Spotlight on the WESM - The Lantau Group · Spotlight on the WESM Four points I will make today 1....
Transcript of Spotlight on the WESM - The Lantau Group · Spotlight on the WESM Four points I will make today 1....
Spotlight on the WESM
Spotlight on the WESM Mike Thomas 26 March 2014
Spotlight on the WESM
The WESM has recently been in the news
1
Most of the attention has been negative – is it deserved?
Spotlight on the WESM
Four points I will make today
1. The WESM is not the cause of high electricity prices in the Philippines
2. The WESM produces signals essential to reducing mistakes and driving down costs, and
should be respected more, not less
3. The November / December price spikes highlight problems with contracting and regulation, not
the WESM per se (though improvement is possible!)
4. Going forward, more focus needs to be put on how to ensure timely capacity investment,
especially giving rising perceptions of regulatory and policy risk
2
We step back and put some perspective on the WESM’s role and on recent developments and risks
Spotlight on the WESM
What the consumer sees
Why are the retail tariffs in the Philippines so much higher than
Asian neighbours?
(But….is this a problem with the WESM?)
3
Spotlight on the WESM
0
2
4
6
8
10
12
14
16
18
20
Ku
ala
Lu
mpu
r
Be
ijin
g
Ta
ipe
i
Sh
ang
hai
Va
nco
uve
r
Se
oul
Sh
enzh
en
Ja
ka
rta
Ho
ng K
ong
(H
EC
)
Ho
ng K
ong
(C
LP
)
Sa
n F
ran
cis
co
Mia
mi
Wa
sh
ingto
n,
D.C
.
Da
va
o
Ma
ca
u
Ho
usto
n
Pa
ris
He
lsin
ki
Sin
gap
ore
Ce
bu
Lis
bon
Am
ste
rdam
Ma
nila
To
kyo
Bru
sse
ls
Lon
don
We
llin
gto
n
Luxe
mb
ourg
Ne
w Y
ork
Sydn
ey
Ma
drid
Ro
me
Be
rlin
Other Cities
Asia Cities
Philippines
Electricity tariffs in the Philippines are high compared to most other Asian
countries (as they have been for many years)
4
Source: TLG research
PhP/kWh
Residential retail tariffs for customers using 200kWh per month (Nov 2013)
Major utility in each Philippine
grid
Australia / New
Zealand
Spotlight on the WESM
Same story for commercial customers
5
Source: TLG research
PhP/kWh
Commercial tariffs for customers using 1,923MWh per month (Nov 2013)
Major utility in each Philippine grid
0
2
4
6
8
10
12
Ho
usto
n
Se
oul
Ku
ala
Lu
mpu
r
Au
ckla
nd
Ma
drid
Ta
ipe
i
Am
ste
rdam
Me
lbo
urn
e
Ro
tterd
am
Ho
ng K
ong
Ja
ka
rta
Los A
ng
ele
s
Ba
nga
lore
Ha
noi
Ba
ngko
k
Sh
ang
hai
Ad
ela
ide
Be
ijin
g
Da
va
o
Co
pen
hag
en
Zu
rich
Sto
ckh
olm
Sydn
ey
Mu
mb
ai
Ne
w D
elh
i
Du
blin
Bru
sse
ls
Ne
w Y
ork
Lon
don
Ce
bu
Pe
rth
Sin
gap
ore
Ma
nila
Vie
nna
To
kyo
Yo
ko
ham
a
Mu
nic
h
Fra
nkfu
rt
Ro
me
Other Cities
Asia Cities
Philippines
Spotlight on the WESM
0
2
4
6
8
10
12
Ho
usto
n
Ha
noi
Se
oul
Sto
ckh
olm
Ba
nga
lore
Ja
ka
rta
Ku
ala
Lu
mpu
r
Au
ckla
nd
Ma
drid
Ho
ng K
ong
Ta
ipe
i
Am
ste
rdam
Me
lbo
urn
e
Ro
tterd
am
Los A
ng
ele
s
Ba
ngko
k
Mu
mb
ai
Sh
ang
hai
Be
ijin
g
Ne
w D
elh
i
Ad
ela
ide
Co
pen
hag
en
Da
va
o
Zu
rich
Sydn
ey
Bru
sse
ls
Du
blin
Lon
don
Ne
w Y
ork
Ce
bu
Pe
rth
Ma
nila
Sin
gap
ore
Vie
nna
To
kyo
Yo
ko
ham
a
Mu
nic
h
Fra
nkfu
rt
Ro
me
Other Cities
Asia Cities
Philippines
And for industrial customers, too
6
Source: TLG research
PhP/kWh
Industrial tariffs for customers using 2,188MWh per month (Nov 2013)
Major utility in each Philippine grid
Spotlight on the WESM
Smaller users are somewhat protected from the higher prices, however
7
Manila residential tariff structure
0
5
10
15PhP/kWh
kWh consumption per month
50kWh per month (PhP/kWh)
0
4
8
12
16
5.6
About a million Meralco residential
customers (21-70kWh pm)
29% 18%
3% 14%
7% 13%
Customer number distribution
Spotlight on the WESM
Other Asian countries face rising tariffs – slowly catching up to the Philippines,
as they reduce subsidies, invest, and absorb rising fuel costs
8
Energy costs are increasing throughout the Asia Pacific region
• Government policy shift to reduce fuel
and other subsidies Kuala Lumpur Tariffs in KL went up by more
than 10% in Dec 2013
Price Trend
• Proposing significant shift to gas-fired
generation to meet emissions targets
Hong Kong (CLP) CLP estimates a potential
c.40% rise over next few
years
• Reduce subsidies and restore
Taipower’s financial viability Taiwan (Taipower)
Tariffs in Taiwan went up by 7-10%
for residential users and 10.4-
12.2% for commercial and
industrial users in October 2013
• Cover rising costs due to increased
reliance on imported gas and new
emission reduction requirements
China (Beijing, Shanghai) Tariffs in Beijing and Shanghai
recently increased by an average
of 8% and 5% despite falling coal
costs
Spotlight on the WESM
Compare Manila to Hong Kong or Singapore – two other non-subsidised power
systems dependent on natural gas or imported fuels…
9
Note: * Meralco’s WESM purchases assigned to fuel type according to WESM monthly generation mix. This may underestimate proportion of oil and other
peaking supplies; ** Generation charge plus adjustments to previous months and system loss.; ^ 2012 exc. CEDC; ^^ 2013 local
Source: Meralco; PEMC; FirstGas; CLP; EMA (2012); TLG analysis
3.7
1.5
0
2
4
6
8
10
12
14
16
18
20
Hong Kong
(CLP)
5.6
Manila
11.1
6.3
1.0
4.1
PhP/kWh
Breakdown of Residential retail rates for
200kWh per month (Nov 2013)
Electricity
sales (TWh):
32.5^ 31.8^^
Manila vs. Singapore Manila vs. Hong Kong
Energy cost**
T&D / Other
Taxes
PhP/kWh
Breakdown of Residential retail rates for
200kWh per month (Nov 2013)
3.7 1.7
0
2
4
6
8
10
12
14
16
18
20
9.3
7.0
Manila
11.1
6.3
1.0
Singapore
Taxes
T&D / Other
Energy cost**
Electricity
sales (TWh):
42.6 31.8^^
2.0 network/metering/
retail/other
-0.7 energy
2.2 network/metering/
retail/other
2.2 energy
Spotlight on the WESM
Gas and coal costs are about the same
10
Philippines CLP Singapore
Gas marginal cost (US$/MWh)
~89 ~93 ~119
Coal marginal cost (US$/MWh)
~39-43 ~37 n/a
GEN COSTS BY
FUEL TYPE
The challenge lies in a combination of fuel mix and the cost of legacy investments
Spotlight on the WESM
The fuel mix (gas intensity) is an obvious difference
11
0
10
20
30
40
50
60
70
80
90
100
Meralco HK (CLP) Singapore
Oil/Other
Nuclear
Coal
Gas
More gas than Hong Kong, less than Singapore – but these largely reflect historical commitments
Percent
(higher cost than
In WESM)
(lower cost than
In WESM)
Generation fuel mix (2013)
Spotlight on the WESM
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
The fuel mix has been challenging because the amount of Malampaya gas
exceeded the ability of the system to efficiently absorb it….
12
Take-or-pay gas c. 2,700 MW
Hydro ‘must-take’ c.400 MW
Geothermal ‘must-take’ c.400 MW
Total ‘non-coal’ c.3,500 MW
Coal pmin (2013 exc. GNP) 1,325 MW
Total ‘must-take’ c.4,800 MW
In 2007, many coal plants could barely run due to insufficient opportunity; by 2013 things had changed
MW
Load-Duration Curves (2007-13)
Percentage of hours
Only 50-60% of hours
where coal can run
above PMIN –
inefficient and costly
Most coal can
finally run at
PMIN all year
2007
2013
Source: PEMC; TLG analysis
4,800
Spotlight on the WESM
The Philippines (like other Asian countries) committed to gas when gas was
expected to be cheaper but, later, oil-linked gas prices increased materially
13
COAL WINDOW COAL WINDOW
1991 Discovery of
Malampaya gas
field
1997 NPC/FirstGen sign GSPAs
with SPEX/OXY
2001 Commission of
Malampaya
2006 Singapore
commits to
LNG imports
1995 Hong Kong
first gas unit
commissioned
As the price of oil increased, gas prices also increased (due to oil-price linkages in gas pricing formulae)
1992 Singapore first
gas unit
commissioned
Spotlight on the WESM
Different systems (HK and Philippines) are in different places in their overall
investment cycle – making direct tariff comparisons misleading
14
TYPICAL RATE BASE CAPITAL
RECOVERY PROFILE
TYPICAL PPA CAPITAL
RECOVERY PROFILE
Two “LRMC” Profiles with the Same Value (Across three investment cycles of 20 years each )
Hong Kong has older depreciated coal fired capacity (replacement of which would drive up prices in the future)
(Philippines still has a number of PPA obligations – but many of these will expire in the next several years)
MANILA
PPAs
HONG
KONG
(older capacity more depreciation)
YEARS
PHP/KWH
20 Years 20 Years 20 Years
BUILD FIRST POWER STATION BUILD SECOND POWER
STATION
BUILD THIRD POWER STATION
Spotlight on the WESM
Summary: tariff differences reflect many factors – none relate to the WESM
• Subsidies and cross subsidies
– Most Asian countries use fuel or other subsidies to support their electricity sectors, at significant expense
• Treatment of legacy versus new costs (historical PPAs, PSAs, Stranded Costs, etc.)
– When an industry is “restructured” what do you do with the cost of past decisions/investments?
• Fuel contracts and supply mix
– Fuel costs vary widely depending on when contracts were signed. Some countries are lucky, others not
• Reliability of supply
– More reliable systems cost more, but also deliver more value
• Outlook for growth and age/condition of existing system
– Some systems have excess capacity or older/newer network systems
– Costs vary widely depending on age of system and overall supply/demand balance
15
Spotlight on the WESM
The WESM produces signals essential to avoiding past mistakes, and should
be respected more, not less
16
What is the essential challenge of the Philippine power
sector: dealing with uncertainty and variability!
Spotlight on the WESM
The Philippines has an “event-driven” electricity sector – much uncertainty and
variability for both natural and technical reasons
Note: * Buying price (with 100% surplus)
Source: PEMC; TLG analysis
0
2
4
6
8
10
12
14
16
18
20
22
24
26
Jan-14 Jul-13 Jan-13 Jul-12 Jan-12 Jul-11 Jan-11 Jul-10 Jan-10 Jul-09 Jan-09 Jul-08 Jan-08 Jul-07 Jan-07
PhP/kWh
Low
hydro
Gas curtailments
and low hydro
Plant forced maintenance
outages and HVDC link
maintenance
Transformer breakdown and San
Jose substation congestion
Plant outages and
coal limitations
Plant outages
Gas curtailments
and plant outages
Average monthly WESM spot settlement price* (2007-14)
17
Gas scheduled outage
and plant outages
ERC-
regulated
price
reduction
Spotlight on the WESM
Weather effects vary widely each year – the system must have the capability to
deal with strong swings between El Nino and La Nina
18
Deg. C
NOAA Oceanic Niño Index (ONI)
Source: NOAA
(2.5)
(2.0)
(1.5)
(1.0)
(0.5)
0.0
0.5
1.0
1.5
2.0
2.5
3.0
Jan-5
0
Oct-
51
Jul-5
3
Apr-
55
Jan-5
7
Oct-
58
Jul-6
0
Apr-
62
Jan-6
4
Oct-
65
Jul-6
7
Apr-
69
Jan-7
1
Oct-
72
Jul-7
4
Apr-
76
Jan-7
8
Oct-
79
Jul-8
1
Apr-
83
Jan-8
5
Oct-
86
Jul-8
8
Apr-
90
Jan-9
2
Oct-
93
Jul-9
5
Apr-
97
Jan-9
9
Oct-
00
Jul-0
2
Apr-
04
Jan-0
6
Oct-
07
Jul-0
9
Apr-
11
Jan-1
3
ONI measures average surface sea temperatures and it is used by the US
National Oceanic and Atmospheric Administration (NOAA) for their
operational definition of El Nino and La Nina
El-Nino
La Nina
Spotlight on the WESM
Temperature variations have profound impacts on hourly demand
19
Relationship between hourly GDP-normalised*
demand and temperature in Luzon by time of day
(2006-13)
0
1
2
3
4
5
6
7
8
9
15 20 25 30 35 40
Shoulder
Peak
Off-peak
GW
Air temperature (oC)
Note: * Demand across the different years can be adjusted for levels of economic activity in order to elucidate the impact of other factors (e.g., temperature).
Assumes 0.73 GDP-demand elasticity (maximises R-sq); Off-peak defined as 10pm-7am and Peak from 9am to 5pm and 6pm to 8pm
Source: PEMC; NSCB; Wunderground.com; TLG analysis
R-sq = 0.443
Dec Nov Oct Sep Aug Jul Jun May Apr Mar Feb Jan
32
31
30
29
28
27
26
0
oC
27.0
27.5
28.0
28.5
13 12 11 10 09 08 2007
Annual average oC
Monthly average temperatures
(Manila)
2013
2012
2011
2010
Spotlight on the WESM
And of course hydro is not the same each day, week, month, season, or year
20
13
2
1
0
5.3
12
5.3
11
5.5
08
4.4
10
4.0
09
5.5
05
4.3
04
4.3
03
5.4
07
4.6
06
4
3 2.9
2002
3.8
6
5
Source: DOE Power Statistics (2002-12); PEMC (2013); TLG analysis; NOAA
Annual hydro generation in Luzon
(2002-13)
0
5
10
15
20
25
30
0
5
10
15
20
25
30
600
400
200
0
D N O S M F J A J J M A
800
Monthly hydro generation in Luzon and
2011 precipitation (2006-2012)
Hydro generation is
low in Q2 when
demand is at its
peak
Low inflows in severe El-
Nino years reduce ability
of hydro plants to
generate
TWh (bars) GWh (lines) mm (bars)
2008
2007
2006
2011 precipitation
(RHS)
2012
2011
2010
2009
Generation peaks
when there is
plentiful inflows
Spotlight on the WESM
Hydro unpredictability is greatest during peak demand hours…
(which is kind of a bummer!)
21
Hydro scheduled generation profile (ordered by total Luzon load) GW
Difference between a dry and wet year depends on fuel and capacity availability
0
200
400
600
800
1,000
1,200
0 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
2009
2010
2011
2012
2013
Note: Illustrated data points represent aggregation of 80 hours
Source: PEMC; TLG analysis
High Luzon load Low Luzon load
Spotlight on the WESM
As a consequence of all these things – timely, flexible, capacity is needed
22
0
100
200
300
400
500
600
700
2/3/14 2/2/14 2/1/14 1/31/14 1/30/14 1/29/14 1/28/14 1/27/14
Sual G1
Mariveles G2
Pagbilao G1
Typical weekly generation schedule (w/c January 27, 2014)
MW
Source: PEMC (ex-post schedules)
However -- the plants currently providing most of this capacity are not well suited to do so
COAL PLANTS
Spotlight on the WESM
Coal plants are optimally operated as baseload plants – with other
technologies being better suited for flexible / responsive operations
23
Oil Gas Coal Oil Gas Coal
0
50
100
150
200
250
300
Fixed costs - $/kW per year Variable costs - $/MWh
0
20
40
60
80
100
120
140
160
180
Capital
Fixed O&M
Fuel
Variable O&M
No single technology or fuel is “best” or “cheapest” – the mix of fixed (capital) and variable (fuel) costs is what matters
IT’S BECAUSE
YOU WANT TO RUN IT A LOT
IF YOU SPEND ALL THIS
MONEY TO BUILD IT
Spotlight on the WESM
Furthermore, excess coal-fired capacity is being absorbed as a result of
Philippine economic growth
24
2013
Source: PEMC (ex-post schedules); TLG analysis
Percent of max
Percentage of hours
0
20
40
60
80
100
0 20 40 60 80 100
Pagbilao G1
Pagbilao G2
Sual G1
Sual G2
QPPL
Masinloc G1
Masinloc G2
2009 Percent of max
0
20
40
60
80
100
0 20 40 60 80 100
Pagbilao G1
Pagbilao G2
Sual G1
Sual G2
QPPL
Masinloc G1
Masinloc G2
Percentage of hours
Generating unit dispatch-duration curves – Coal units
But as the Philippines grows, economically, the available “spare” coal capacity is being absorbed
Spotlight on the WESM
Improving fundamentals of supply and demand for coal lead to both greater
offered and more scheduled capacity!
25
No surprises here. Fundamentals matter.
2011 2010 2009
+24% +67%
+49%
+34% +25% +18%
2008
30
25
20
15
10
5
0
2013 2012
Excludes GNPower
Mariveles for
comparability
"Theoretical"
85% gross CF
Offered
Scheduled
TWh
Luzon coal capacity offered and scheduled
Source: PEMC; TLG analysis
Spotlight on the WESM
If we could wave our magic wand, a raft of flexible gas-fired CCGT capacity
would enter the WESM, reducing costs and enhancing reliability
26
Note: EWC plant assumed to not be committed
Source: DOE (committed plants as of Aug 2013); TLG analysis
Least-cost capacity expansion plan for Luzon under expected assumptions
0
200
400
600
800
1,000
1,200
29 27 25 23 21 19 17 15 2013
Net MW
Economic least-cost entry
Natural Gas
Biofuel
Wind
Geothermal
Hydro
Oil
Coal
Uncertainty over how
further supplies from
Malampaya could be
used?
Other types of capacity (coal, geothermal, renewables) also all have bright prospects…but today I focus on flexibility
Displacing older oil-fired
capacity
Providing cover for
Malampaya
outages
Responding to varying loads
Allowing baseload plant to
operate
consistently and efficiently
Spotlight on the WESM
(10)
0
10
20
30
40
50
0 1 2 3 4 5 6 7 8 9
5/7/2013 2pm
1/8/2013 2pm
As the system gets tighter, offers increase, which is the logical and normal
situation how else to signal the need for new capacity?
27
Offered quantity (GW)
Price (PhP/kWh)
Source: PEMC; TLG analysis
Luzon generator offers for two illustrative peak hours
DEMAND?
DEMAND?
Spotlight on the WESM
Some capacity is always on outage, and other capacity is uneconomic to
operate in normal market conditions
28
Source: PEMC; TLG analysis
Average capacity on outage in Luzon (2011-14) MW
0
500
1,000
1,500
2,000
2,500
3,000
No
v
Oct
Se
p
Au
g
Ju
l
Ju
n
Ma
y
Ap
r
Ma
r
Fe
b
20
12 J
an
De
c
No
v
Oct
Se
p
Au
g
Ju
l
Ju
n
Ma
y
Ap
r
Ma
r
20
11 F
eb
20
14 J
an
De
c
Geothermal
Nat Gas
Coal
Hydro
Oil
De
c
No
v
Oct
Se
p
Au
g
Ju
l
Ju
n
Ma
y
Ap
r
Ma
r
Fe
b
20
13 J
an
Total
2013 average
(MW)
303
359
659
283
446
2,051
Proportion of
registered capacity
35%
13%
15%
12%
25%
17%
Fire at San
Lorenzo 2
Gas plant maintenance
to coincide with
Malampaya outage
Sta. Rita/Ilijan
maintenance
Sual1 and GNP2
on maintenance
It is not economic or technically possible for a lot of capacity in the Philippines to be operational all of the time – need to focus
on sharpening incentives so that this capacity can be counted on when needed (and can be ignored when it is not)
Spotlight on the WESM
Normally the highest offers are found in the off-peak period on older, less
flexible, capacity – a sign of trouble….
29
Capacity offered ≥PhP60/kWh
The probability of being required is low – the ability to respond economically is low – the value expected is low
Or perhaps there is just not enough risk in the market to reward more responsive behaviors and investment!
Normally the highest prices would be here
(which suggests that the price cap is too low)
than in the peak hours….
More capacity offered
near the price cap
during the off-peak…
Spotlight on the WESM
However – the WESM rules include provisions designed to “force” uneconomic
behavior, an approach that almost always backfires
Consider the “Must Offer” rule in combination with the PMIN requirement….
• It costs money to keep a plant at its minimum output level (PMIN) just in case it might be called –
and there is little if any compensation for this
– If a unit cannot be started quickly and is not needed often, it loses money waiting around
– If the price cap is too low, it cannot be sure of making enough money back
• Not all units can even perform consistently at their PMIN
– Fuel-limited operations (hydro, some oil)
• If the price cap is too low, a new unit that might be faster in response may not be economic
– The WESM won’t reward an investor and prices won’t support contracting
– So the Philippines is stuck using expensive older plants on must-run or special direction
30
A better WESM would not “force” good behaviour, but would use more effective incentives
(as is done in energy-only wholesale spot markets in other countries)
Spotlight on the WESM
(5)
0
5
10
15
20
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Percentage of hours*
2013
2012
2011
2010
2009
2008
2007
Note: * Excludes administered prices; Graph clipped at PhP(5)/kWh and PhP20/kWh
Source: PEMC (RTX); TLG analysis
Luzon WESM price-duration curves (2007-13)
PhP/kWh
As a result there is very significant risk for anyone who purchases from the
WESM in the top 30% of hours over the year
31
Graph clipped at PhP20/kWh
Variation in fuel prices
(not nearly so material)
Variation in supply
availability & peak demand
(enormous risk)
Far fewer zero or
negative prices after 2009
The harder we try to “protect” consumers from these higher prices, the less likely investors will be able to respond with
prudent, viable and effective investments to solve the problem
Spotlight on the WESM
WESM fundamentals are telling us two things
• The supply situation is tightening – new capacity
is needed
• But even more urgently and important: some of
that capacity needs to be flexible and responsive
• (Incidentally: this has been a focus of our work
on a Gas Masterplan for the Philippines, the
reports for which may be found at
www.lantaugroup.com)
32
The WESM is pointing the way towards a solution – but will we listen and respond?
Philippines Natural Gas Master Plan – Recap of Key Findings of Phase 1
Phase Two Public Consultation
20th March 2014
Prepared for:
Supported by:
Prepared by:
Spotlight on the WESM
Unfortunately, the ERC does not consider the
WESM is fully competitive
33
ERC Order, case no. 2014-021MC (dated 3 March 2014)
ERC Order, case no. 2012-118RC (dated 28 January 2013)
Spotlight on the WESM
Despite the fact that the concentration of capacity in the largest players is
similar to other markets
0%
20%
40%
60%
80%
100%
Other
NEM-QSL
CS
Energy
Stanwell
Intergen
Other
NEM-NSW
Macquarie
Origin
Other
WESM
Power
Seraya
SMC
PSALM
Aboitiz
Alinta
Tuas
Other
WEM
NewGen
Verve
NEM-SA
Other
Senoko
Snowy
Hydro
NEMS
Int’l
Power
Alinta
AGL
Energy
Other
Energy
Australia
First
Gen
Source: PEMC (2012 Annual Report); EMC (2012 Annual Report); AER (State of the Energy Market 2013); ERA (2013/14 capacity credits)
NEM
Generation company market share
Oligopoly market power exists in some degree in all energy markets, but so too does significant confusion between “bad”
market power (gaming) and the high prices that arise during periods of true economic scarcity
34
Spotlight on the WESM
Or the fact that vast majority of WESM outcomes are readily understood and
modelled
35
0
1
2
3
4
5
6
7
8
9
10
Q12009
Q2 Q3 Q4 Q12010
Q2 Q3 Q4 Q12011
Q2 Q3 Q4 Q12012
Q2 Q3 Q4 Q12013
Q2 Q3
Actual
Estimated
PhP/kWh
Source: PEMC (2012 Annual Report); EMC (2012 Annual Report); AER (State of the Energy Market 2013); ERA (2013/14 capacity credits)
Comparison of actual vs. estimated quarterly average LWAP
That which can be modeled can be understood and explained
Spotlight on the WESM
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
LWAP / SRMC
Load / Available Capacity
1.2 1.1 1.0 0.9 0.8 0.7 0.6 0.0
Some WESM outcomes rely on capacity “above” the level that is
“available”….a clear indication of a problem of incentives
36
2012
“Strong economy”
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
LWAP / SRMC
Load / Available Capacity
1.2 1.1 1.0 0.9 0.8 0.7 0.6 0.5 0.0
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
LWAP / SRMC
Load / Available Capacity
1.1 1.0 0.9 0.8 0.7 0.6 0.0
2011
“Cool year”
2013
“Major Events”
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
LWAP / SRMC
Load / Available Capacity
1.2 1.1 1.0 0.9 0.8 0.7 0.6 0.0
2010
“Hot dry year”
Gradient: 12 Gradient: 11
Gradient: 5.6 Gradient: 11
Capacity forced to run (must run)
Spotlight on the WESM
In similar markets, prices spike to much higher levels during the same types of
events that happen in the WESM – these price spikes support investment
37
New Zealand historical monthly average final prices
2000-Current at 3 major nodes
Eastern Australia historical monthly average final prices
2000-Current at 3 major nodes
Without investment, price spikes get worse, the market fails, and huge value is destroyed
Spotlight on the WESM
We think that a key problem is the WESM price cap – it is too low
38
Comparison of the Market Price Caps
0
100
200
300
400
500
600
Singapore
NEMS
159
US
ERCOT
IMEM
226
32
Australian
NEM
WESM
(2013)
538
62
PhP/kWh
Due to increase
in 2015
Low price caps penalise responsive capacity and can both exacerbate market power and promote insufficient peaking
capacity – trapping the Philippines in a cycle of dependence on older unreliable and very expensive “must run” units
With a higher price cap:
The highest offers would more sensibly be found during
the peak periods, not the off-peak periods
More attention would be paid to effective contracting
strategies – especially contracts to cover disruptions
outages and peak demand
Flexible and responsive capacity would become
more commercially attractive, leading to earlier
replacement of older, expensive, and less responsive
capacity
The WESM would mature faster, provided it is allowed
to develop
On the other hand:
The diversity of contracts and pricing terms would
seriously challenge the current approach to
contract approvals by the ERC
Risk to retailers would increase, as they would be
more exposed to uncovered (spot) price risk
Spotlight on the WESM
The lower the price cap, the greater the risk of future unserved load
39
7,000
7,200
7,400
7,600
7,800
8,000
8,200
8,400
0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% 9.1%
Unserved
Served
Fuel consumption (l/kWh) 0.34
Fuel cost (PhP/l) 42.05
VOM (PhP/kWh) 0.32
Host DU wheeling (PhP/kWh) 1.9424
Capital cost (PhP/kW) 22,000
WACC 15%
Lifetime (years) 25
FOM (PhP/kW/yr) 150
Price cap (PhP/kWh) 32
Lowest capacity factor 2.6%
229 unsupported
hours
“normal year”
Proportion of hours
MW demand
Disastrous hot / dry El Nino year
(1 in 3 El Nino year: 3x229 = 687 hours)
(1 in 5 El Nino year: 5x229 = 1,145 hours)
May be fine in a “wet / cool” year
Minimum running time needed at price cap
before reaching commercial viability of annual hours
At
Risk
A price cap of 32 will, in time, guarantee shortage
Source: DOE; PEMC; TLG analysis
Spotlight on the WESM
The other clear symptom of a problem is that stakeholders appear unable to
contract efficiently
40
Average power cost vs. load factor for Luzon grid ECs (2012)
Despite the ERC’s diligent approvals process, contract prices outcomes make no sense!
Spotlight on the WESM
Contracting behaviour seems influenced mainly by historical price experience
(not current expectations) – a bit like driving through the rear-view mirror!
41
0 2 4 6 8 10 12 14 16 18 20 22 24
LWAP (PhP/kWh)
18
16
14
12
10
8
6
4
2
0
Spot load (%)
0 2 4 6 8 10 12 14 16 18 20 22 24
LWAP (PhP/kWh)
7
6
5
4
3
2
1
0
Spot load (%)
In Month Price 12-mo Trailing Average Price
Note: Monthly averages are time-weighted, as reported by PEMC
Source: PEMC; World Bank; BSP; TLG analysis
R-sq = (0.47)
R-sq = 0.08
Average monthly market price vs. proportion of load transacted on spot market
Spotlight on the WESM
Summary
1. The WESM is not the cause of high electricity prices in the Philippines
2. The WESM produces signals essential to avoiding past mistakes, and should be trusted more,
not less
3. The November / December price spikes highlight problems with contracting and regulation, not
the WESM per se (though some improvement is possible!)
4. Going forward, more focus needs to be put on how to ensure timely capacity investment,
especially giving rising perceptions of regulatory and policy risk
42
There are problems, but they are fixable
Spotlight on the WESM
Fix simple, basic, and long-standing WESM issues
• Stop distorting economic outcomes
– Eliminate Pmin
– Eliminate the must offer rule
• Provide proper signals with offer caps that align with desired reliability of supply targets
– Raise the price caps
– Don’t use price caps for consumer protection unless you also plan to hand out flashlights when the power
does not come on
• Introduce trading of Ancillary Services in the WESM
– Price signals for the value of flexible capacity
– Potentially not fully compensated under current regulatory regime
• Invest in market software / processes to minimise pricing errors
43
If necessary to manage consumer / transitional exposure, temporary value management mechanisms are available
Spotlight on the WESM
Improve economic regulation of purchases for regulated (captive) consumers
• Trust competition
– The perfect is the serious enemy of the good
– Move away from regulatory review of every contract
– Make it easier for DUs to secure a range of different contracts to cover entire demand curve
• Focus on economic fundamentals
– Financial contracts not physical delivery
– Prices vary by time of use and level of responsiveness required
• Expose stakeholders to WESM risk so they support prudent contracting
– Do not cover all mistakes with regulatory sledgehammers and pass-through
44
Economic regulation is about achieving reasonable value not adhering to precedent
Spotlight on the WESM
There is considerable scope for improvement in DUs’ contracting processes
• Trading is a 24 hour activity – the WESM is a risky environment
• Time of use and different types of financial contracts are imperative
• Target efficient portfolios, not specific contracts
• Avoid “cliffs” where many contracts expire at once
• Actively educate respect to portfolio analysis and risk management
45
Actively educate respect to portfolio analysis and risk management
Spotlight on the WESM
Rigour
Value
Insight
Energy Power Utilities For more information please contact us:
Mike Thomas
+852 2521 5501 (office)
www.lantaugroup.com
The Lantau Group (HK) Limited
4602-4606 Tower 1, Metroplaza
223 Hing Fong Road
Kwai Fong, Hong Kong
Tel: +852 2521 5501
www.lantaugroup.com
Thanks
46