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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