Policy Research Working Paper 8721 Learning from Developing Country Power Market Experiences The Case of the Philippines Hugh Rudnick Constantin Velasquez Energy and Extractives Global Practice January 2019 WPS8721 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure AuthorizedProduced by the Research Support Team Abstract The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent. Policy Research Working Paper 8721 Deep reforms of the Philippine power sector began in 2001, aiming at competitive wholesale and retail markets. This case study analyzes the Philippine experience with wholesale electricity markets at the generation level, including design, implementation, and outcomes. The spot market began operation in 2006, amidst adequate generation capacity albeit highly concentrated among few players. The reforms have successfully introduced market-driven forces to system operation and spot price signals for investments. Invest- ment in new generation has recently been commissioned; generation concentration has plunged since the market’s inception (mainly due to privatization of generation assets); and generation supply has been generally secure (barring natural disasters). However, serious conflicts due to market power abuse occurred in the past; the market remains con- centrated in four major players; and new competitors have slowly entered through the opaque and largely regulated market of bilateral contracts. Moreover, following aggres- sive capacity additions, baseload coal generation soared over the past decade, reaching 50 percent of total output in 2017, thus raising concerns about environmental sustainability, the optimal capacity mix (due to lack of investments in flexible mid-merit and peaking power plants), and long- term supply security of the Philippine power sector (since coal is imported). The case of the Philippines’ power market highlights the importance of adequate ownership structure supportive of competition, the need of effective monitoring and oversight, especially during initial phases of the market, and the benefits and challenges that open and competi- tive wholesale markets can provide over time, especially in interaction with vertical integration (whether through cross-ownership or through bilateral contracts). This paper is a product of the Energy and Extractives Global Practice. It is part of a larger effort by the World Bank to provide open access to its research and make a contribution to development policy discussions around the world. Policy Research Working Papers are also posted on the Web at //www.worldbank.org/research. The authors may be contacted at [email protected]
Learning from Developing Country Power Market Experiences: The Case of the Philippines 1Hugh Rudnick Competition; Developing countries; Emerging markets JEL codes: L13, L94, L98, Q4, K21 1This paper is a product of the “Rethinking Power Sector Reform” knowledge program of the Energy while system operation is conferred to the sole national Transco. Transmission was unbundled from generation and distribution, but cross‐ ownership between generation and distribution businesses is allowed up to a limit stipulated by the regulator. On the supply side, 84% of electricity needs continue to be covered by contracts, some of which include rigidities and clauses from the 1990s IPP program aimed at solving the deep power crisis faced by the Philippines at the time. Key figures for the Philippines power sector are summarized in Table 1‐1. Table 1‐1 Philippines power sector summary. Population (2016) 103 million Electricity sales (2017) 78 TWh Electricity sales CAGR (2005‐2017) 4.6% Major generation technologies 1Coal: 50% Natural gas: 22% Geothermal: 11% Hydropower: 10% Learning from Developing Country Power Market Experiences: The Case of Philippines 2 Spot electricity price (2005‐2017) 25,549 PhP/kWh (114 USD/MWh) Source: Worldbank, Department of Energy. 1As share of 2017 energy generation. 2Average spot electricity prices from 2006 to 2017, expressed in 2015 currency. The objective of this paper is to document and analyze the experience of the Philippines with power markets, regarding design, implementation and outcomes of the market. Ultimately, the analysis in this paper is expected to be useful for developing countries which are currently developing or considering the development of a power market. However, the paper does not aim at providing policy or market recommendations for improving the performance of the Philippines power market. Furthermore, the scope of this paper is limited to assessing competitive power markets, with an emphasis on the generation and supply segment. Hence, retail competition, as well as the transmission and distribution segments, are not the primary focus of this paper. Moreover, the paper does not directly address several power sector reform issues, such as regulation, privatization, and political economy. These and other subjects are addressed elsewhere for each country, as part of the wider project. This case study is structured as follows. First, section 2 desc ribes the basic pre‐conditions for power markets, referring to both power system infrastructure and ownership (section 2.1), and to fuel supply (section 2.2). Section 3 describes the power market design. Section 4 describes the implementation of the power market, referring to both the governance of the market (section 4.1) and the transitional process towards a power market (section 4.2). Section 5 assesses the performance of the power market, from the perspective of prices and efficiency (section 5.1), investment and security of supply (section 5.2), and sustainability (section 5.3). Section 6 concludes this case study. 2 Context and conditions for power markets 2.1 Power System As the 12th‐largest nation in the world, the Philippines has a population of more than 100 million people spread over 7,000 islands, presenting several electricity infrastructure challenges. Luzon (which includes Manila), Visayas and Mindanao are the three main Philippine islands, of which Luzon and Visayas are currently interconnected. The transmission grid in these three major islands is operated by the National Grid Corporation of the Philippines (NGCP). The island of Luzon accounts for 75% of Philippine’s energy demand and 73% of installed capacity, with Visayas and Mindanao accounting for 13% and 12% of power demand, respectively (see Figure 2‐1). It is worth noting that about 70% of Luzon’s demand is concentrated in the franchise area of the major Disco Meralco. The major transmission grid addressed in this case study comprises Luzon and Visayas, which are interconnected via a submarine HVDC link since 1997. The Visayas grid is in turn composed of five sub‐ grids in different islands, interconnected via submarine AC lines (NGCP, 2015). Besides the three major islands, there are more than 120 small island and isolated power grids. These smaller systems are not addressed in this case study, since the focus is on wholesale markets and therefore focus on the main power grids.