ERC needs to expedite price cap decision

LAST month, the Energy Regulatory Commission (ERC) announced that it would begin a review of the secondary price cap, a mechanism applied in the Wholesale Electricity Spot Market (WESM) that is meant to keep electricity prices from rising to excessive levels. The announcement was welcomed by the electricity sector, because even though it is recognized that steps to keep consumer electricity prices from skyrocketing are beneficial and probably necessary, the secondary price cap might create more problems than it solves.

Nearly a month has passed, however, and the latest statements — reported at the end of last week — from the ERC on the issue are exactly the same ones made several weeks earlier, suggesting that there has not only not been any progress toward rationalizing the secondary price cap, work on doing so is yet to start. While we appreciate the enormous amount of work the ERC is tasked with doing, the great anxiety the secondary price cap issue causes for power producers and consumers alike strongly suggests that it be given a higher priority than it evidently has been.

The secondary price cap was implemented about 10 years ago, and is enforced if settlement prices in the WESM exceed a certain level. Currently, the cap price is P6.245/kilowatt-hour (kWh), and is triggered if the settlement price exceeds P9/kWh over a three-day rolling average. This typically happens during times when there is reduced capacity due to power plant outages, particularly when those outages are unexpected. The ERC noted that the price cap was triggered more than 50 percent of the time during several months last year for this very reason; by contrast, the planned maintenance period for the Malampaya gas facility last month, which was scheduled well in advance, only resulted in the price cap being implemented about 7 percent of the time during the two weeks the facility was offline.

In its statements, the ERC has acknowledged concerns expressed by the electricity sector that the existence of the secondary price cap, at least at its current level, is a disincentive to investment in the energy sector. There are two reasons for this; first and most directly, operators of plants with high costs might be caught out and actually operate at a loss during those times when the price cap is triggered, because the implementation of the cap lags the actual production and trade of the electricity. Second, the price cap causes a distortion in market prices, so that a potential investor has difficulty accurately forecasting demand and revenue, forecasts that are necessary to determine the type and scale of a generation plant to be built.

Burden on consumers

The remedy for this is to raise the secondary price cap to a level where it would only be triggered under extreme circumstances, allowing the market to naturally moderate prices most of the time. It has been suggested that one possible fix would be to increase the threshold for implementation from P9/kWh to something over P10/kWh, and possibly increase the cap price as well. Those on the consumer side of the equation, however, have raised concerns that raising the price cap will impose an additional burden on consumers.

In a statement to the Manila Times earlier this week, electricity distributor Meralco said: “Meralco has consistently supported measures that will protect consumers from higher power costs. Raising the secondary price cap from its current level may result in higher power costs, especially during tight supply situations. We, however, will defer to the wisdom of government, especially the regulator in coming up with a decision on this matter.”

It added, “We also would like to emphasize that what will truly help the overall supply situation is having adequate capacity and a comfortable power reserve in the grid to ensure lower and more competitive market prices.”

As to the latter objective, there is a great deal of effort already being applied to the problem by the government, power generation companies, power distributors such as Meralco, and a growing number of renewable energy developers and retail electricity suppliers. What the country needs to make all that effort productive is for the regulator to apply its wisdom and come up with a decision on the matter of the secondary price cap as soon as possible.

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