Published July 9, 2020,
10:00 PM by Myrna M. Velasco
With physical deliveries
The Securities and
Exchange Commission (SEC) has reportedly given its go-signal on the
establishment of a “derivatives market” in the Wholesale Electricity Spot
Market (WESM) as long as this is anchored on commodities that will have actual
physical deliveries.
“When we sat down with
the SEC, their major input to us was: we can start with the derivatives as long
as there’s physical delivery of the commodity. But if the derivatives market
will just be based on ‘speculations’, they told us that current mechanisms and
laws may not allow that,” said Isidro E. Cacho, Jr., chief corporate strategy
and communications officer of the Independent Electricity Market Operator of
the Philippines (IEMOP), the entity currently operating the WESM.
He qualified though
that they would still need additional round of studies and further discussions
with SEC before they will kick-start derivatives offer in the spot market.
Cacho said the
propounded derivatives market will be ideal for “forward contract” that
generation companies (GenCos) can lean on, especially on their need for
“replacement power” when their generating facilities will suffer forced
outages.
In finance, a “forward contract” is a non-standardized transaction agreed upon
by parties to buy or sell an asset or commodity at a specified future time and
with agreed price at the conclusion or firming up of the contract.
For derivatives market
in particular, these instruments could take the form of “futures contract” or
“options contract” – which may be underpinned by a whole range of commodities
that could be incorporated into the power spot market.
“What we’re looking at
is a ‘forward market’ that can have a tenor of one month or quarterly or even
annual…because one aspect that we’re trying to address is the need for power
replacement. Since for example, if a generator loses capacity because of forced
outage, then there should be a market mechanism in the WESM that would be able
to address that,” the IEMOP executive emphasized.
When power plants in
the country conk out due to technical glitches, these GenCos would have to
guarantee “replacement power” that shall be funneled to their off-takers
(capacity buyers) because these are generally required under their power supply
agreements.
The replacement power
will ensure that brownouts could be avoided, but under current set-up, these
capacity-procurements are often exposed to price volatilities that could end up
more expensive for consumers.
Cacho indicated they
would also need further collaboration with the Philippine Electricity Market Corporation
(PEMC) because aside from the derivatives market, there are proposals for the
integration of financial transmission rights (FTRs) in the new market
management system (NMMS) of the WESM.
FTR is a type of
financial instrument that entitles the holder to receive compensation from
congestion costs that arise when power transmission grids are congested as a
result of the dispatch of power plants.
With FTRs, trading
participants in the spot market could steer clear of potential losses relative
to price risks inherent in the wheeling of energy capacity into the grid.
As envisioned, such financial instrument “will address the volatility of prices associated with power supply due to transmission congestion costs.”
As envisioned, such financial instrument “will address the volatility of prices associated with power supply due to transmission congestion costs.”
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