12 Mar 2014
"Simulations that aim to point the cause of the Manila Electric Co. (Meralco) price hike during the 2013 Malampaya shutdown to the non-dispatch of Malaya Thermal Power Plant (TPP) in the Wholesale Electricity Spot Market (WESM) trading process are fundamentally flawed and extraordinarily misleading," Power Sector Assets and Liabilities Management (PSALM) Corporation President and Chief Executive Officer Emmanuel R. Ledesma, Jr. emphasized.
"Simulations are supposed to recreate a past situation in a logical manner, before the resulting conclusions can be considered reliable. Hence, the assumptions underlying the simulations should be consistent with each other, predictable, and based on rational behavior," Mr. Ledesma said.
"No consistent simulation can arise in using, on one hand, PhP62 per kilowatt-hour (kWh) bids that were repeatedly offered both for peak and off-peak hours of several days despite sufficient notice that the Malaya TPP was not being traded and dispatched in the WESM since January 2010, and on the other, the bid offers made by PSALM for the Malaya TPP under an open-breaker status for the purpose of complying in good faith with the Must-Offer Rule. The subject simulations simplistically factor into the equation such bid offers made for the Malaya capacity together with other bid offers made during the Malampaya shutdown. This method used in the subject simulations cannot possibly yield sensible results, given that when the WESM trading participants made their bids, the assumption cannot be other than the fact that the Malaya TPP was not being traded and dispatched in the WESM. The bids made under a no-Malaya assumption on one hand and bids under a with-Malaya assumption on the other hand, are contradictory. As such, a simulation using both types of bids at the same time cannot produce a coherent conclusion," Mr. Ledesma explained.
Mr. Ledesma noted that including the Malaya TPP as among the WESM trading participants fails to consider the fact that the aging Malaya plant can only run a very limited number of days in a year even as it refuels all year round. "This proposition will have far more disastrous consequences to the grid's stability and the energy supply. A realistic simulation should consider Malaya as what it has actually been - a security plant, which will be dispatched only for energy and grid security purposes," he said.
In addition, Mr. Ledesma noted that the subject simulations will not produce predictable results, in view of the inherent dynamic nature and unpredictability of the WESM market clearing prices (MCPs).
"If the situation to be recreated is unpredictable in itself, the simulation of this situation will necessarily be unpredictable as well. With the special way that the WESM works, the level of unpredictability in a stock market is no match to it. Unlike in the stock market where buyers and sellers see each others' bid amounts and volumes, a generator/supplier selling its power in the WESM submits a bid oblivious of the bids of the other generators, and a distributor buying power in the WESM is likewise oblivious of the bids of the generators and does not provide a bid at which amount it wants to buy. Unlike in the stock market where at any point in time during the trading day which spans less than six hours in a day, one sale bid and one purchase bid that matches would clear and affect only the parties involved, the pricing in the WESM is determined hourly for 24 hours with the lowest bid being dispatched first and with the last bid that meets the demand determining the market price for all dispatched plants for any given hour. With this system, a WESM trader cannot ascertain in advance that trading the Malaya TPP in WESM would set the MCPs at the price of the plant's bid offers, given that the trader cannot possibly divine the bids made for a particular hour and given that real-time demand cannot be foreseen, as these are precisely based on actual market demand at a particular hour," Mr. Ledesma said.
"As it happened in the past, when the Malaya TPP was still participating in the WESM bidding process, the plant did not always get dispatched when it bid. Real-time demand can increase and thereby clear bids higher than that of the Malaya TPP. In the same way, real-time demand can also decrease and thereby not dispatch the Malaya TPP despite its being synchronized to the grid. The determination of the dispatch schedule of all plants that participated in the WESM is done by the Market Management System software of the PEMC's Market Dispatch Optimization Model and considers other real-time information from the System Operations, such as reserve requirements, outage schedules, contingency list, transmission limits, and security limits," Mr. Ledesma added.
"It has to be noted likewise that if the capacity of the Malaya TPP were actually traded and dispatched in the WESM, the market behavior of all WESM traders would most likely change. PSALM's bids would also naturally change if the Malaya TPP were actually trading in the WESM, as PSALM would adjust to the real-time circumstances," he said.
An after-the-fact evaluation when all cards are already laid on the table, which could not have possibly been available to the parties involved beforehand, will not cure or explain the fact that there was no way such cards could have been laid under the rules set.
"No rational conclusion can also arise from the subject simulations, in view of the irrational and anticompetitive behavior that the simulation purports to recreate," Mr. Ledesma explained. "Bidding at PhP62/kWh only at off-peak hours allegedly in the hopes of avoiding being dispatched due to high operational costs was futile because such bid nonetheless resulted in the plant involved to actually get dispatched," he said.
"Quite surprisingly, the high bids were repeated a number of times on off-peak. When these high bids at off-peak cleared despite the purported intention, the sensible reaction on the part of the trader should have been to change its supposed bidding strategy as it was not working according to the purported plan. The clearing of the high bids over and over again over a span of a number of days should have lead a rational trader to bid low, as the bid would clear anyway and set the MCPs as the chances have been," Mr. Ledesma noted.
"Perplexingly worse, the repeated high bids were likewise made at peak hours. Based on Meralco's definition given on their website, peak periods are hours of the day when the demand for electricity is high while off-peak periods are hours of the day when the demand is low. When there is high demand, more power plants are called to run even those using expensive fuels in order to meet the demand for electricity, which is not the case when the demand is low or during off peak hours. A peaking plant fully contracted by a distribution utility specifically for the 2013 Malampaya shutdown would be able to comply with its power supply agreement (PSA) by bidding low or zero, if it wants to ensure inclusion in the WESM trading process in which lower bids are prioritized in the dispatch and hence get dispatched or run. Bidding at zero, as what PSALM did for its hydropower plants namely Caliraya, Casecnan, and HEDCOR to ensure their dispatch during the 2013 Malampaya shutdown, should have been the appropriate actuation from such a peaking plant. If Meralco indeed wanted to adhere to its public responsibility to protect the interest of its consumers, then it should have bid lowest, and not highest, during peak hours knowing full well that given the high demand for electricity, its bids is bound to be dispatched."
"Needless to state, the claim that there was an expectation that Malaya is being traded and dispatched in the WESM is unbelievable, especially on the part of trading participants that are experienced in WESM. It is undeniable that Malaya has been operated only as a Must-Run Unit s
Strategic Communications and Partnership Division |