How does WESM work and affect electric bills?

MANILA, Philippines – Consumers who look forward to the rainy season for lower electricity rates will be disappointed as a confluence of factors trigger a peak in prices.

Among these factors — which include supply and demand issues, maintenance shutdown of power plants, seasonal changes, and persisting pricing problems in the spot market — the latter has been the most peculiar of late.

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 when prices of traded electricity units from power generators spiked beyond logic. These spikes have and will burden consumers through higher power rates.

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 a month ago.

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.

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.

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.

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.”

How WESM works

If prices are settled in the spot market, how can consumers be assured that tightness is not manipulated? The answer is simple: they can’t.

A monthly assessment report by the PEMC of the spot market situation in January to February 2010, when contingency reserve was similarly tight, showed that the market still needs additional oversight powers to avoid pricing errors.

More market re-runs are needed before settling on a price. In short, the WESM needs to transact business instantaneously and in real-time.

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.

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.
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.

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.”

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. 
• The Combined PSFI-PSI Index (CPPI) counts the number of intervals a participant is both a price setter and a pivotal player.

These indeces, 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.

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 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.

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.

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.

Competitive market

Once Malampaya goes online by July 21, energy supplies are expected to stabilize. But consumers should anticipate increase in their electric bills in the August billings.

Fortunately, as this is 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 by end of July.

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.

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. – Rappler.com