A significant step toward a sensible electricity market

By Ben Kritz March 16, 2021
https://www.manilatimes.net/2021/03/16/business/columnists-business/a-significant-step-toward-a-sensible-electricity-market/851517/

THE government’s disastrous handling of the coronavirus pandemic, and the economic and social calamity that it has caused for everyone is understandably the only issue most people care about or are even aware of at the moment, but there are occasional positive developments that bode well for a productive future, no matter how distant a hope that may seem today. News of one of these came across my desk late last week in the form of a press release from Green Tiger Markets (GTM), a firm that first caught my attention a little more than a year ago, and whose efforts here in the Philippines I have followed with keen, although under the circumstances somewhat frustrated interest ever since.

GTM is in the business of developing and operating derivatives markets, combining a great deal of expertise in commodities and other financial market work with an equally impressive skillset in software and systems design. GTM’s particular interest in the
Philippines is the electricity market, for which they have developed a derivative marketplace platform that will allow buyers and sellers of electricity to trade forward contracts. This allows traders to hedge their price risk exposure, which ultimately will result in benefits to end users in the form of more efficiently managed electricity supply and less volatile prices.

Although the actual platform is rather sophisticated, the basic concept of forwards trading is relatively simple. For example, a buyer of electricity – say, a distribution utility like the Manila Electric Co. (Meralco) – can purchase a quantity of electricity at an agreed price from a seller/generator for delivery at some future time; next week, next month, maybe six months from now. Meralco is then guaranteed the contracted supply and price at the appointed time.

If at that time the market price of electricity is higher than the price on the forward contract, Meralco gains; if it is lower, the supplier gains. The supplier could, depending on how the market is doing, trade that forward contract with others or create new ones with other suppliers to hedge its own price risk. Either way, from Meralco’s perspective, the price for that quantity of electricity at the time of delivery is set, which allows Meralco to manage its rates. More often than not, this would result in somewhat lower electricity costs for consumers at any given time, and almost certainly would over a longer period; any changes in the retail rate would in any case be much smaller than they are now, as the forward market virtually eliminates the risk from unexpected shocks, such as an unplanned shutdown of several generating plants at once.



The significant step forward was disclosed by GTM in its press release dated March 9, 2020, announcing the start of a live pilot of its electricity forwards market platform, initially involving five participants – electricity producers, distribution utilities, retail electricity suppliers, and large retail customers – with an additional six scheduled to be on board by the end of this month. As it is a pilot program at this point, the market participants have not been publicly announced, but to provide a clue as to who might be involved, they collectively represent about 40 percent of the Philippines’ present generation capacity and about 65 percent of the country’s electricity demand.

In the interest of full disclosure, I was actually made aware of this latest development several weeks ago, including who the pioneering market participants are, but the uncertainty of when this might actually go live – as well as not wishing to step on the toes of some guys who have worked very hard on this, and richly deserve the chance to toot their own horn about it before anyone else does – precluded an earlier announcement.
Progress has been much slower than anyone had hoped; operating during the coronavirus pandemic has obviously been a huge challenge, and the pandemic has also aggravated the normal maddening, glacial pace of the relevant bureaucracy here in the Philippines.

As they say, however, once begun is half done, and there is no overstating the significance of the launch of the forwards market platform. It has been more than 20 years since there has been anything resembling a commodities market in the Philippines, and that absence has represented a glaring shortcoming in financial market development here. Electricity is an excellent place to start, given the country’s chronic issues with price and supply. The forwards market platform is also ideally suited to the market for renewable energy, which makes the launch of the pilot even more portentous in light of the government’s recent enthusiasm for accelerating the pace of renewable energy development here. As a matter of fact, according to GTM Chief Executive Officer John Knorring, the company is currently in the final stages of putting together a renewable energy platform for the Singapore market, which would presumably also be useful here in the near future.

A successful launch and operation of an electricity forwards market augurs well for the development of other commodities markets as well, as the system can be easily configured to just about anything – rice, pork, palm oil, sugar, bananas, even water – all things that have routinely been economically problematic for suppliers, consumers or both. An active commodities market, a regular, vital component of most grown-up economies, would be a huge boon to this one, and it is rather exciting to finally see the tangible possibility of that.