International Experience in Market Testing of Power Supply Agreements Ruperto P. Alonzo

Competitive Selection Process Early pronouncements deal with opening of NPC-SPUG areas to private sector DC NPC-SPUG areas declared open for private sector participation Competitive process to be used to select one or more New Private Providers (NPPs) to supply power to area DU options in managing competitive process— –Use a Transactions Advisor –Let NPC-SPUG assign its PSA to NPP through a competitive process –Let DU manage competitive selection process by itself

Competitive Selection Process ERC Resolution No. 11, Series of 2005 –DU/EC’s proposed PSA must specify expected output the NPP shall provide –Aggregation – a group of ECs may conduct a joint CSP to select a single NPP to supply electricity in their designated areas –After two failed biddings, EC may enter into negotiations with any interested party ERC’s Draft Rules Governing PSAs (2013) also stress CSP –No mention of aggregation, though –Still going through public hearings and consultations?

Country Experiences in CSP in PSAs Available literature relevant to PHL is mostly about Latin America Main objectives: –Secure lowest long-term cost of power for consumers –Attract new generation capacity Countries adopting auctions may differ widely in terms of: –power industry structure –regulatory regime

Key Attributes

Brazil – Industry Profile Largest consumer of energy in South America. Large GOCCs dominate the electricity sector. ~ 27% of generation assets with private investors. Two large grids and many smaller systems in isolated regions, most transmission lines controlled by federal and state governments. As of 2007, 64% of Brazilian distribution assets are with private sector companies. Hydropower is the main source of electricity. o Accounts for 90% of the national power generation. o Accounts for about 70% of installed capacity. Total installed electricity capacity in 2012 was 116,835 MW In 2011, Brazil produced enough energy to cover 90% of its demand.

Brazil – Aggregation and Auction Mandatory aggregation for those participating in auction –DUs aggregate their demand Mandatory auctioning only for captive market –Designed by government (MME ~ DOE) –Regulated by government (Aneel ~ ERC) –Private not-for-profit auction facilitator (CCEE ~ PEMC) 3 kinds of auctions –Auctions for contracts for energy from existing plants Delivery in the following year Duration is 3 to 15 years –Auctions for contracts for energy from new plants Delivery in three or five years Duration is between 15 to 35 years 2 public auctions every year –Adjustment contract auctions 4 times a year Delivery 4 months ahead

Chile – Industry Profile Total installed electricity capacity = GW (2010) –Thermal 65%, hydro 24%, other renewables 1% to 4%. Four regional power systems o SIC with 11,600 MW serves the populous central region including main consumption centers o SING with 3,700 MW serves the major mining and minerals processing operations o Aysén and Magallanes systems with joint 150 MW serve small and isolated remote area power systems There is no integrated transmission system spanning the entire country due to geography and the distribution of electricity generation.

Chile – Aggregation and Auction Aggregation is optional No aggregation facilitator Auction is mandatory Auction regulator is government – CNE (~ ERC) Distributors can auction contracts up to 15 years at a fixed price Auction is conducted at the discretion of the distributors provided they be 100% contracted at all times, at least for the next 3 years The regulator sets a price cap for the auction

Colombia – Industry Profile Total installed electricity capacity in 2010 was 13,531 MW with hydro at 68% and fossil fuels at 32%. The electricity sector is unbundled into generation, transmission, distribution, and commercialization since sector reforms were carried out in About half of the generation capacity is now privately owned although private participation in electricity distribution is lower. There are 36 active generation companies but the largest one controls 1/5 of generating capacity. The transmission grid is owned by different corporations as well but 70% is controlled by one company – ISA, 59% of which is government-owned.

Colombia – Aggregation and Auctioning No aggregation Auctioning is optional Auctions are conducted only at discretion of the regulator and facilitator – CREG. Primary auction is for Firm Energy Obligations Firm Energy Obligations: o Option contracts that commit generating companies to supply contracted amounts of energy at pre- determined scarcity price whenever the spot price in the electricity market exceeds the scarcity price  The product being auctioned is the option contract backed by a physical resource certified as being able to generate energy when the scarcity conditions are present.

Panama – Industry Profile As of 2009, total installed electricity capacity was 1,789 MW: thermal at 51% and hydro at 49% Electricity demand is dominated by commercial sector. It is a net exporter of electricity Before 1998, there was one vertically integrated electricity utility, the IRHE In 1998, IRHE was restructured into 4 generation companies, 3 distribution companies, and 1 transmission company Only the transmission company remained in the state’s hands (ETESA)

Panama – Aggregation and Auctioning No aggregation Auction is mandatory o The government obligates distributors to buy 100% of their demand, and generators to offer all available power in the contract market. No aggregation facilitator Use of government-owned auction regulator (ETESA) is optional; DUs may contract energy through public bidding directly with the generators

Assessment Chile –Due to much decentralization, contracts not standardized –Objectives of low prices, high auctioned demand coverage not achieved Brazil –New capacity auctions have attracted interest of national and foreign investors –Problems in obtaining environmental clearance licenses have led to fewer hydro projects joining auctions

Assessment Colombia –Auction system allows bidders to see when their capacity becomes pivotal (largest genco owns 25% of total capacity) –Sealed-bid auction recommended Panama –Structure of market is similar to PHL –experience with auction of renewables may be worth looking into

Conclusions (from 2011 World Bank Study) Risks with auctions –In markets that are not fully functional –Where institutions are not strong enough to support any formal procurement schemes –Where contract sanctity is often challenged Auctions help to –Increase transparency in procurement process that reduces risks –Promote competition –Provide efficient outcomes that deter future challenges even as political scenarios change –Establish objective, market-driven criterion for regulatory issue of pass-through of generation costs to utility-franchised market

Some Useful References Maurer, L.T.A. and L.A. Barroso, Electricity Auctions: An Overview of Efficient Practices. World Bank, 2011 Moreno, R., et al., “Lessons from Five Years of Experience in Energy Contract Auctions in South America.” Presented at the 33rd IAEE International Conference, Rio de Janeiro, Brazil, June 6 - 9, overviews

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