Learning from Developing Country Power Market Experiences: The Case of Philippines from Indonesia while the remaining was coming from Australia, Vietnam and the Russian Federation (DoE, 2017).<sup>5</sup> The mid‐term outlook for Philippines remains reliant on coal‐fired generation to match demand growth. As of December 2017, the Department of Energy (DOE) reports that committed coal‐fired power plants for a total of 6.3 GW are planned to be commissioned between 2018 and 2022 in Philippines, equal to 73% of on‐grid committed generation projects.<sup>6</sup> It is worth noting that a tax hike on coal was passed in late 2017 in the Philippines. Nevertheless, figures on planned capacity additions refer to power generation projects in advanced development or construction stages.

Natural gas has also become important for power supply (accounting for 22% of power generation during 2017), especially in the Luzon island where the 3 GW of gas‐fired generating capacity of the Philippines is located. Three gas‐fired power plants were commissioned in the early 2000s in Luzon for a total of 2,700 MW, and two more power plants during 2016 for a total of 520 MW, reaching 16% of dependable generation capacity of Philippines in 2017, and 23% in the Luzon Island. These gas‐fired power plants have rather inflexible supply arrangements to access natural gas from the Malampaya deepwater gas‐to‐power field, compelling those plants to run as baseload resources, especially the 1.5 GW of Santa Rita and San Lorenzo power plants with high take‐or‐pay quantities.<sup>7</sup> Maintenance shutdown of the Malampaya gas field had, among other factors, led to tight power supply conditions and high spot prices in Philippines in 2010 and 2013, as further discussed later. However, inflexible gas‐supply has been at least partially alleviated recently due to the 2010 IPP administration contract of the 1.2 GW Ilijan plant, and the commissioning of two new power plants in 2016 (The Lantau Group, 2011, 2013).

Hydrological conditions also affect the power sector due to the significant share of run‐of‐river and dam hydro power plants, which account for 16% of dependable generation capacity in 2017. Hydrological conditions are especially important during El Niño meteorological phenomena which result in unusually hot and dry weather in Philippines. Such an event coincided with maintenance shutdown of the Malampaya gas field during 2010, leading to high spot prices and tight supply conditions, as further discussed later.

# 3 Market design

The Philippine power market is composed of bilateral contracts, and an energy‐only bid‐based power pool (the Wholesale Electricity Spot Market, or WESM). The market operator (PEMC) develops a least‐cost generation schedule and determines the market‐clearing spot price considering all power injections and withdrawals from the grid, based on generation offers. However, the spot price is used to settle traded quantities net of bilateral contracts (that is, quantities not covered by contracts). In turn, contracts are settled privately by the parties.

> 5 Department of Energy, “2016 Coal Statistics”. Available online: https://www.doe.gov.ph/energy-resources/2016- <u>coal-statistics</u>

> 6 Department of Energy, “Private Sector Initiated Projects” as of December 2017. Available online: <u>https://www.doe.gov.ph/private-sector-initiated-power-projects</u>

> 7 Natural gas-fired power plants reached an average capacity factor of 70% (with respect to registered capacity) during 2016 (Market Assessment Group, 2017).

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