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Module 8 - WESM Rules

The document discusses how electricity prices in the Philippines are affected by the Wholesale Electricity Spot Market (WESM). It provides details on two instances where supply issues led to price spikes in WESM: 1) In June 2012, high demand and low supply caused prices to spike to over P46/kWh, prompting warnings of rotating blackouts. This followed a similar situation in 2010. 2) An upcoming 8-day maintenance shutdown of the Malampaya Natural Gas Facility in July is expected to further tighten supply and increase electricity prices paid by consumers. Ensuring adequate and diverse power supply through additional generation sources is needed to stabilize prices in the long run.

Uploaded by

Pao Castillon
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© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
168 views

Module 8 - WESM Rules

The document discusses how electricity prices in the Philippines are affected by the Wholesale Electricity Spot Market (WESM). It provides details on two instances where supply issues led to price spikes in WESM: 1) In June 2012, high demand and low supply caused prices to spike to over P46/kWh, prompting warnings of rotating blackouts. This followed a similar situation in 2010. 2) An upcoming 8-day maintenance shutdown of the Malampaya Natural Gas Facility in July is expected to further tighten supply and increase electricity prices paid by consumers. Ensuring adequate and diverse power supply through additional generation sources is needed to stabilize prices in the long run.

Uploaded by

Pao Castillon
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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WESM RULES Week 6

EE LAWS, CODES AND ETHICS


The Philippine Power Industry
The New Industry Structure

 Establishment
of WESM

 Privatization of NPC

 Unbundling of electricity rates for


transparency

 Establishment of an Independent
Transmission Company

 Open Access of distribution network and retail


competition
The Philippine Power Industry
The Philippine Power Industry
Demand Distribution
No. of Distribution Utilities Wholesale Customers
Per Region (% based on Peak Demand)
Mindanao
Elec.
30 Luzon Coops
(25.4%) 54 28%
(45.8%)
34 61% Meralco
(28.8%) Private 11%
DUs
Visayas
End-Users
(% based on Actual Energy)
Others
3% Industrial
35%

Residential 35%
27%
Commercial
OVERVIEW OF THE PHILIPPINE
WESM
MARKET DESIGN
Gross Pool
 All energy transactions are scheduled through the market

Net Settlement
 Bilateral Contract quantities transacted in the pool can be settled outside of the market

Locational Marginal Pricing


 Marginal price computed at each node or location to reflect transmission loss and / or congestion

Reserve Co-Optimization
 Reserve and energy offers are scheduled at the same time

Demand Bids
 Customers’ choice to buy energy lower than a specified price

Mandatory Market
 EPIRA mandates procurement of at least 10% from the market for distribution utilities for the first 5
years from the establishment of the WESM
WESM at a Glance
• Locational Marginal Pricing (LMP) market
with 270 trading nodes
• 30 Generating Resources/13 Trading
Teams
How does WESM work and affect electric bills?

Factors which may cause increase in electricity


rates
• supply and demand issues
•maintenance shutdown of power plants
•seasonal changes
•persisting pricing problems in the spot market
How does WESM work and affect electric bills?

Currently, the trading process at WESM works like this:


1. Stakeholders determine the total demand for electricity
for a certain hour.
2. “Trading” happens. Seeing the demand, the suppliers
submit bids, essentially telling PEMC they are willing to
supply, for example, 100 megawatts at P10 per
megawatt.
3. PEMC ranks the bids from the lowest to the most
expensive, until it has enough supply bids to meet the
total demand for power.
How does WESM work and affect electric bills?

Currently, the trading process at WESM works like this:


4. The highest priced offer that is accepted becomes the
spot market’s price for the hour.
5. Electricity is thrown to the grid and facilitated by the
National Grid Corporation of the Philippines (NGCP).
6. Then it is distributed to households and businesses through
distribution companies like Meralco.
How does WESM work and affect electric bills?

The supply of power is meant to increase over time,


creating competition that results in a lower price.
Decreasing the price of power that consumers pay for
in Luzon and Visayas is the sole goal of the Wholesale
Electricity Spot Market or WESM.

The WESM failed to deliver this promise in June 2012


when prices of traded electricity units from power
generators spiked beyond logic. These spikes have
and will burden consumers through higher power rates.
How does WESM work and affect electric bills?

WESM was created following the restructuring of the energy


sector under Electric Power Industry Reform Act (EPIRA) of
2001. WESM is where power suppliers disclose energy outputs
and agree on energy prices. The Philippine Electricity Market
Corporation (PEMC) facilitates the trading at WESM.
How does WESM work and affect electric bills?

Trading goes on an hourly basis, depending on


demands from households, manufacturers, office
buildings, and other consumers. The numbers vary,
change, increase or decrease.

WESM has monitoring devices called MAG Marketing


Monitoring Indices. These devices “suggest the
presence of market power and other behaviors that
could undermine market efficiency.”
How does WESM work and affect electric bills?

The MAG Marketing Monitoring Indices include the


following:
•The Price Setting Frequency Index (PSFI) counts the
number of times a participant sets the price in a
specific period. If a participant’s price became the last
accepted offer, they have more opportunities to design
bidding strategies that influence prices, says WESM.
•The Pivotal Supplier Index (PSI) studies whether the
demand can be supplied without a particular generator.
Pivotal suppliers are watched because they can
influence the pricing scheme.
How does WESM work and affect electric bills?

The MAG Marketing Monitoring Indices include the


following:
•The Combined PSFI-PSI Index (CPPI) counts the
number of intervals a participant is both a price setter
and a pivotal player.
How does WESM work and affect electric bills?

These indices, however, are not definitive tests to


measure excessive market power, or even if such
market power was misused

Notes from the WESM market analysis show that in


most instances, pivotal players and price setters are
those from coal-fired plants in 2010, followed by
natural gas plants. They have yet to determine if these
happened in the same trading hours
Competitive Market

Once Malampaya goes online, energy supplies are expected to


stabilize. But consumers should anticipate increase in their
electric bills in the August billings.

Fortunately, due to a La Niña year, there are no threats to low


water reserves in hydro plants, which are also usually tapped
when the contingency reserves reach alarming levels.

Optimistically, power prices will lower with the return of the


natural gas facility.
Competitive Market

But this is discounting two key elements that will result in lower
power price: the need for additional supply and more diverse
energy sources.

Visayas, for example, is highly dependent on geothermal


sources. The lesson of the Mindanao power supply woes
highlight the impact of El Niño since the region is largely reliant
on hydro sources.

When WESM prices jacked up in June 2012 and February 2010,


tapping the plants using expensive imported fuel or oil also
jacked up prices.
Competitive Market

Unless generating capacities are built today, there will be power


supply problems in the future.

Additional power plants, power players, and a diverse supply


chain will push for a more competitive market that will put
WESM into good use—it will lower down electricity prices.
Activity

1. Analyze the Price Spike Incidence last June 2012


and summarize its effect in the market price of
electricity.
2. Analyze the occurrence of Malampaya Shutdown
and summarize its effect in the market price of
electricity.
Price spikes

In July, electricity bills will inch up to, among others, reflect the
higher cost of power that retailers, like Manila Electric Co.
(Meralco), have bought from WESM on June 2012

For four days – from June 20 to 23 – power bought from WESM


over a time period during the day spiked to a record high of
between P45 and over P46 per kilowatt-hour (kwh). These
prices between noon to 11 p.m. were abnormally higher than the
entire day average of P18 to P24 per kwh during those days

Particularly strange was June 23, a Saturday. Weekends usually


have cheaper prices as demand is low. Spot prices that day still
hit over P46 per kwh.
Price spikes

These prices reflected either an overall low supply generated by


the power plants or high demand from customers. WESM said
demand then peaked at 8,796 megawatts (mw) but supply was
only up to 8,660 mw.

System operator National Grid Corporation of the Philippines


(NGCP) was prompted to declare “yellow” or “red” alerts, which
warranted the scheduling of rotating brownouts.

Red alert is handed out when the contingency reserve is zero or


worse, the generation supply is deficient. The yellow alert
signifies that the total reserves are less than the capacity of the
largest plant, which supplies the power.
Price spikes

No brownouts came as demand reportedly stabilized the


following days.

This was not the first time WESM prices spiked and threats of
brownouts loomed. A similar dire spot market situation occurred
in January to February 2010 — the months leading to a national
election.

Those troubled months were considered a period with the


“perfect storm.” Supply was tight largely due to the El Nino
phenomenon, scarce fuel supply and simultaneous maintenance
shutdowns of key power plants as demand surged with the
preparations for the elections coming in full swing.
Price spikes

WESM itself noted that February 2010 energy situation showed


that the level of prices was not consistent with market
conditions. It concluded: “The counterintuitive level of offered
prices [should] be probed, explained, and understood for
regulatory and policy development.”
Malampaya Shutdown

At the heart of the pricing issue at WESM is tight supply. This will
manifest again this July as the Malampaya Natural Gas Facility,
an offshore drilling facility in Palawan, will go on an 8-day
maintenance shutdown from July 13 to 21.

The Philippines has a total installed generating capacity of


15,610 megawatt (mw) as of 2012. With a dependable capacity
of only 13,319 mw overall, the maintenance shutdown of
Malampaya will further reduce the thin emergency buffer supply
of only a little over 2,000 mw.
Malampaya Shutdown

Malampaya provides fuel to power plants that supply 40% to


45% of the needs of Luzon. These gas-fired facilities can
generate 2,700 mw.

The shutdown will greatly affect Luzon’s power supply situation


for the month—and yes, the loss will affect prices.

With the temporary shutdown, the power plants that depend on


Malampaya will have to use alternate, and more expensive, fuel
just to make sure that there is enough power in the system.
Malampaya Shutdown

Other power plants will also have to offer their maximum


available capacity. This entails working the machines at full
power and most of the time, using emergency reserves that run
on more expensive fuel, such as imported bunker oil or diesel.

“The non-availability of plants or outage is one of the many


reasons for the deterioration of the reserves,” a WESM market
report states.
Maintenance Shutdowns

Power plants constantly halt operations to conduct an overall


inspection. Parts are changed, cleaned, and prepared for
another long haul

But in the Philippines, the limited supply has required shutdowns


to be scheduled with the energy department to ensure that other
plants can throw in additional power to the grid.

The NGCP monitors the supply-demand condition in the grid,


allots a contingency reserve and, if needed, issues alerts.
Maintenance Shutdowns

These alerts are usually issued — and rotating blackouts occur


— when plants shutdown not because they are scheduled for
maintenance but because of sudden technical problems.

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