Wholesale Electricity Spot Market ready to open
Friday, January 20, 2006
Manila Bulletin
RP power industry moves on to ‘uncharted territory’ (First of Three Parts)
Leading a way to policy reforms sometimes entail charting a course into a territory that one hasn’t been before.
Oftentimes, it’s difficult assuming the task of being a harbinger of change; but evading such responsibility is simply cowardice especially if these are bound to bring in long-run public benefits. Case in point for the country’s power industry is putting up the Wholesale Electricity Spot Market or WESM.
The entire industry perceives that this experiment with WESM, tough and bizarre as it may appear, is sure to catch national spotlight — if not now, soon enough. Yet despite declaration of readiness for its commercial operation (targetted within this first quarter), this electricity spot trading scheme remains an arcane concept to most electricity consumers.
There are two operative aims worth noting in the WESM — that trading involves "wholesale"; and since it is a "spot" market, buying-and-selling of electricity (it being a commodity that cannot be stored) has to operate in a realtime environment.
As patently as the entity’s name suggests, the targetted array of market buyers would just initially be the big-ticket end-users such as distribution utilities, directly connected customers and industries, among others. It is clear from policy prescriptions that it is not yet for individual electricity consumers – like you and me – at least not until the entry of the supply aggregators (also called as retailers in some overseas markets) that are out to consolidate electricity demand of contiguous areas (like buildings or villages) and trade for their supply via the spot market.
Legal ground
The broad strokes of policy reforms spawned by the Electric Power Industry Reform Act ("EPIRA") of 2001, spelled out among its centerpiece the establishment of a competitive electricity spot market. The law ushers in significant changes for the domestic power industry from the traditional utility monopoly that consumers have gotten used to for decades.
Section 30 of the law states that: "Within one year from the effectivity of this Act, the DOE (Department of Energy) shall establish a wholesale electricity spot market composed of WESM participants…"
Based on the crafted market design, the spot market’s operations will have to be governed by the WESM Rules; complemented by the Grid and Distribution Codes and all other protocols and manuals geared toward ensuring safe and efficient operation of the power system.
At the same time, it is envisaged to help bring in reliable and sustainable power supply to customers.The power pool’s day-to-day operations will be run and supervised by the Philippine Electricity Market Corporation (PEMC), taking entitlement as the Market Operator (MO); and it is duly supervised by a PEM Board chaired by the Energy Secretary and underpinned by market participants.
First bite of "customer choice"
WESM affirms that it would not be long from now before it can take the forefront of finally affording electricity consumers that initial bite of "customer choice" — a goal deemed too elusive as the industry brazenly walks through four years of implementing the preliminary phases of the wide-ranging policy reforms enunciated under EPIRA.
Taking that crossroad, WESM is unequivocal with its policy objectives. Firstly, it aims at providing incentives for the cost-efficient dispatch of power plants through an economic merit order; second is to create reliable price signals to assist participants in weighing investment options and decisions; and third: to promote a fair and level playing field for suppliers and buyers of electricity, wherein prices are driven by market forces.
The WESM has been envisioned as a mandatory gross pool, with provisions on contracts for differences (CfDs) and bilaterals. Its market design takes the pattern of a two-way bidding – getting tenders from sellers/generators for supply and allowing voluntary bids from buyers for purposes of managing the demand-side, which is also seen essential for load forecasting purposes in the market.
The power industry reform law correspondingly mandates distribution utilities (DUs) to source part of their power supply from the WESM; with the significant 90-percent chunk of their requirement still to be tied into bilateral or supply contracts.
Price offers and volume commitments are set ex ante (prior to trading) and settlements will have to be done with ex post (the actual result of the trading) market to reconcile the imbalances experienced at a particular trading period; which is typically set at every one-hour interval. Bids are to be submitted through the WESM’s Market Management System, a web interface directly linked to market participants. Adjustments in bid price and committed volumes are warranted before gate closure, which is four hours before dispatch.
PEMC market operations head Mario P. Pangilinan explained that the market clearing price will be determined based on the bid of the marginal plant (the facility that plugs the demand gap at specified trading interval). Dispatch of participant-generation plants are anchored on merit order as laid down under the "Dispatch Protocol" mutually agreed to by PEMC (MO) and the System Operator of the National Transmission Corporation; which takes responsibility over dispatch of the traded capacity.
Settlements
Market settlements, on the other hand, will be carried out daily, but the calculation of trading amounts will be done every hour, according to Mr. Eduardo B. Buhain, head of the WESM’s billing and settlement department; adding that while market participants will be billed daily, "we still follow a 30-day invoice or billing cycle".
Before any interested party can become a WESM trader, they are required to register with PEMC and that comes with a market registration fee of P180,000 (charged on an annual basis) to cover costs relating to the installation of the web-based trading device, orientation and training, help desk facility and publications.
A prudential guarantee (to serve as security deposit) is also required to be put up with Standard Chartered-Banco de Oro; which bagged PEMC’s contract to provide the necessary system for billing and settlement of traded electricity in the spot market; including electronic fund transfer (EFT) activity. The amount required shall cover 85 percent of what the participant wants to trade in the power pool. Payments can be posted in the form of cash, standby letter of credit or surety bond.
The pricing scheme drawn for the spot market is being built on the price determination methodology (PDM) which will factor in cost components from the bid price of the marginal plant, reserve capacity, transaction fees and ancillary services, among others.
At least in the initial stage, PEMC made pronouncements that it can take on the supply-demand imbalances and that is seen to account for about 10 percent and at times may even reach up to 20 percent of system peak demand (hovering up to more than 6,500 MW for the Luzon grid); or those that are not covered by bilateral contracts.
Saved for the remaining rulings needed to be rendered by the Energy Regulatory Commission (ERC), such as those on price determination methodology, market fees and proposed administered price in case of market suspension and the final go-signal to be given by the Department of Energy, PEMC president Lasse A. Holopainen vouched that the WESM system is all set for commercial operation.
While stealthily holding on to hopes that the WESM would in the end leave up to the expectation of the market and the consumers, those working hard to finally steer its operation are appealing that they be given that most important chance to prove that it could thrive as a fully-functioning electricity market that will bring in welfare gains for the Filipinos.
posted by philpower @ 7:38 AM,
