The Philippines liberalises electricity energy market to lower costs

The Philippines’ electricity market has recently undergone major reform, as control of the Wholesale Electricity Spot Market (WESM) passed from the state to a new, independent body. The transition was formally undertaken in September 2018 with the creation of the Independent Electricity Market Operator of the Philippines (IEMOP) and fulfils an aim of the Electric Power Industry Reform Act of 2001 to establish a “strong and purely independent regulatory body and system to ensure consumer protection and enhance the competitive operation of the electricity market”.

The IEMOP is meant to provide a reliable supply of electricity at affordable prices while guaranteeing a transparent, free and competitive power market, according to the Department of Energy (DoE). Established in 2006, the WESM functions as the market for buying and selling electricity as a commodity. Before being handed over to the IEMOP, its operation and governance were the remit of the Philippine Electricity Market Corporation. The IEMOP also facilitates the registration of generation firms, distribution utilities, contestable customers, directly connected customers, bulk users and suppliers. The operator determines the schedules of generating units that supply electricity to the grid, alongside the corresponding electricity prices on the spot market, and manages the metering, billing, settlement and collection of spot-trading funds. The IEMOP is fully autonomous, but the DoE and the Energy Regulatory Commission serve as monitoring authorities for WESM regulatory compliance and ensure that no breaches of governing codes or anticompetitive behaviour take place.

Mandatory Registration

Shortly before the creation of the IEMOP, the DoE expanded the authority of the WESM, giving it greater oversight of private self-generating facilities (SGFs) and certain types of embedded generators (EGs), or generating units that connect to the grid via a distribution utility. Under the terms of an August 2018 directive, businesses maintaining SGFs or EGs with a maximum stable load of 10 MW on the Luzon grid or 5 MW on the Visayas and Mindanao grids will be required to register with the WESM and ensure that they meet certain standards to feed into the grid. The order also expands the generation capacity that the IEMOP can call upon and increases opportunities for smaller, stand-alone producers to sell capacity to the grid.

Price Hike 

Although officials have said that the IEMOP will boost competition in the power market and potentially reduce consumer tariffs, overall electricity rates have not declined since its inauguration. In April 2019 Meralco announced a hike in its monthly electricity rate from P10.4961 ($0.1952) to P10.5594 ($0.1964) per KWh. The rise was attributed to higher generation charges associated with increased WESM rates and the weakening of the Philippine peso against the US dollar.

Speaking at a seminar in September 2018, Francis Saturnino Juan, president of the IEMOP, warned that new taxes on fuel could push prices up by P0.1111 ($0.0021) per KWh in 2019 and P0.1311 ($0.0024) in 2020. These upticks could be further inflated if the upstream segment does not maintain the flow of new investments in generation capacity.

“If there is a comfortable cushion between the offered capacity and the demand, prices tend to be stable,” Juan said regarding the tax reform passed in late 2017. “But every time there is a rise in demand or a reduction in supply, the buffer reduces, and there is a corresponding spike or increase in prices.”

While a supply cushion exists in Luzon, which is the largest electricity market in the country, it is expected to be eroded by 2022 unless new investments in generation capacity are made. Indeed, in Visayas the supply margin has almost been eliminated. Under a scenario of high GDP growth, energy demand in Luzon is forecast by the DoE to rise at a compound annual growth rate of 4.9% between 2016 and 2040.