[OPINION] Why is electricity more expensive at the WESM? 1

[OPINION] Why is electricity more expensive at the WESM?

Dean dela Paz

Posted at Dec 07 2022 10:43 AM

For those who bother to do the math, the inevitable increase in electricity prices in the Luzon grid can cost subscribers from as low as a temporary six-month increase of P5.2 billion, an average of P0.86 billion a month, to as much as a perpetuating increase of over P2.5 billion per month, or an equivalent P15 billion-plus for six months. The latter higher cost is the price paid for sourcing from the Wholesale Electricity Spot Market (WESM).

The alternate scenarios project increases from P22.94 billion to as high as P102.93 billion. The determining factors range from quantifiable demand and supply, to unquantifiable levels of intransigence and rationality among players in the industry including energy regulators.

When envisioned under the original Electric Power Industry Reform Act (EPIRA) before its growing legion of distortions, misinterpretations, and gross violations committed by even the highest energy officials tasked to implement it, WESM, one of the law’s novel creations, was supposed to rationalize and reduce electricity prices.

It was to have achieved this in two ways.

One was where the WESM provides a marketplace through which consumers are able to choose the power providers they want to source from at the most optimal cost. That pandered to the demand side, the needs of the public, and it involved comparative costs and dependable energy. For distribution utilities (DU) like the Manila Electric Company (Meralco), an integral link in both the supply and value chains where their franchise demanded sourcing from the ‘’least-cost’’ generators, the WESM provided a choice. Either the DU directly contracts from an independent power producer through bilateral contracts, or it sources from the spot market whichever was cheaper.

On the supply side, energy producers who operate efficiently and are able to generate at the least cost are rewarded by WESM’s marginal pricing system.

There were two ways in which lower tariffs were achieved at the WESM. One was through a priority dispatch system where the least cost producer is prioritized among a hierarchy mandated to offer their capacities to the WESM.

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The other was the marginal pricing system that rewarded least cost producers with higher margins. In other words, an energy provider will have to produce at a relatively lower cost if it wants to be dispatched prior to others and if it wants to enjoy the higher margins provided by a set price determined on an hourly basis where peak demand pricing is higher than those charged for non-peak hours.

Here we can see that any capacity offered at the WESM is subject to competitive forces where both prices and dispatch are conditional.

Here is how that works. The WESM is a spot market. The price of electricity set at the WESM is based on the margin, the last unit of energy provided by a generator that fills in the demand gap at specific hours. During non-peak demand hours, electricity is typically provided by relatively inexpensive base-load plants such as the larger unit geothermal, hydroelectric and coal-fired plants that produce at relatively lower costs. During peak demand hours where a gap might occur, the WESM taps the more expensive, diesel, bunker C and oil-fired plants that quickly fill a demand gap within 15 to 30 minutes.

When lower cost base-load capacities are inadequate and reserves are either thin or non-existent as is the case with the Luzon grid, gaps in demand are filled in by the higher cost generators. Following WESM’s marginal pricing formula, the set price applied to the whole market regardless of fuels would then be determined by these more expensive generators. This results in higher electricity costs charged to consumers.

Spot markets reduce tariffs only where there is sufficient competitive supply. EPIRA assumes government would attract enough investors to build competitive base load capacity as that would reduce tariffs at the WESM. Unfortunately, every high ranking energy official under EPIRA failed to attract adequate generating investments.

To our continuing misfortune, aggravating the inadequacy of dependable capacity is an over-supply of non-technical, ill-trained or incompetent grid management factotums who pander to the supply side of the energy industry rather than the underrepresented demand side consumer market.

Disclaimer: The views in this blog are those of the blogger and do not necessarily reflect the views of ABS-CBN Corp.