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Asian Electric Competition Custom Tailored For Success

Taking the anti-FERC approach to the grid.

Fortnightly Magazine - August 2007

these reforms is to facilitate competitive, efficient, and transparent trading of electricity between generators and wholesale consumers, with the objective of promoting competition in electricity production and supply, and of attracting private investment in the sector. An equally important goal is to give consumers a choice of picking their provider of electricity. The resulting economic price signals from the spot market would assist generators, customers, and network-service providers in their investment decisions.

Prior to deregulation, National Power Corp. (NPC) was the local electric monopoly for generation, wholesale transmission, and sub-transmission networks in the Philippines. The prerequisites for prying open this market included: 1) the unbundling of rates to disaggregate the charges related to transmission, distribution, and supply; 2) the removal of cross-subsidies that existed on the transmission grid and between industrial and residential retail tariff rate classes; and 3) the privatization of at least 70 percent of NPC’s generation capacity in the largest islands of Luzon and Visayas.

Market Design: One Size Doesn’t Fit All

The first phase of Philippine electric competition focused on the bulk-power system, with the launch of the wholesale electricity spot market, also called WESM, in June 2006. The market design has some very interesting elements, all of which are contributing collectively to the stability and success of the market.

WESM employs a bid-based market structure that closely resembles the Singapore wholesale electricity market (which went into operation in 2003). It is a mandatory gross pool forcing all qualified market participants to trade through the pool-trading mechanism. However, for purposes of managing risk, market participants are permitted to enter into bilateral contracts for up to 90 percent of their installed generating capacity.

Given the unique topology of the transmission grids, the electricity prices are calculated nodally. This means market prices vary depending on the location in the network and the transmission congestion that exists at specific “pinch points” on the grid. To ensure that no electricity consumer is price discriminated based on location, the loads pay a load-weighted average price, while the generators are selected and dispatched (scheduled to operate) based on the merits of their bids and are paid the nodal price (locational marginal price) at their location. To minimize power interruptions, and to ensure adequate generation reserves are available to all load areas, a parallel regulation and reserves market is scheduled to be operated and co-optimized with the energy market.

Evolving Out of Its Inefficiencies

So what are some of the market issues that could set back the clock in WESM and require close monitoring?

The Electric Power Industry Reform Act (EPIRA) mandated that at least 70 percent of total capacity of the NPC’s generation assets in Luzon and Visayas be privatized prior to the “open-access” implementation. The target date for the sale of assets originally was proposed for the end of 2005, or when WESM commenced. To date, less than an estimated 10 percent of the sales target has been achieved.

Even if the NPC generation assets are unbundled and plants allocated to a number of portfolios participating independently in WESM, the common-parent ownership is