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-2004-01-001

• 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

hydro thermalBrazil 1998 75% 25% mandated 31Colombia 1996 67% 33% mandated 1Chile 1982 40% 60% mandated 3Peru 1992 60% 40% mandated 3Spain 1998 15% 55% mandated 11PJM 1997 0% 100% voluntary 7New England 1996 0% 100% voluntary 4Mexico 1992 80% 20% mandated 8Panama 1997 45% 55% mandated 2

Year of 1st reform

Jurisdiction Capacity mix Auction is: Total Auctions

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 = 15.94 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 1994.

• 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, 2010.

• http://www.reegle.info/policy-and-regulatory-overviews

Thank you!

Tel. Nos. +63 (2) 9279686 loc. 239Telefax Nos. +63 (2) 9205465

Website: www.upecon.org.ph/epdp Email: infoepdp@gmail.com