PEMC undertakes feasibility study into power derivatives market

THE Philippine Electricity Market Corp. (PEMC) is looking at the viability of an electricity derivatives market and has started a feasibility study on how the move will allow industry participants to manage price movements in the wholesale electricity spot market ( WESM).

“This pioneering undertaking supports the government’s thrust in ensuring transparent and reasonably- priced electricity in a liberalized power industry. We are expected to come up with a report that will cover the appropriate market design and instruments cognizant of the regulatory landscape,” said PEMC President Melinda L. Ocampo in a statement on Monday.

“We shall ensure that recommendations to relevant government agencies shall be made to facilitate a market for financial contracts,” she added.

PEMC, a non- stock and non- profit firm, was set up in 2003 upon the initiative of the Department of Energy ( DoE). Various sectors of the electric power industry are represented in the company, which serves as the governance arm of WESM.

PEMC said experience in various jurisdictions suggests that electricity derivatives help in the management of risks due to price movements in the spot market through structured hedging strategies.

“When properly utilized, an electricity derivative market is found to be beneficial to the sharing and controlling of undesired risks for achieving economic efficiency,” it said.

The feasibility study will be complemented by PEMC’s efforts to implement the financial transmission rights (FTR) in the market through the new market management system ( NMMS), which is set for deployment in June.

“FTRs are financial instruments that allow market participants to offset potential losses related to the price risk of delivering energy to the grid. These instruments will address the volatility of prices associated with power supply agreements due to transmission congestion costs,” PEMC said.

Ms. Ocampo said the inclusion of an FTR auction in the NMMS shows “PEMC’s readiness and initiative to deploy market mechanisms in accordance with the WESM rules that will mitigate price volatility in the spot market.” —