The impact of bidding behaviour on electricity prices in the Philippines

The Philippines Wholesale Electricity Spot Market (WESM) has seen high electricity prices in the past few years, especially during the summer months. The capacity margin in the Philippines is typically much tighter during the summer months because:

• High temperatures increase air conditioning use, resulting in higher overall electricity demand.

• The hydro plants output less power during the hotter months.

• The coal power plants struggle to operate optimally during high temperatures, reducing their output.

In 2023, the highest market prices were seen during the month of May, as shown in the figure below. This was partly due to coal plant outages, which resulted in diesel-fired power generators being on the margin.

Average Luzon market price in 2023:

Coal and gas power plants offer a large proportion of their power at negative prices to ensure they are dispatched. The Philippines’ wholesale electricity market operates as a gross pool and net settlement market. Most plants have a high share of their power output contracted by Power Purchase Agreements (PPAs) with distribution utilities. Many of these plants offer zero or negative prices to ensure market dispatch. The figure below shows the accepted offers of an example coal plant in 2023. This plant was chosen because its bidding was typical for a Philippines coal plant. Approximately 80% of power sold by this plant was offered at prices less than or equal to zero. The price offered is substantially higher than a cost-reflective bid during many hours - again something that we observe for many plants. These high prices may indicate plants exercising market power during periods with a tight supply margin.

Accepted offer prices for an example coal plant:

The volumes contracted under PPAs can result in generation capacity being used out of merit. The bidding practice shown above results in changes to the supply stack, as illustrated below. Capacity offered into the market at a negative price shifts to the left in the merit order. This impact has a material effect on the generation mix in the Philippines. For example, the PPA volumes result in some gas-fired generation being run before all the lower-cost coal capacity has been used.

Impact of PPA volumes on the supply stack:

* Wind and solar have a must run status and offer volume but not price into the market. Geothermal plants

offer negative prices to ensure dispatch.

The observed bidding behaviour distorts the distribution of prices in the wholesale market. The price duration curves below compare actual market prices for Luzon to the prices from our WESM model, set up to only consider generator short-run marginal costs. The lines show all prices in a year (2023) from highest to lowest. When the system is tight, plants bid above their short-run marginal costs, raising prices. Meanwhile, many thermal plants bid negative prices during other hours to meet PPA commitments, lowering prices. The net impact on average price is approximately neutral.

Duration curve of Kuungana model and Luzon market data, 2023:

Despite having a small impact on average wholesale prices, the change in distribution of prices will impact the electricity sector in other ways. These include:

• Total system costs will be elevated as distribution utilities will not benefit from low wholesale price in many periods; rather they will pay much higher PPA prices to plants they contract through PPAs.

• Generators deciding whether to build a generation project will consider the price captured by their project not average prices. The average capture price for renewable energy projects may be lower as a result of the observed bidding strategy as their generation is often correlated with periods with lower power prices.  

In some countries, wholesale market rules or sector regulations have been refined to mitigate the impact of prevailing contracting arrangement in distorting wholesale market outcomes.

Kuungana’s WESM model can reflect the behaviour of market participants. Our market scenarios can take into account the impact of different bidding strategies on market outcomes and on the margins earned by individual generators. The analysis presented above indicates the importance of considering the potentially distortive impact of current bidding practice in the Philippines when assessing opportunities in the market.