WESM doing wonders for power sector

By Lenie Lectura – August 2, 2017

from Business Mirror

ELEVEN years since it was launched in Luzon and seven years after in the Visayas, the Wholesale Electricity Spot Market (WESM) has promoted competition and transparency—and has continued to multiply investors—in the power sector.

WESM stakeholders Philippine Electricity Market Corp. (PEMC), National Grid Corp. of the Philippines (NGCP), the Department of Energy (DOE), Energy Regulatory Commission (ERC), power-generation companies (gencos), distribution utilities (DUs) and directly connected customers agree on this.

The Manila Electric Co. (Meralco), which partly sources its power requirements from the spot market, sees WESM as an enabler of a competitive and transparent market. “WESM rates mirror actual market conditions and generally reflects the market. Information from the market is also useful in terms of policy-making, and assists participants in terms of research and planning, and also analyzes current state of the market,” the country’s largest power-distribution firm said in an e-mail.

WESM is a venue for trading electricity as a commodity. It was created by virtue of Section 30 of Republic Act   9136, otherwise known as the Electric Power Industry Reform Act (Epira) of 2001. Similar to the stock market, WESM is where the power generators sell their excess capacities not covered by contracts, and where the customers buy additional capacities on top of their contracts.

The WESM commenced commercial operations in the Luzon grid on June 26, 2006. Four years into the commercial operations in Luzon, the Visayas grid was integrated into the WESM and commenced commercial operations on December 26, 2010. At present, the WESM in Mindanao is under trial.

Meralco Assistant Vice President Joe Zaldarriaga said that apart from promoting ascountability, it also demonstrates transparency, as the rate culled from the WESM serves
as indications of relevant power costs. “The effectiveness of [the] WESM demonstrates and proves that allowing the market to operate freely ultimately benefits electricity consumers,” he said in an interview.

For consumer group Laban Konsyumer Inc. the WESM is helpful for both the consumers and the industry players. “Overall, yes, it is benefiting them. The spot-market technical regulations are transparent, and plants are able to tender competitieve prices, whether off-peak or peak hours,” said the group’s president Vic Dimaguiba, a former trade undersecretary, in a text message.

The challenge, however, is to transform the WESM as the sole and exclusive marketplace of electricity, he added. “Thus, there is a necessity to change the law to expand the WESM universe,” Dimaguiba pointed out.

How the WESM works

Power generators submit online hourly energy offers through the Market Management System (MMS). The offers must include the volume of energy capacity and its price (for example, 100 megawatts [MW] for P10 per MW).

These offers are submitted by accessing the Market Participant Interface of the MMS through the generator’s computers installed with digital certificates.

The PEMC, which acts as the Market Operator that administers the operation of the WESM, matches the offers of generators with the demand of customers through the MMS. The bids are automatically ranked from the lowest price to the highest,  until the required amount of power is met.

The last offer to fit into the power requirement becomes the market-clearing price. All accepted offers for that hour, regardless of initial quotations, would be paid at clearing-price level. Since the WESM is a 24/7 market, the trading cycle simply repeats every hour, and pricing tends to differ each time.

Prices of electricity traded in the WESM are determined based on the ERC-approved Price Determination Methodology. The rates are driven by market forces, inlcuding demand conditions.

From the initial WESM membership of six  participants in June 2006, wholesale-market participation now stands at 280, or a fiftyfold increase in market membership.

For Aboitiz Power Corp., the WESM “is extremely valuable”.

“It offers a venue for all parties to trade shortages and excesses. It is a very good indicator of supply and demand. It is also a clear indicator of price that can be traded,” company President Antonio Moraza said in a text message.

AC Energy Holdings, Inc. President John Eric Francia, commented that the WESM “is serving its purpose very well”, particularly in periods of oversupply. “The fact that we have reserves shows that the market is working. Despite outages in the Malampaya gas facility, earthquakes, [the] shutdown of Sual plant…it goes to show that we’re a maturing market,” he said in a text message.

Lowest WESM price

WESM prices plummeted to six-year lows in January, as more customers sourced power from the spot market.

According to the PEMC, the effective settlement spot prices (ESSPs) plunged to P1.90 per kilowatt-hour (kwh) for the January billing period, the lowest since January 2011. ESSPs refer to the average prices paid by wholesale customers for energy purchased from the spot market.

The resulting prices resulted in customer confidence, thereby augmenting their supply sourced from the WESM, where wholesale customers sourced 23 percent of their electricity requirements for the January 2017 billing period.

The PEMC said this was the highest percentage that customers sourced from the WESM since December 2006. “We believe this shows competitive pricing being given by [the] WESM,” PEMC Corporate Planning Division Manager Isidro Cacho said.

Over the past three years, WESM prices have been steadily declining —from P5.58 per kwh in 2014, P4.46 per kwh in 2015 and P3.33 per kwh in 2016, PEMC data showed. The decline in prices was due to the notable market reforms and developments that ushered in transparency and competition in the electric-power industry.

“The WESM has been an aid to the economic growth of the country and developments in the electric-power industry. More than the competition, supply augmentation, investment simulation and advancements that the WESM has contributed in nation-building, the WESM boasts years of integrity through transparency,” said PEMC President Melinda Ocampo.

Price cap

The PEMC assures that there won’t be a repeat of the 2013 record-high WESM price because mitigating measures have been put in place to prevent abnormal price spikes.

“There is a threshold that will prevent higher WESM prices,” Ocampo said.

The WESM’s primary offer cap was lowered to P32 per kWh, from P62 per kWh, in a bid to prevent excessive price spikes. It can be recalled that WESM prices soared by P4.16 per kWh in December 2013 as a result of the Malampaya natural gas field shutdown.  Besides the primary cap, a secondary cap was implemented to further protect consumers from excessive price spikes triggered by supply tightening.

Called the price-threshold mechanism, the P6.245 per kWh secondary cap kicks in once an average threshold of P9 per kWh is reached over a 168-hour period. “Actually, the price caps were made permanent, but there is a colatilla that there will be a continuing review. There is a provision that there will be a review, so depending on the situation, they will study it,” Ocampo said.

The ERC is currently evaluating if there is a need to adjust the price ceiling on power traded at the spot market. This, after the DOE raised the possibility of further lowering the secondary price cap. “We are reviewing how to lower the secondary price cap in the WESM with ERC,” said Energy Undersecretary Felix William B. Fuentebella.

The price cap is the highest offer that sellers could give when they sell their electricity to the market.

When sought for comment, ERC Spokesman, lawyer Rexie Digal said there is an ongoing review on the price cap, including the primary cap set at P32 per kWh.

“Given that the present offer price cap and secondary price cap were determined based on 2014 data, the commission is already in the process of reviewing these levels using the most recent available input parameters and update them if necessary,” Digal said in a text message.

To be continued