The operator of the country’s Wholesale Electricity Spot Market (WESM) has started a feasibility study on the electricity derivatives market which will allow industry participants to manage price movements in the WESM.
The study aims to assess the legal and technical aspects of implementing a derivatives market and strategize the phased-in market development that is appropriate to the Philippine context, WESM operator Philippine Electricity Market Corporation (PEMC) said on Monday.
“This pioneering undertaking supports the government’s thrust in ensuring transparent and reasonably-priced electricity in a liberalized power industry,” PEMC President Melinda L. Ocampo said.
“We are expected to come up with a report that will cover the appropriate market design and instruments, cognizant of the regulatory landscape. We shall ensure that recommendations to relevant government agencies shall be made to facilitate a market for financial contracts,” she added.
Experiences from various jurisdictions suggest that electricity derivatives help manage risks due to price movements in the spot market through structured hedging strategies.
When properly utilized, electricity derivative market is found to be beneficial to the sharing and controlling of undesired risks for achieving economic efficiency.
Complementing the study is PEMC’s continuing efforts to implement the financial transmission rights (FTRs) through the New Market Management System (NMMS) due for deployment in June 2017.
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.
Including 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, Ocampo said.