Of WESM Price Caps and Market Settling Prices

The DOE and ERC are incessantly being pressured by pro-IPP lobby groups MAP and ECCP to lift the secondary price cap in the WESM market. They claim “this deters the entry of new and existing peaking plants by effectively disallowing them from recovering fuel costs”.  They are referring to diesel power plants running on bunker c fuel whose fuel and lubes costs alone is P8.50 per kwh in Luzon.

The Secondary Market Cap of P6.245 per kwh was installed by the Energy Regulation Commission, in a welcome flash of regulatory reawakening, “to prevent market power abuse and other anti-competitive practices which affect prices in WESM to the detriment of the consumers”.  This was triggered by the public outcry and Bayan Muna’s Supreme Court petition, over the 74% and 100% upsurge in power generation costs of Meralco in December and January when the WESM prices spiked to P62 per kwh (the old offer price cap in the spot market)  and averaged P23 and P33 per kwh for those months.

The WESM system is clearly broken and needs fixing. It is very vulnerable to manipulation under the rules that were installed by the market participants themselves and obviously did not have informed input from the consumers. MAP and ECCP are among those organizations that came out with a full page advertisement lobbying for the retention of the status quo in WESM rules and many of their obvious media supporters sang the same tune. ECCP is reported to refer to the ERC’s Secondary Market Cap as an “artificial market manipulation (that) is a disincentive for the private sector to invest in future power generation development”.  Really? artificial market manipulation? Tell us about it!

The ERC’s steadfast imposition of the P6.245 per kwh Secondary Market Cap “will remain until the establishment of a permanent pre-emptive mitigating measure in the WESM is established”.

Reforming the WESM rules is however the territory of the Department of Energy and it needs to do so urgently. Perhaps its Multi-Sectoral Task Force to Find Ways to Reduce Electricity Prices must focus first on re-writing the WESM trading rules to better protect the consumers instead of a catchall dragnet for solutions that will probably not come out until the end of the year if at all. This may be too late to have an impact in the coming summer.

The DOE had come out with its first step of reforming the WESM by trying to turn it over to a more independent market operator instead of PEMC. They however proposed that the rule making recommendations will be done by a “market participants group” (MPG), the same people who wrote the initial rules that have been disaster for the consumers.We are wondering why the DOE is not willing to take the lead itself in making a provisional consumer protective rule changes now and ask the new IMO to determine whether they will make it permanent.

The fallacy of Market Clearing Price

The Basic problem of the WESM is the concept of market clearing price which is “the highest offered price that was dispatched” for the trading hour.  This means even if hydro power is offered at P3.00 and coal is offered as P6.00, they will still be paid P32 per kwh if a diesel plant offered that price since it is the current market price cap.  This is a prescription for overpriced power prices in the spot market and so anti-consumer.

If we look at the origins of the P62 per kwh market cap, we will find that there is really no econometric reason for it other than that was the number wished by the Hopewell Navotas facility to run emergency power in case of shortage. It did not make sense even then because the facility had its basic capacity fees covered by its contract with Napocor and the number should have been based on its variable cost for incremental running. Even if we double their variable cost, it will not be anywhere near P62 per kwh.

The Secondary Market Cap is an enlightened  preventive mechanism by the ERC but temporary.  It is the Market Clearing Price methodology that needs thorough rethinking.Adopting the highest price for the trading interval as the Market Clearing Price was patterned after the Chicago spot market for commodities where buyers of wheat and corn decide on whether to buy or not and therefore determines the market price of the commodity. This should not apply to power because the buyers do not have a choice of whether to buy or not and therefore the highest price of capacity dispatched is not a determinant of “market value” of the power.  There is no free interplay of “supply and demand” market forces.

Market Clearing Price being the highest price for the period only benefits the generator suppliers and a sure overcharging of the consumers to whom it is passed on.

Paying Offerors their offered Price

What would be fair to both energy suppliers and the consumers (as represented supposedly by their distribution utility) is for them to be paid at their offered price only. Then we will really see the true value of the power at any given time. Distribution utilities can also be given a say on whether to buy at high prices or elect to have short term brownouts to avoid price spikes in their service area or put a limit on such high prices.

Reserve Market

The diesel power plants whose roles are peaking and reserve can be covered by the proposed “reserve market” where there is a predetermined viable dispatchable price. They can even have assured revenue for being on standby covering their fixed costs and the variable costs if they are dispatched. Overall this will result to more stable and reasonable cost contribution to the energy mix.

The ERC might consider applying the current secondary market cap of P6.245 per kwh only to the base-load plants like coal and natural gas. This should also be applied to hydro power. Diesel plants can have an interim rate cap of P12.50 per kwh. This can be a step towards “technology based” spot market pricing.

The reform of the WESM trading rules to better protect consumers from wayward pass on charges and eliminate market manipulation and excessive generator profits is very urgent and timely. It may need its own task force by the DOE.

Matuwid na Singil sa Kuryente Consumer Alliance Inc.
1 September 2014
Email: david.mskorg@yahoo.com.ph