Overview of Market Reforms and the WESM Presented by: Debora Anastacia T. Layugan Spot Market Division

Reforms in the energy market Discussion points Reforms in the energy market The WESM and its basic concepts The role of ERC in competitive markets

Industry Structure Prior to Reforms NPC IPPs GENCOs Private Generation Transmission Distribution Utilities End-Users Customer

Reforms under the EPIRA Privatization of government owned generation and transmission assets. (Sections 8 & 47) Restructuring of the industry into four (4) major sectors comprising of the generation, transmission, distribution and supply. (Section 5)

Objectives of reforms Encourage competition and attract more Restructuring More efficient delivery of electricity to End-users Transparent and reasonable prices Freeing up government funds through private sector participation Encourage competition and attract more private sector Investments.

Major Sectors Transmission Distribution Supply Generation Competition REGULATED COMPETITIVE Competition takes place at the --Wholesale level --Retail level

The WESM Generation prices comprise almost 64% of retail rate. Market place for trading electricity as a commodity Prices not subject to regulation but governed by market forces Generation portion of the retail rate is being traded The heart of the industry structure Generation prices comprise almost 64% of retail rate.

How WESM works Basic concepts: Adopts the gross pool concept Prices are market driven Uses the least cost economic dispatch concept Governed by locational marginal pricing concept (nodal pricing) Adopts the ex-ante ex-post pricing scheme

Gross pool concept Pool (WESM) DU OTHER BUYERS GENCOs Pool (WESM) 10% 90% All physical electricity is traded through a centralized venue known as the gross pool At least 10% of total requirements of DUs subject to spot price

Economic Dispatch; Supply & Demand Supply Side Offer of Genco A Q = 100 MW P = P500/MWh Demand Side Industry Demand: 400 MW P/MWh Offer of Genco B Q = 250 MW P = P 800/MWh 400 Offer of Genco C Q = 500 MW P = P 1,500/MWh 1,500 G e n c o C Market Clearing Price is set at P 1,500/MWH. Offer of Genco D Q = 500 MW P = P 1,800/MWh 500 Genco C Genco B Genco A Offer of Genco E Q = 300 MW P = P 9,500/MWh MW 100 250 50

Bilateral Contracts as hedge to spot price volatility

Locational Marginal Pricing Cost of supplying next MW of load at a specific location, considers generation marginal cost, cost of losses and transmission congestion cost. LMP Generation Losses Congestion = + +

LMP

LMP

Nodes and Zones; LMP A B C A node is a point where the WESM participants (i.e generation facilities and loads) are connected to the transmission network. Nodal pricing provides economic signals in real time B Gen A = 50MW @ P50 Gen B = 60MW @ P100 Demand = 100 mw MCP = P100 Prices are calculated hourly at 406 nodes on the HV grid - Luzon – approx. 214 nodes, 118 generation; 96 customer nodes - Visayas – approx. 120 nodes, 69 generation; 51 customer nodes - Mindanao – approx. 72 nodes, 43 generation; 29 customer nodes Approximately 406 nodal prices for each trading interval C Zone

Price determination flow Pricing Mechanism (MMS) Basic Concepts DUs and other buyers Pay Hourly Nodal Spot Prices GENCOs Paid

Regulatory Filings Price Determination Methodology- provides the principles and formula by which energy and reserves shall be priced in the WESM Market Fees – charge to be imposed on all WESM participants for the recovery of the cost and expenses of PEMC and MO for administering and operating the WESM. Administered Price - methodology for determining the administered price that will be used for settlement of energy in the WESM in cases of market intervention and/or market suspension.

Dealing with market imperfections “Regulation has worked where market conditions for competition don’t exist”. PGDC WESM RULES COMPETITION RULES W E S M INVESTIGATES ANTI-COMPETITIVE BEHAVIOR IMPOSE FINES AND PENALTIES

How to get things going! Need for government and players to inform the consuming public about new power industry Dialogue, cooperation and coordination among players, regulators and government Gradual and proper sequencing of reforms

“ Let us not go over old ground, let us rather prepare for what is to come.” Marcus Tullius Cicero (106-43 B.C.)

Thank you.