P15-Billion Windfall for Gencos with Mindanao WESM

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By The Mindanao Coalition of Power Consumers
April 11, 2019

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The extension of the Philippine WESM into Mindanao can be done legally and becomes technically possible only upon completion of the Visayas-Mindanao HVDC Interconnection.

According to a paper submitted last year by the Mindanao Coalition of Power Consumers, an isolated WESM in Mindanao or anywhere else in the Philippines is not mandated by the EPIRA, although neither is it explicitly prohibited by the EPIRA.

“So the Department of Energy (DoE) is probably thinking of going ahead with the establishment of an isolated Mindanao WESM, because it is good for the generating companies in Mindanao, and there is no legal prohibition against an isolated WESM in Mindanao,” said Engr. David A. Tauli, MCPC President.

“But even if the DOE can legally establish an isolated WESM in Mindanao, they still have to tell the public now, and tell the legal courts when the issue is brought to the courts, what are the economic benefits of a Mindanao WESM,” Tauli added.

The MCPC said advocates of a Mindanao WESM have failed to establish the economic benefits that would accrue to the people of Mindanao as a result of its operation.

The extension of the Philippine WESM into Mindanao can be done legally and becomes technically possible only upon completion of the Visayas-Mindanao HVDC Interconnection.

According to a paper submitted last year by the Mindanao Coalition of Power Consumers, an isolated WESM in Mindanao or anywhere else in the Philippines is not mandated by the EPIRA, although neither is it explicitly prohibited by the EPIRA.

“So the Department of Energy (DoE) is probably thinking of going ahead with the establishment of an isolated Mindanao WESM, because it is good for the generating companies in Mindanao, and there is no legal prohibition against an isolated WESM in Mindanao,” said Engr. David A. Tauli, MCPC President.

“But even if the DOE can legally establish an isolated WESM in Mindanao, they still have to tell the public now, and tell the legal courts when the issue is brought to the courts, what are the economic benefits of a Mindanao WESM,” Tauli added.

The MCPC said advocates of a Mindanao WESM have failed to establish the economic benefits that would accrue to the people of Mindanao as a result of its operation.

 

Average Annual Rate of Electricity in Mindanao

The MCPC said the average rate being paid by consumers for bulk generation in Mindanao today, without a WESM, is around P4.20 per kilowatt-hour.

When a WESM is established in Mindanao, the price of bulk generation during peak loads, assuming that there is adequate capacity of generating plants available, will be P7.00/ kWh.

In times of power capacity shortage, which will occur during periods of droughts or when major power plants are undergoing repair or maintenance, the price in the WESM will go up to at least P20 /kWh, assuming that the dominant generating companies do not abuse their market power.

 

WESM Windfall for Gencos

Based on these assumptions, the MCPC calculates the operation of a WESM in Mindanao at this time would result in a windfall profit of at least P15- billion annually.

These are the economic impacts of the WESM in the short run, two or three years into the future. In the long run, a WESM in Mindanao will be disastrous for everyone, including the generating companies.

Investors will not come to Mindanao because of the high prices of electricity, consumers will reduce their usage of electricity, and the more expensive power plants will have to shut down because they will no longer be needed.

 

High power rates stunt growth

Despite the windfall profits accruing to the remaining gencos, the industry would earn fewer revenues due to the reduction in consumption and the negative effects of the high electricity rates on growth. In the long run, this would force power intensive industries which originally located to Mindanao because of its lower power rates to locate elsewhere.

 

With Mindanao WESM

A Mindanao WESM would increase power rates in the island because of its pricing mechanism which would be the same for Mindanao as the pricing mechanism being implemented now in the Philippine WESM.

In a Mindanao WESM, the price for all generation, during normal periods when there is adequate generation, will be the highest bid price of the generators that are dispatched.

The last generator dispatched during peak load hours will be a diesel-fueled power plant, with a price of 7.00 pesos per kWh. This will be the price of the generation of all power plants dispatched during peak hours.

During hours of intermediate load, the price will be the price of the last diesel-fueled power plant dispatched, which will probably be around P6.00/kWh, lower than diesel-fueled power plants used for peak loads.

And during the hours in which only baseload power plants are operating, the price will probably be around P5.00/kWh, the price of the most expensive coal plant that is dispatched.

Thus, with a WESM there will be an inevitable increase in the prices of bulk generation, even if there will be no exercise of market power by the dominant generating companies generating companies in Mindanao. The average rate of electricity sold in the WESM over an entire year will be around P5.60/kWh.

 

Without WESM

Under the economic dispatch of generating plants being implemented by the National Grid Corporation of the Philippines (NGCP) in Mindanao at present, the rates for bulk generation are the rates for the bilateral contracts between distribution utility companies and generating companies.

This would be an average of around P4.20/kWh, after normalizing the rates for the FDC coal plant in Villanueva, Misamis Oriental and the Mt. Apo geothermal power plant.

The current rates of these power plants are abnormal, but the rates should be normalized in 2017 after legal actions by consumers against the exorbitant rates of the 100-MW Mt. Apo geothermal power plant and the FDC 405-MW coal plant.

 

Conclusion

The only change that will result from the imposition of a WESM in Mindanao would be the replacement of the present pricing of bulk generation obtained through bilateral contracting with pricing determined by the WESM.

Even without abuse of market power by the half-dozen dominant generating companies in Mindanao, the average rate for bulk generation will rise from P4.20/kWh without the WESM, to at least 5.60/kWh, a 33 percent increase that would subsequently passed on to consumers.

This would result in a windfall profit of approximately P15-billion annually to be paid by consumers with practically no investment on the part of the gencos and the same level of service to consumers, all thanks to the mere transfer of the present bilateral contracting scheme to the WESM market and pricing mechanism.

The MCPC said the average rate being paid by consumers for bulk generation in Mindanao today, without a WESM, is around P4.20 per kilowatt-hour.

When a WESM is established in Mindanao, the price of bulk generation during peak loads, assuming that there is adequate capacity of generating plants available, will be P7.00/ kWh.

In times of power capacity shortage, which will occur during periods of droughts or when major power plants are undergoing repair or maintenance, the price in the WESM will go up to at least P20 /kWh, assuming that the dominant generating companies do not abuse their market power.

 

WESM Windfall for Gencos

Based on these assumptions, the MCPC calculates the operation of a WESM in Mindanao at this time would result in a windfall profit of at least P15- billion annually.

These are the economic impacts of the WESM in the short run, two or three years into the future. In the long run, a WESM in Mindanao will be disastrous for everyone, including the generating companies.

Investors will not come to Mindanao because of the high prices of electricity, consumers will reduce their usage of electricity, and the more expensive power plants will have to shut down because they will no longer be needed.

High power rates stunt growth

Despite the windfall profits accruing to the remaining gencos, the industry would earn fewer revenues due to the reduction in consumption and the negative effects of the high electricity rates on growth. In the long run, this would force power intensive industries which originally located to Mindanao because of its lower power rates to locate elsewhere.

 

With Mindanao WESM

A Mindanao WESM would increase power rates in the island because of its pricing mechanism which would be the same for Mindanao as the pricing mechanism being implemented now in the Philippine WESM.

In a Mindanao WESM, the price for all generation, during normal periods when there is adequate generation, will be the highest bid price of the generators that are dispatched.

The last generator dispatched during peak load hours will be a diesel-fueled power plant, with a price of 7.00 pesos per kWh. This will be the price of the generation of all power plants dispatched during peak hours.

During hours of intermediate load, the price will be the price of the last diesel-fueled power plant dispatched, which will probably be around P6.00/kWh, lower than diesel-fueled power plants used for peak loads.

And during the hours in which only baseload power plants are operating, the price will probably be around P5.00/kWh, the price of the most expensive coal plant that is dispatched.

Thus, with a WESM there will be an inevitable increase in the prices of bulk generation, even if there will be no exercise of market power by the dominant generating companies generating companies in Mindanao. The average rate of electricity sold in the WESM over an entire year will be around P5.60/kWh.

 

Without WESM

Under the economic dispatch of generating plants being implemented by the National Grid Corporation of the Philippines (NGCP) in Mindanao at present, the rates for bulk generation are the rates for the bilateral contracts between distribution utility companies and generating companies.

This would be an average of around P4.20/kWh, after normalizing the rates for the FDC coal plant in Villanueva, Misamis Oriental and the Mt. Apo geothermal power plant.

The current rates of these power plants are abnormal, but the rates should be normalized in 2017 after legal actions by consumers against the exorbitant rates of the 100-MW Mt. Apo geothermal power plant and the FDC 405-MW coal plant.

 

Conclusion

The only change that will result from the imposition of a WESM in Mindanao would be the replacement of the present pricing of bulk generation obtained through bilateral contracting with pricing determined by the WESM.

Even without abuse of market power by the half-dozen dominant generating companies in Mindanao, the average rate for bulk generation will rise from P4.20/kWh without the WESM, to at least 5.60/kWh, a 33 percent increase that would subsequently passed on to consumers.

This would result in a windfall profit of approximately P15-billion annually to be paid by consumers with practically no investment on the part of the gencos and the same level of service to consumers, all thanks to the mere transfer of the present bilateral contracting scheme to the WESM market and pricing mechanism.

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