Learning from Developing Country Power Market Experiences: The Case of Philippines Ancillary Services Procurement Agreement (ASPA) of NGCP with various reserve providers. The cost of these Ancillary Services is currently paid by all electricity consumers.

# 3.3 Price formation

Hourly nodal prices are cleared by centralized optimization of the market operator, based on bidding by Gencos and inelastic demand. Gencos bid price‐quantity pairs in 1 MW blocks, monotonically increasing in price. It is worth noting that DOE has recently mandated the reduction of the trading interval to 5‐ minutes to determine dispatch and spot prices.<sup>8</sup> It is important to note that the Philippine spot market is a hybrid between a gross pool for generation scheduling, with bilateral contracts which often include minimum off‐take requirements (Abrenica, 2014). Unlike bilateral power markets where generators can self‐dispatch based on physical contracted quantities (and can offer excess capacities in the spot market), scheduling in Philippines is based on economic dispatch of all the offered generation capacities. Hence, many power plants offer zero or negative prices to ensure dispatch in order to fulfill minimum off‐take requirements of bilateral contracts.<sup>9</sup> On the other hand, a must‐offer rule requires Gencos to offer their entire available generation capacity, in order to prevent capacity withholding from the market. Furthermore, the regulator established offer and price caps in 2013‐2014 following sharp spot price spikes (see section 4.1.3).

Market‐clearing nodal prices are determined by the Market Operator’s optimization model, considering transmission losses and congestions (although a price‐substitution methodology is in place to avoid extreme nodal price separation). Gencos are paid at the nodal price for produced quantities net of Bilateral Contract Quantities (BCQs), while buyers pay a zonal price (weighted average of nodal prices at all off‐take nodes within the pricing zone) for consumed quantities net of quantities traded in bilateral contracts.

Retail tariffs are regulated for captive customers, and the generation charge is passed‐through by Discos to final customers (mostly households and small businesses). The energy charge to final customers covers both payments for bilateral contracts and purchases from the spot market (WESM).

# 3.4 Demand participation in the wholesale market

Demand participates directly in the financial bilateral contracts market; while retail customers can choose their retail supplier. Discos and bulk customers (i.e. connected to the transmission grid) can engage in contracting directly with suppliers. Discos and bulk customers are also forced to participate in the gross power pool for settling physical energy transactions not covered by bilateral contracts.

Direct demand participation in the wholesale market is envisioned in the market rules but is not yet implemented in practice. It is noteworthy that Discos tend to be passive buyers due to the pass‐through of the generation charge to captive customers (PEMC, 2014). Moreover, cross‐ownership between

> 8 DoE circular No. 2015-10-0015. Available online: <u>https://www.doe.gov.ph/sites/default/files/pdf/issuances/dc_2015-10-0015.pdf</u>

> 9 For example, PEMC’s 2016 Annual Market Assessment Report indicates that all geothermal power plants in Luzon priced their capacity offers at zero or negative prices during the year; while Luzon coal plants priced 45% of its capacity offers between 0 and 5,000 PhP/MWh, and 53% were priced at zero or negative (2% bid higher than 5,000 PhP/MWh).

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