authority as systems operator.  It must concentrate on expanding and upgrading the HV transmission system to efficiently and economically transmit major power sources to the load centers.  The congestions in the transmission systems have been causing  a significant increase in charges to the consumers referred to as “line rental charges” which is apparently a term used by PEMC to refer to line congestion and transmission systems losses.

A lot of conflict has been on the ownership of sub-transmission lines of 69kv in most areas and 115kv in the Meralco area and the connection lines of the embedded generators.   NGCP has also been at loggerheads with power generators in its attempt to extend the boundaries of its service ownership up to the power substations of the power generators.

Part of the problem is the method of setting and approval of the Transmission Development Plan which , like its cousin Power Development Plan prepared by the DOE,  is a hodge-podge of projects driven purely by the private sector with little locational strategy.

As an example, NGCP has been applying to build a 230kv submarine transmission system to connect Mindoro Island to Luzon at a cost of P12 billion that the Luzon consumers will pay for starting from the planning stage.  It was based on a dubious claim that Luzon consumers will benefit from a 300MW coal power plant that can be built on Mindoro island when the the nearest coal reserve is 18 kilometers away in another island of Semirara. Luzon consumers can source that 300mw from the  generators in Luzon island itself without paying for a P12 billion transmission system.

Actually under the Epira Law that provided under Section 21 the privatization of Transco, it clearly defined the role of the buyer/concessionaire (NGCP) to “be responsible for the improvement, expansion, operation, and/or maintenance of its transmission assets and the operation of any related business.”

The responsibilities of the National Transmission Company (Transco) as defined under Section 9 clearly includes that of being theSystems Operator, a function that is not authorized to be included for transfer to the private concessionaire as specifically defined by Section 21 on Transco Privatization.

How NGCP, as managed by the State Grid of China, was allowed to arrogate unto itself the right to be the Systems Operator is perplexing.   NGCP, who as facilities investor and operator of the transmission grid, has a right to a fair return on its investment. However, for it to be the rule making body for grid connections as System Operator, is to give them the right to print money by making rules not for power transmission efficiency and market competition but to optimize its revenues, a prescription for unnecessary increases in pass-on charges to consumers.  This is probably the business model that the SM Group bought into.

State Grid of China obviously has the technical and operational skills and financial muscle to do a good job as a concessionaire. And it is the Filipinos who put them in the position to be both systems operator and transmission services provider.  Chinas power grid is a monopoly and the State Grid of China’s operating mind set is that of a monopoly and not for opening the transmission system for the promotion of open market competition.  NGCP is not a fit for Systems Operator if the Philippines is to be successful in creating a truly competitive generation market.

So why is that a problem for consumers?

NGCP makes its money as a return on the value of its assets used in the service of transmission of power. The more extensive its assets and system coverage the more assets it will have and hence the more revenues it will be allowed. It is determined by the ERC as the Maximum Allowed Revenue.  It is computed based on the value of its installed assets and because of Performance Based Rate making (PBR), also on their projected or promised investments.  As in Meralco, they do not have to make the investment as long as theoretically they deliver the “performance” that is prescribed for them.  PBR allows for regulated distribution utilities and the transmission company to make a profit even on investment that they only promised and have not yet incurred.

There is a need to insure that NGCP’s proposed projects are really based on what a competitive national grid requires and not just for expansion.  The ERC is supposed to have a Grid Management Committee that will oversee the activities of NGCP.

Anti-distributed generation and embedded generation

The Department of Energy, the Energy Regulatory Commission, and the Joint Congressional Power Committee may not be realizing that NGCP’s interpretation of the Grid Code and its role and discretion acting as the System Operator is resulting to increased centralization of power and anti-distributed generation and embedded generation, denying electric users and small distribution utilities the opportunities to save the P0.90 per kwh transmission charge for the consumers and the attendant 3% energy transmission losses.

Embedded generation is the production of power within the territory of the user or distributor and feeding power directly to their distribution system as opposed to generating power from large power plants from long distances that had to pass through high voltage transmission lines. This is an essential part of creating a reliable power system in an archipelagic country like the Philippines and unequivocally encouraged by the  Epira Law and the Philippine Grid Code.

Obviously if these embedded generators do not pass through the transmission system, NGCP does not generate revenue from that power.  NGCP, as the systems operator, makes the required grid-impact studies for power projects.  They however are observed to be foot-dragging and restrictive when it comes to embedded generators and owners of connection lines apparently to protect their revenue interest.

Embedded generation and distributed generation in increasing capacities and wider adoption is a technological wave of the future especially for the Philippines that has so many islands.

One way to assure that is to make sure the Systems Operator who implements the rules of transmission competition is truly independent with pure focus on technical and economic efficiency for the consumers.

Ancillary Services

NGCP as the system operator has been negotiating ASPA’s or ancillary services purchase agreements and passing on the cost to the consumers. These are supposed to provide reserve and voltage regulating services that may be needed by the national grid to make it reliable and stable.  Supposedly they have signed about 400mw of such ASPA’s but in the system debacle of November and December 2013 in the Meralco area, the reserve power services that the consumers have been paying seems unaccounted for. Were they instead traded in the Wholesale Electricity Spot Market (WESM) at P33 per kwh?

Did NGCP demand the delivery of those reserve power when they were needed? This aspect has not been explained.

Awakening Transco

To assure that the national grid operates better and configured for technical and economic efficiency for the consumers, the appointment of a truly independent system operator is long overdue. As a minimum the governments own Transco can be the Systems Operator, independent from NGCP.  It must do the Transmission Development Plan . To professionalize, it must be provided with the ability to hire, train, and retain good talent. More importantly it must be infused with a deep public service soul.

There is a need to review the Philippine Grid Code to clarify many grey areas to make sure none is misinterpreted for their profit-interest.   It should not be forgotten that the Philippine Grid Code and many of the rules approved by the ERC were actually written by the old National Power Corp. whose mindset was similarly monopolistic.  We need to update the rules according to the new paradigm of open market competition.

Quality of transmission facilities

Transco must be asked to assert itself as the asset owner to set standards on the equipment and facilities that are being installed and charged to the consumers.  It is in a better position to assure that the performance standards required by the Philippine Grid Code is complied with by the concessionaire.

Our power pushcart needs to work better so that Electricity consumers can receive the proper services that they pay for. The Plan and Rules from independent systems operator and WESM market operator is an imperative.

Part II – A Need for an Energy and Power Planning Commission with enforcement power.       


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