As Pippa looks ahead from its first 24 years, it remains a champion of both the energy industry and its customers.
VERY few organizations can boast that they touch the lives of nearly every person in the country, but the Philippine Independent Power Producers Association (Pippa) may be one of those few. The professional organization of independent power producers (IPPs) celebrates its 24th founding anniversary today, November 15.
Founded on November 15, 1995, with nine original member power firms, the association has grown to include 28 companies, among them some of the biggest and best-known energy providers in the country: First, Alsons Power Group, AES Philippines, Energy Development Corporation, SN Aboitiz Power and San Miguel Energy Corp., among others. The Pippa members collectively provide 82.8 percent, or 13,549.40 megawatts (MW) of the Philippines’ installed electric generating capacity, providing energy to nearly every part of Luzon, Visayas and Mindanao.
Pippa’s role is two-fold, but it aims to prioritize its commitment to promptly respond to consumers’ demand for adequate, reliable and affordable supply of electricity. At the same time, the association represents the electric power industry to help shape policies that benefit both consumers and the industry, fostering ethical and productive relationships between the industry and concerned public institutions.
By definition, an IPP is a “non-utility generator,” meaning an enterprise that is not owned by a national electric company or other public utility. The electricity generated by an IPP is typically sold to a third party, either to a specific distribution utility or through some form of electricity market.
Working in the background
In recent years, Pippa has actively worked to improve and support energy policy, mostly in ways that have not been obvious to electricity consumers, whom those policies ultimately benefit.
In 2014, for example, Pippa supported policies that established the price cap on electricity at the Wholesale Electricity Spot Market (WESM), in response to a spike in prices the previous year.
The Department of Energy (DoE), Energy Regulation Commission (ERC), and the Philippine Electricity Market Corporation (PEMC), which operates the WESM, reassessed the basic rules governing the operation of the Philippine wholesale electricity market with an eye to ensuring reasonable and more stable prices of electricity through a market price cap.
Pippa supported the policy by submitting a carefully designed proposed methodology for determining the price cap to the PEMC.
Pippa’s proposal was based on a concept called value of loss of load (VOLL), which is “the price that consumers will be indifferent between experiencing a supply interruption and paying a very high price for supply reliability.” In other words, the VOLL is the maximum price the average consumer will be willing to pay to ensure a continuous supply of electricity. If the cap is set at that level, Pippa argued, an optimal level of generation investment will be maintained, which in turn would minimize supply disruptions. If the price cap was set lower than the VOLL, then there would be no incentive to invest in new peaking generation capacity.
The methodology presented by Pippa was modeled after pricing models used in New Zealand and Singapore, neither of which have excessively high power costs, nor difficulties in maintaining abundant, reliable supplies of electricity. In order to determine the actual monetary figure of the proposed price cap, Pippa presented two alternative methods for doing so: The VOLL, which would presumably be equal to the eventual price cap, could be determined from a supply perspective as the ratio of the country’s GDP to total electricity sales, which resulted in a VOLL/price cap level of P173.55 per kilowatt hour (kWh).
The second, and more complex, method calculated the average price of a “best new entrant” peaking plant “to serve the last block of energy needed by the system given a target loss of load expectation,” or, put another way, the price of a plant that would not necessarily operate continuously, but which would provide sufficient power on demand to ensure that the number of hours (or days) that the entire system might experience supply interruptions in a given year would be below a predetermined target.
Even though electricity sold through the WESM almost never reaches as high as the price cap, having a somewhat higher cap allows energy investors to accurately calculate their investment and financing requirements, which encourages the development of new energy supply.
Reducing generation charges
The shockingly high price of electricity in 2013 and 2014 raised calls for the government and the power industry to step in and provide some relief to consumers. As the organization with perhaps more at stake in the issue than even the consumers themselves, Pippa presented suggestions to resolve the power crisis and prevent its reoccurrence by focusing on generation charges, the largest component of customers’ electric bills.
In its letter to former President Benigno Aquino 3rd, Pippa provided three suggestions, parts of all of which were eventually implemented, to smooth out market activity and prices that had become volatile.
First, Pippa recommended modifying the “must offer rule.” Under the “must offer rule,” all power plants must offer all of their capacity that is not already being supplied to a customer on the WESM. This had led to situations in which power plants which for one reason or another could not or did not wish to offer their excess capacity on the market would only do so if the price was set very high. Pippa suggested allowing power plants that were unable to offer any capacity to be called on only as a last resort, and without setting the market price.
Second, Pippa suggested establishing a “day ahead” market. In other words, generation capacity and buy offers would be posted based on anticipated needs for the following day, instead of for the same day. This would help to reduce wholesale electricity prices simply by eliminating many “emergency” situations in which distributors found themselves having to purchase electricity on the spot market to resolve supply deficiencies as they happened.
Finally, Pippa also recommended the establishment of a “forward market” for electricity, similar to the active forward and contract for difference (CFD) markets operated in other countries’ energy spot markets, and for that matter, in most other forms of financial markets. Like the “day ahead” market, a forward market allows utilities to plan for future needs and secure the needed power at reasonable prices. In a forward market, for example, a distribution utility could purchase power several weeks or months before the planned shutdown of a key generating facility, ensuring that there would be no shortfall and that electricity costs would still be reasonable.
Looking to the future
As Pippa looks ahead from its first 24 years, it remains a champion of both the energy industry and its customers, constantly seeking new technologies and new ways to maintain reliable and sustainable power. About 30 percent of the capacity represented by Pippa’s member companies is in renewable energy resources such as geothermal and hydroelectric power, and several of its members are investing heavily in other sustainable sources of energy such as solar and wind.
Managing a growing economy, a growing population, and protecting the environment are constant challenges, but the resources and know-how of Pippa’s member companies, gathered together and working toward common goals, should more than be equal to our changing circumstances in the years to come.
