Pruning power prices

How can we lower the cost of electric power so that our producers can be more competitive and create more jobs, while also easing the burden on household power consumers?

Last year, I wrote about higher power costs in the Philippines relative to our neighbors mainly because of the massive subsidies they provide their energy sectors, which they can well afford, but we can’t (“Is our power too costly?” 12/5/23). Still, there’s room to lower our power costs, and the answer hinges on one word: competition. Things could have been so different if Republic Act No. 9136 or the Electric Power Industry Reform Act of 2001 (Epira) had been fully implemented to achieve one of its primary goals: “free and fair competition” in the electricity market.

It has been more than 23 years since Epira was enacted, but we remain nowhere near free and fair competition in the power market, because elements of an efficient market are simply not there. Seasoned power industry expert Guido Delgado, president of the National Power Corp. (NPC) during the Ramos administration, argues that in this country, the phrase “power market” is a misnomer. And he’s right.

By definition, a “market” consists of buyers and sellers, and an efficient market where competition can prevail must have many of both. Epira mandated the establishment of the Wholesale Electricity Spot Market (WESM) within a year of its enactment. But it was only five years later that WESM started operating in Luzon (in 2006), nine years later in the Visayas (2010), and 22 years later in Mindanao (2023).

Still, WESM has not operated as a true market, for two reasons. First, in the reality of WESM, the “market” is composed only of the generators (sellers); the buyers are, in effect, mere price takers. On the other hand, if WESM opens up to buyers under today’s setup, the result will be a near-monopsony (translation: only one buyer), which is as unwanted as having only one seller (monopoly). Why? The dominant power distributors would be the main buyers, and thus have undue market influence. It is no secret that in the Luzon grid, the dominant distributor (Meralco) controls up to 70 percent of the retail market.

Things would be different, and there would be true competition, if all power buyers, large or small alike—including small businesses and households—could buy power directly from their chosen source. This is the essence of Retail Competition and Open Access (RCOA), which a 2018 Philippine Institute for Development Studies paper called “the pinnacle of Epira.” Section 31 of Epira mandated that RCOA was to eventually reach the household demand level. Now, 23 years hence, one might well ask: Anyare? (What happened?) Or will we resign ourselves to the cruel reality in the joke that says, in the Philippines, laws are just suggestions?

The second reason WESM can’t function as a full power market is the continued effective separation of the Luzon, Visayas, and Mindanao grids, hence precluding a single nationwide market. This is because even with some interconnection in place, the capacities of the transmission lines connecting the Cebu-Mindanao, Cebu-Leyte, Cebu-Negros-Panay and Luzon links remain constrained.

On this, fingers point to the National Grid Corp. of the Philippines (NGCP) for its inability to install transmission facilities at pace with growth in capacity requirements. In turn, NGCP blames the Energy Regulatory Commission (ERC) for delays in approving its transmission projects. (ERC issues would fill a whole article in itself, so I will leave that for a later column.)

Also contributing to lack of competition in the sector was the manner by which NPC power plants were later privatized. Delgado recalls that President Ramos had proposed, and Epira later provided (in Section 47c), that NPC’s plants be privatized as portfolios of plants that can deliver baseload, mid-merit, and peak generation—three types of generation (“merit orders”) to respond to specific power needs depending on time of day, load requirements, and output variability. Certain plants can deliver only specific types. But the Arroyo administration sold individual plants anyway. This means that some companies now can only bid for baseload, while others only for peak, making it possible that only one or two plants are bidding at a given time of day, forestalling competition. Delgado thus suggests that ERC (or the Philippine Competition Commission?) examine the level of competition at the different merit orders in the industry.

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