in Serious stuff, my friend

A guide to the Philippines’ Wholesale Electricity Spot Market (WESM)

(from http://balitangsanrafael.files.wordpress.com)

(from http://balitangsanrafael.files.wordpress.com)

(This has been submitted by a concerned citizen about the WESM.) 

Cheaper electricity is the benefit that was supposed to result from the establishment of the Philippines’ Wholesale Electricity Spot Market (WESM).

Launched in June 2006, the WESM provided a platform that allowed the sale and purchase of electricity supplies everyday for every given hour.

Using the platform, big-ticket electricity users—including distributors such as Meralco, heavy power users such as factories, and electric cooperatives—indicate their requirements by submitting them into the system.

Once submitted, power plants make offers based on their available electricity supply on a given hour.

Then, the WESM matches bids and offers, enabling electricity supply and demand to be met at any given hour.

But it’s not as simple as it sounds.

This is because electricity requirements of a single trading participant is rarely satisfied by a single power plant.

Let’s say trading participant “X,” an electric cooperative, needs 10 kilowatts (kW) of electricity for a single hour (i.e., from nine o’ clock in the morning until 10).

X then proceeds to submit its needs by putting it on the WESM.

It then waits for a power plant to submit its own offer to supply its requirements.

Seeing X’s needs on the trading platform, and recognizing it can help meet them, “Y,” a power plant, offers to supply five kWs at ten pesos and submits his bid.

But obviously, that’s not enough.

Even with Y’s offer, X’s power requirements of 10 kWs remain unmet.

So now comes Z, another power plant, which offers to supply the remaining five kWs to X.

Owing to WESM’s auction rules, Z is disallowed from making an offer that is equal to or lower than than Y’s prices.

As a result, Z offers to sell the remaining five kWs that X needs for a higher price, say at P20 per kW, which is also known as the marginal cost.

With requirements met, X agrees to pay both Y and Z P20 for their electricity since the last bidder’s price is followed in the WESM.

While Z may have set final prices for the transaction, its electricity will be dispatched last. The 5kW supply offered by Y, the first bidder, is dispatched first, giving it the advantage to produce electricity for another transaction at another hour.

This process is undertaken on the WESM every hour every day for electricity that is expected to be delivered 24 hours later.

Payments made by X—in this case, P20 for 10 kWs—only represent generation costs. This in turn is charged to consumers, excluding transmission fees for using the country’s power grid (as operated by the National Grid Corp. of the Philippines) and distribution costs, imposed by companies such as Meralco and electric cooperatives.

Meanwhile, prices at the WESM vary from hour to hour because supplies vary during the interval as well.

Moreover, the cost of producing electricity also depends on the type of fuel used by the power plant (diesel being the most expensive and hydro being the cheapest) as well as the demand for energy for the given hour.

As a result, prices are generally higher during peak hours, anywhere from nine o’clock in the morning to nine in the evening and lower during off-peak hours, a period from one to eight in the morning and ten in the evening until midnight.

Being the last bidder that fulfilled X’s power needs, Z is considered as the price-setter for the transaction.

The price offered by Z is also considered as the “true market price” of electricity.

This “true market price” is brought about by the supposed increased operational efficiency of power plants—encouraged by the WESM—which in turn is expected to result in lower power prices for consumers.

However, electricity prices can be—and may have been—manipulated.

That bears repeating: electricity prices in the WESM can be—and may have been—prone to market abuse, no thanks to the concentrated ownership of electricity generators in the Philippines.

How?

A company that owns and runs a number of power plants—especially those with large electricity outputs—has the ability withhold supplies, even for a few trading intervals.

Lower supplies will thereby allow them to offer electricity at much higher prices at the WESM at the last moment (i.e., the last few seconds or minutes of a trading interval).

As a result, not only are power plants—especially those owned by only one group—able to set prices for certain trading intervals, they may also be able to charge record-high prices.

A number of power plants may take advantage of the lack of supply offers for certain trading intervals.

Since no power plant offered electricity for sale for a number of hours, generation facilities with available capacities are able to set their prices at record-highs.

This is best illustrated by what took place a few years back when 17 plants were temporarily decommissioned.

Routine maintenance for all these plants cut electricity supplies by an estimated 3000 or so mWs for one day, an amount roughly half of the system’s demand for that same day.

However, on that day, no shortage was announced nor experienced. After all, other plants that were previously decommissioned were coming online, allowing them to offset the lower electricity output.

In other words, on that day, supply for electricity—on the whole—exceeded demand.

However, from nine in the morning to four in the afternoon of the same day, prices reportedly reached record levels.

Why?

There weren’t just enough offers made by power plants during those trading intervals.

Power plants may either have been unable to generate electricity and/or were unwilling to sell the electricity that they were able to produce that day.

In short, a capacity gap—the difference between available electricity supply and the amount generators were willing to sell—reportedly took place during trading intervals covering peak hours of the day in question.

During the period covering the trading interval, a power plant reportedly offered—and won the right—to supply electricity for a record amount of money per hour.

The record-high offer was supposedly accepted because the trading interval covered a peak hour period—when demand for electricity is strong—and other offers to sell power weren’t rising fast enough to meet requirements.

Consumers were then forced to pay for higher generation costs.

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