WESM: Instrument of Reform and Agent of Progress
Progress is an abstract concept with many concrete manifestations. While arguably easy to define on an individual, personal level, it becomes considerably more complex on a national level. The seemingly infinite variables that characterize such an expanded scope often necessitate a more critical look at the otherwise straightforward term. Of note is the fact that ours is a developing country that has undergone considerable political and economic transformation over the last several decades. Here, progress is not only a term that is slippery to define – it is also something that is occasionally at risk, thanks to unseemly manipulation and misinformation at many levels. This is where reform becomes the partner of progress, and indeed when applied at the right time it becomes the spark for considerable change. Reform is a point of focus for the present administration, whose principles of “a straight path” and “inclusive growth” have been the impetus for ongoing efforts to improve governance.
These moves are partly responsible for the acceleration of foreign direct investment (FDI) in business process outsourcing, as well as a renewed vigor for FDI in the manufacturing sector. The industrial sector grew 7.5% in 2014, not outpacing its 9.3% leap in 2013, but continuing a positive trend for the sector seen with renewed strength in the 2010s. On the whole, the country’s growth in economic freedom has also been recognized by the Heritage Foundation, whose rankings saw the Philippines rise from 115th (2011) to 76th (2014). Major credit rating agencies like Moody’s and Standard & Poor’s have also taken notice of the Philippines’ economic improvements, upgrading the country to Baa2 and BBB ratings, respectively. All told, the country experienced a 6.3% average growth rate in the first half of the 2010s, beating out many Asian neighbors (Indonesia at 6%, Malaysia and Vietnam at 5.8% and Thailand at 3.6%),
The very principle of reform has also informed the way that the current progress has taken shape: in 2001, an instrument of reform was first set up to make the continued powering of progress possible.
In 2001, the Electric Power Industry Reform Act (EPIRA) was passed, marking a renewed commitment to reforming the Philippine power industry and establishing a tighter framework for the future. Seven years in the making, the EPIRA sought to empower consumers, maintain industry accountability and foster competition in the power industry.
EPIRA had the additional goal of chipping away and eventually dismantling the apparently monolithic monopoly that had come to characterize the power industry. This would be replaced with a spot market, where the commodity of electricity would be traded in a competitive environment that would go on to result in benefits for the end consumers. Operated by the Philippine Electricity Market Corporation (PEMC), a non-stock, non-profit firm, the Wholesale Electricity Spot Market (WESM) has spent the intervening years expanding commercial operations to the Luzon and Visayas grids and making forays into Mindanao.
How has WESM Operated as a Driving Force that Powers Progress?
The gains from WESM’s integration into the landscape of the Philippine power industry have been characterized as more long-term than short-term — more in the vein of developing a system where energy prices are reasonable than magically reducing prices overnight. Nevertheless, the very existence of a market that behaves like a market – as opposed to a nebulous, apparent power monopoly – allows electricity to properly be treated as a market commodity.
Indeed, the presence of a market where demand and supply can be laid out cleanly and clearly has allowed the Philippine power industry to enter a new and better phase. But beyond that is the way the market is run: WESM consistently works to ensure a level playing field, allowing market forces to be all that dictates the flow of trade. Just as importantly, the real-time availability and visibility of market prices reflects a commitment to promoting transparency in market conduct. The accountability that this fosters helps shape the proper conduct of the spot market.
Further, the presence of a competitive spot market encourages growth in generation capacity. This is undeniable when faced with the figures that show a steady annual rise in generation capacity with over 5,000 MW capacities added to the grid since 2006. The presence of a spot market offers another venue, beyond bilateral contracts, for the selling of electricity – one where demand and supply can more effectively meet in the middle.
This venue, for that matter, is also one that has become more responsive to the times. Renewable energy has enjoyed a surge in productivity, giving the Renewable Energy Act of 2008 a continued string of good results. Wind power has climbed to taking up 2.6% of the overall registered capacity mix in 2015 from 0.6% in 2006 – as a matter of fact, the 2015 jump in generation capacity is attributed to the entry of three Luzon wind power plants. Geothermal power has also increased its share in the registered capacity mix, from 7.73% in 2006 to 13.2% in 2015. It has been argued that continued growth in renewable energy could potentially lead to lower prices overall for consumers, especially if there is enough growth to eventually supplant the more costly diesel power.
In relation to this, WESM has also served to provide grid-connected customers an additional source of capacities in excess of their contracted capacities. If these high-use customers had no such alternative means of securing capacities, blackouts would be the likely result. This role played by the spot market becomes particularly instrumental in terms of literally powering the way these customers contribute to progress, and has in fact, increased over the last few years. Greenlit two years ago, Retail Competition and Open Access (RCOA) takes the market concept and pushes the envelope. This by offering qualified end-users the power of choice, letting them secure capacities from qualified and certified Suppliers. Aside from giving Suppliers an additional means to earn, this increases the level of competition – a shift that stands to benefit the customers.
To bring it full circle, one can revisit the image of the Wholesale Electricity Spot Market as a level playing field – and then look beyond that to see what effect such a playing field has on its players. WESM espouses accountability and holds all market players to this, as well as spelled out both in the overall WESM Rules and the relevant Market Manuals. Consistent implementation of this over WESM’s run has helped create and maintain a culture of discipline among industry participants, who are aware that they are held to particular standards.
Like progress, reform is best and most beneficial when it is sustained and targeted toward the greater good. WESM has managed to stay the course its mandate has charted for it, remaining stable with a consistent direction that has weathered numerous external changes. Internally, however, it has managed to evolve, with RCOA and a reinvigorated drive toward renewable energy adding new layers to the principles that were established at its inception.
As such, WESM continues to grow in its role of providing a means of reform for the Philippine power industry. This way, it both strengthens the nation’s capability to produce and grow in turn, and the confidence of investors in a developing country that continues to progress.
JEROME F. JUNIA is the Managing Editor of Trade In Magazine.