WESM sets out plan for derivatives market

By Myrna M. Velasco – Updated September 23, 2019, 11:14 AM
from Manila Bulletin

To reinforce interplay of financial transactions in the country’s electricity spot market, the integration of derivatives market and financial transmission rights (FTR) is now being advanced in the Wholesale Electricity Spot Market.

These are among the future plans laid down by Philippine Electricity Market Corporation (PEMC) President Oscar E. Ala, that will set the pathway for more mature and complex types of financial transactions in the power spot market.

“To allow electric power industry participants to manage the price movements in the WESM, PEMC will follow through the development work on electricity derivatives market and financial transmission rights,” he said.

PEMC, which is the governing entity of the WESM, as well as spot market operator Independent Electricity Market Operator of the Philippines (IEMOP) are currently assessing the legal and technical facets of implementing a derivatives market and are also strategizing on phased-in market development that will be appropriate to the Philippine context.

Derivatives could take the form of financial instruments – such as futures contract or options contract – which may be anchored on the whole range of commodities that could be incorporated into the power spot market.

Taking cue from the experiences of other highly liberalized power markets, PEMC indicated that electricity market derivatives could help in the management of risks due to price movements in the spot market through structured hedging strategies.

The market operator added that if an electricity derivatives market is viably managed, this would turn out “beneficial to the sharing and controlling of undesired risks” that in turn could result in better economic efficiencies for trading participants.

Adjunct to the derivatives market would be the WESM’s bid to introduce financial transmission rights (FTR) as a consolidated feature of the new market management system (NMMS) – or the enhanced trading platform of the spot market that is targeted to finally be set in commercial operations this year.

FTR is a type of financial instrument that entitles the holder to receive compensation from congestion costs that arise when power transmission grids are snarled up as a result of the dispatch of power plants.

With FTRs, trading participants in the WESM could countervail potential losses relative to price risks inherent in the wheeling of energy capacity into the grid.

As envisioned, such financial instrument “will address the volatility of prices associated with power supply due to transmission congestion costs.”