Learning from Developing Country Power Market Experiences: The Case of Philippines

- Ageing and outages of generation and transmission infrastructure

- Tariff reform

- Contractual positions of market players

Positive price spikes in the Philippines power market have been driven primarily by tight supply due to forced and scheduled outage of power generation facilities (for example, due to natural disasters, forced outage, or due to planned periodical maintenance), and slow investment with electricity demand growth outpacing capacity additions until recent years. Natural calamities result in particularly high spot prices as expected, although most of those intervals are subjected to administered pricing.

Zero or negative prices have occurred in Philippines as a result of bidding behavior by market participants who submit zero or negative offers to the pool in order to ensure their power plants are dispatched during low load conditions. Many bilateral contracts have minimum offtake requirements (MW and/or MWh). This results in the submission of very low offer prices (0 to negative 10 PHP/kWh) in the market by generators serving their minimum offtake. Even if there are plants with cheaper marginal costs in the market, they are displaced by contracted capacities. Indeed, spot prices fell to a record low of ‐594 PhP/MWh on average during January 2009, by the combined effect of low demand and high supply, as fewer plants went on outage (PEMC, 2014).

Due to limited intra‐island transmission capacity and transfer capacity in inter‐island connections, price separation has been a common occurrence in the market. A robust transmission grid would reduce the occurrence of price separation resulting in the optimal utilization of available capacities in the grid.

Although concentration in the Philippine power market plummeted over the past decade, the market remains relatively concentrated. As of 2017, the WESM remains dominated by four major players who account for 62% of total registered capacity (i.e. First Gen Corporation – FGC; PSALM; Aboitiz Power – AP; and San Miguel Corporation – SMC); while other generators account for 38% of registered capacity (see Figure 5‐4). Market concentration measured by the registered capacity HHI dropped from over 3,700 in 2006 (highly concentrated) to nearly 1,120 in 2017 (moderately concentrated) (PEMC, 2016a, 2017b). Other indices are also calculated by PEMC to reflect market outcomes. For example, the market Residual Supply Index exceeded 100% during an average of 62% of the hours of 2016. Hence, during 38% of the hours there was a pivotal supplier who can modify the market‐clearing price either by physically withholding capacity or offering its capacity at a high price (Market Assessment Group, 2017).

It is worth noting that the Visayas grid was incorporated in the WESM in 2010, thus expanding the scope of the wholesale market and the number of players. Privatization of publicly‐owned generation assets has also contributed to horizontal disintegration in the generation segment. Furthermore, new competitors have entered the market during recent years.

Both market power and vertical integration (through bilateral contracts and cross‐ownership of generation and retail / distribution) have lowered liquidity in the spot market. Indeed, vertical integration has been apparent with most Gencos establishing retail arms, and even customers having their own retail companies. Discos have also been allowed to establish retail affiliates, and the retail market is currently dominated by Meralco (the Genco/Disco/Retailer which accounts for about 70% of demand in Luzon) with a 47% market share of contestable customers.

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