Download Means and Measures to Giving Greater

Means and measures to giving greater consumer
protection against price spikes
Power & Electricity World Philippines 2015
Mike Thomas
[email protected]
Who we are?
Founding Partners
Mike Thomas
Putnam, Hayes & Bartlett
USA
Thomas Parkinson
Putnam, Hayes & Bartlett
The TLG Team
NEW ZEALAND
PHB Hagler Bailly (NZ)
Putnam, Hayes & Bartlett, Asia Pacific
CRA
The North Bridge Group
ASIA
PACIFIC
CRA
Sarah Fairhurst
CAMINUS
UK/EUROPE
PowerGen International
PHB Hagler Bailly (AU)
Putnam, Hayes & Bartlett, Asia Pacific
AUSTRALIA
Late 1980s/Early 1990s
2015
Note: TLG is an independent company with no affiliation to any of the other companies shown.
Extensive global experience and long history of advising on energy economic and commercial matters
1 | The Lantau Group
We have had a long and deep involvement in the Philippine energy sector
2008
2012
2009
Ancillary Services Market
Review
ERC
2008, 2009, 2010, 2012
WESM advisor for plant
expansion
Multiple
First successful IPPA
Design & Sale
WESM advisor for
ownership stake
evaluation
QPPL
600 MW Coal
WESM advisor for
for financial close
GN Power
600 MW Coal
Power Barges
Strategy advisor for an
LNG to power project
2013-14
Development of the
Philippines Natural Gas
Masterplan
Shell
World Bank Group
2012
2013
2013
Second successful IPPA
Design & Sale
Advisor Mindanao Power
Supply Tender
Advisor on IPPA privatisation
San Roque / Bakun-Benquet
345 MW + 100 MW Hydro
AMRECO
Subcontractor to another advisor
Market advisor to investor in
proposed wind project
Market advisor to investor in
geothermal project
2009
Third successful IPPA
Design & Sale
Ilijan
1200 MW Gas
IPPA candidate
evaluations
Malaya, Unified Leyte, Naga,
Casecnan
Oil, Geothermal and Coal
Advisor on Co-operative
Regulatory Issues &
Renewable support
policies (two projects)
Confidential Client
Multiple projects, confidential
2013
2012
2010, 2011, 2012
2010
Privatisation valuation
Sual & Pagbilao
1200MW + 700 MW Coal
2010
2008
2012
2014
WESM advisor for LNG to
power project
Advisor on coal fired asset
sale
Confidential Client
Confidential
World Bank
2012
2014
2013
Ancillary Services
Opportunity Assessment
for Hydro Power Plant and
regulatory support
Confidential
Transaction advisor
Mine-mouth Coal Plants
PNOC-EC
Advisor on numerous
renewable projects (three
wind, five solar and three
geothermal)
Confidential Clients
Our clients include all stakeholders from regulation/policy to investor/lender
2 | The Lantau Group
Filipino consumers are ultimately responsible for paying the reasonable costs
for all the elements of the power industry …
Power plants
Fuel
(Generation)
Wires & metering
(Transmission, Distribution
& Metering)
Service
(Supply)
Taxes & Cross-subsidies
3
Overall, retail tariffs have declined in real-terms since peaking in 2006
Meralco’s average retail tariffs (1991-2014)
Primary energy costs
Note: * 2014 year to September
Source: Meralco; BSP (exchange rates); World Bank (fuel prices – Brent oil and Newcastle coal); NSCB (Philippine CPI); TLG analysis
4
… but customers occasionally get shocked by big monthly increases
Typical monthly residential tariff (Meralco)
PhP/kWh
12.5
2.0-2.2
11.5
11.0
PhP2/kWh
10.5
10.0
9.5
9.0
8.5
Change in monthly tariff (PhP/kWh)
12.0
13 occasions
tariff increase >
40¢/kWh since
Jan 2010
1.6-1.8
1.2-1.4
0.8-1.0
0.4-0.6
0.0-0.2
(0.4)-(0.2)
(0.8)-(0.6)
(1.2)-(1.0)
(1.6)-(1.4)
(2.0)-(1.8)
May-15
Jan-15
Sep-14
May-14
Jan-14
Sep-13
May-13
Jan-13
Sep-12
May-12
Jan-12
Sep-11
May-11
Jan-11
Sep-10
May-10
Jan-10
8.0
0
Source: Meralco (200kWh month residential)
5
5
10
15
% of months
20
The changes by component have varied widely by year – biggest increases
occurred in 2010, and biggest decreases in 2014
PHP / kWh
Overall
Generation
Transmission
Dist./Supply/Metering
Other
2.00
1.50
1.00
0.50
Feb '10 to
May '15
2010
2011
2012
2013
-0.50
-1.00
-1.50
6
2014
2015
Jan '11 to
May '15
Since January 2011, Increases in Distribution and Other have Offset
Decreases in Generation and Transmission
Change in PHP / KWh over Period, by Component
Overall
Transmissio Dist./Supply/
Generation
n
Metering
Other
Feb '10 to May '15
1.75
0.97
0.32
0.21
0.25
2010
1.76
1.18
0.62
-0.03
-0.01
2011
0.68
0.66
-0.14
0.08
0.08
2012
-0.08
-0.04
-0.33
0.29
-0.00
2013
0.48
0.22
0.08
0.02
0.15
2014
-1.19
-0.89
-0.14
-0.14
-0.02
2015
0.12
-0.16
0.23
-
0.05
Jan '11 to May '15
-0.01
-0.21
-0.30
0.25
0.26
7
So what is triggering the retail price spikes?
Average component change for large changes
Changes in tariff components*
PhP/kWh
Generation
Transmission
Dist./Supply/Metering
Other
PhP/kWh
2
1
1.0
0.9
0.5
0.8
0
0.0
(1)
Feb-15
Oct-14
Jun-14
Feb-14
Oct-13
Jun-13
Feb-13
Oct-12
Jun-12
Feb-12
Oct-11
Jun-11
Feb-11
Oct-10
Jun-10
Feb-10
(2)
(0.8)
(0.5)
Other
Dist./Supply/Metering
Transmission
Generation
Aggregate changes in the
long-run are small as
spikes tend to even out
(0.9)
(1.0)
Decreases
Increases
(Changes more than 40¢/kWh)
Generation costs are the most volatile component – due to linkages to dynamic fuel supply
costs, generation mix, and supply/demand balance
Note: * Components shown include impact on VAT and System Loss components
Source: Meralco (200kWh month residential); TLG analysis
8
Why?
Average Generation Charge change for large changes
Changes in Generation Charge
Other
NPC/PSALM
PSAs
PhP/kWh
2
PhP/kWh
WESM spot
PPAs
1
1.0
0.8
0.5
0.5
0
0.0
(1)
Other
NPC/PSALM
PSAs
PPAs
WESM
Feb-15
Oct-14
Jun-14
Oct-13
Feb-14
Jun-13
Feb-13
Oct-12
Jun-12
Feb-12
Oct-11
Jun-11
Feb-11
Oct-10
Jun-10
Feb-10
(2)
(0.5)
(0.5)
(1.0)
(0.8)
Decreases
Increases
(Changes more than 40¢/kWh)
WESM spot purchases are the biggest contributor but they are not solely to blame!
Note: * The expiry of TSCs with NPC/PSALM in Feb-13 and replacement with PSAs is not shown for clarity.
Source: Meralco (200kWh month residential); TLG analysis
9
When in doubt, blame the weather….
Hydro scheduled generation profile (ordered by total Luzon load)
GW
2010 Severe El Nino
High Luzon load
Low Luzon load
Difference between a dry and wet year depends on fuel and capacity availability
Note: Illustrated data points represent aggregation of 80 hours
Source: PEMC; TLG analysis
10
Compared to fuel and other factors, weather variations have a stronger cyclic
aspect
Change in PHP / KWh over Period, by Component
Overall
Transmissio Dist./Supply/
Generation
n
Metering
Other
Feb '10 to May '15
1.75
0.97
0.32
0.21
0.25
2010 (El Nino)
1.76
1.18
0.62
-0.03
-0.01
2011
0.68
0.66
-0.14
0.08
0.08
2012
-0.08
-0.04
-0.33
0.29
-0.00
2013
0.48
0.22
0.08
0.02
0.15
2014
-1.19
-0.89
-0.14
-0.14
-0.02
2015
0.12
-0.16
0.23
-
0.05
Jan '11 to May '15
-0.01
-0.21
-0.30
0.25
0.26
11
The issue is small consumers’ immediate exposure to wholesale market
volatility, NOT that such volatility exists in the WESM
Wholesale Market
Retail Market
Spot market
purchases
PPAs/PSAs
GRAM
(monthly
adjustments)
Monthly average spot market settlement prices
PhP/kWh
20
15
10
5
0
Jan-06 Jan-08 Jan-10 Jan-12 Jan-14 Jan-16
Most consumers will have a preference
for limited price volatility
Price volatility is a necessary feature
12
Price volatility is the signal that a certain type of supply or demand response is
needed to maintain a reliable and adequate power system
New Zealand
Eastern Australia (NEM)
13
Key fundamentals
Understand the
Problem
• Can’t change fuel markets
• Don’t fight economic fundamentals
• But recognise repeating / cyclical elements and design around them
Is insurance valued –
do consumers want to
pay for it?
Signal ahead where
possible
• Insurance costs money, but do customers have a preference for predictability
• Forcing flatter and less volatile may mean higher and more expensive over
time
• Ex post surprises happen, but if they can be avoided it’s usually better
• Demand and supply response needs forward indication
• Can adjustments include a forward looking component?
14
Recommendations / Ideas
• Administered pricing / Lower price caps
Minimise wholesale
market intervention
– As pursued by the ERC during 2014
– Stop gap solution that damages incentives for prudent behaviours in the longer term
• Increased physical contracting by DUs
Encourage or remove
constraints to
contracting
– Already seen higher levels of contracting during 2014/2015
– Including ‘gentailer’ (cross-ownership) model employed in many markets
– But is cost-plus pricing regulation compatible with ever higher levels of FIT capacity?
• Financial contracting by DUs (e.g., futures market / fuel hedges)
Proportion of Meralco’s 200kWh residential tariff attributable to
WESM spot purchases and line rentals
20%
PSAs
TMO PSA
15%
IPSAs
10%
5%
TRO
Source: Meralco; TLG analysis
15
May-15
Mar-15
Jan-15
Nov-14
Sep-14
Jul-14
May-14
Mar-14
Jan-14
Nov-13
Sep-13
Jul-13
May-13
Mar-13
Jan-13
Nov-12
Sep-12
Jul-12
May-12
Mar-12
Jan-12
0%
Recommendations / Ideas
Non fossil / More
Robust Hydro?
Enhance Competition
(Demand Response)
Longer Cash Flow
Management Cycle
• RE generation whose costs are not linked to fuel markets or El Nino variation?
– However…unlikely to be least cost in the near-term
– Intermittency could contribute towards potential price spikes
• Giving consumers the information and chance to express their real-time choices
– Consumers could then avoid the price spikes they wish
• Smooth adjustments over longer time-frames, particularly El Nino / La Nina,
thereby reducing month-on-month price changes and steeper annual shifts?
– Additional burden on DUs’ working capital
Adjustment period
Philippines
1 month
Singapore
3 months
Malaysia
6 months
Thailand
4 months*
Japan
1 month*
Hong Kong
12 months
*Note: Denotes the frequency of automatic fuel cost adjustment that passes
through uncontrollable fuel costs to end-users. Changes in base tariff are
much less frequent and are driven by underlining cost structures.
16
Recommendations / Ideas
Don’t get too excited
about (small) customer
choice
Ancillary Services
Market (!)
Weather Cycle
Contracts / Fund
• Customer choice alone does nothing to address underlying volatility – and may
make it easier to expose customers to volatility or charge higher costs to
protect them from it
• Not directly related to price spikes, but AS value correlates with flexible and fast
response demand and supply – which can reduce materiality of price spikes over
time
• Fuel cycles are very long, but El Nino / La Nina’s are arguably more
predictable in nature – to the extent that price spikes correlate with El Nino’s it
means that prices will later regress to the mean – could be linked to a
smoothing mechanism for certain customers
17
Mike Thomas
[email protected]
The Lantau Group
4602-4606 Tower 1, Metroplaza
223 Hing Fong Road
Kwai Fong, Hong Kong