Moving Forward: Introducing Competition in Power Distribution

Around the globe, significant changes are taking place in the power sector, particularly in the distribution of energy given the advances in technology. Many countries are gearing up to take advantage of new technologies to help reduce the cost of power, among other reasons.

For example, the European Union (EU) is paving the way for its electricity system to be more efficient by encouraging consumers to use intermittent renewables at different times of the day to save on power and lower their electricity bills. At this time, the EU is working on policies to make it possible.

Those who use more power during off-peak demand or when renewable energy technologies are running on their peak will be given incentives also known as the dynamic pricing scheme.

Other European countries like Spain and Nordic states are already implementing the dynamic pricing. In the long run, EU envisions that customers’ appliances such as washing machines or dryers will run automatically during the day when the sun is shining at its brightest or during windy days. This dynamic pricing scheme is expected to save as much each household an estimated average of €400 annually with the help, of course, of smart meters and smart grids.

Some may be doubtful of EU’s vision and label it as too ambitious. But EU’s goal is achievable. After all, breaking away from the traditional model of the distribution of having power stations at one end with the customers on the other end of the supply chain is long overdue.

Consumers now should have the option of selecting their preferred kind of energy, source, and even meters. This is possible except our tolerance for monopoly has limited the choices available to us consumers, a point stressed by several experts.

For example, Nobel Prize awardee Vernon Smith, who as early in the 1980s, argued that deregulation of the electricity market is possible if there is competition for generation, transmission and even distribution.

In his paper, Currents of Competition in Electricity Markets, he stressed that “Competition is now evident on the fringes of power generation, and a foundation is in place for deregulating not only generation but possibly transmission and distribution as well.”

The economics professor pointed out that regulators have encouraged monopoly in electricity markets rather than implement rules that promote competition: “ An examination of the electric power industry as it exists today reveals a tremendous untapped potential for the development of competitive markets. Regulation has been applied far too broadly to the electric power industry. As a result, policies intended to restrain monopoly power have instead propagated that power.”

smart meters 2

Smart meters in Europe. Changes in the consumption and provision of electricity driven by emerging technologies are taking place and making way for more options in power consumption. Photo c/o http://www.nec-display-solutions.com

A recent paper, Utility of the Future by Massachusetts Institute of Technology (MIT), discusses how changes in the consumption and provision of electricity driven by emerging technologies are taking place and making way for more options in power consumption.

One of the goals of the research is to identify inefficient barriers to the integration of cost-effective new sources of electricity services to help create a level playing field for the provision and consumption of power services.

One of the recommendations of the study is that “the structure of the electricity industry should be carefully re-evaluated to minimize conflict. It is critical to establish a level playing field for the competitive provision of electricity services by traditional generators, network providers, and distributed energy resources.”

The study further stressed that it is essential to review how markets work to make way for new technologies and their integration into the electricity system: “Wholesale market design should be improved to better integrate distributed resources, reward greater flexibility, and create a level playing field for all technologies.”

And it seems that the researchers are addressing our local regulators with their recommendations. It is no secret that I have been calling out for revisions in our policies that would pave the way for new players so that Filipino consumers can enjoy lower power costs especially since new technologies are emerging.

Time and time again I have been calling the attention of the Department of Energy (DOE) to take drastic measures to promote competition rather than protect private interests as this is the essence of the Electric Power Industry Reform Act (EPIRA).

Unfortunately, despite the passage of this law, the welfare of the Filipino consumers takes a backseat while private interests in the distribution sector prevail as manifested in different ways.

For example, currently, our energy regulators are disallowing other franchise holders to enter the market where a Distribution Utility (DU) is already in place, which against runs counter to the essence of promoting competition.

This was the same point made by Smith in his paper when he stressed that “There are numerous ways to introduce competition into electric power distribution. Perhaps the most obvious is to eliminate state policies which grant distributors exclusive operating permits. Customers should have the right to bypass distributors and contract directly with generator owners.”

If one understands basic economics, then it is evident that having more players in the market would always push down prices and create a more efficient delivery of goods and services because this is what competition among businesses does. Preventing the encroachment of another player in an already franchised area will only result in a monopoly where consumers will have to endure higher prices and less efficient service delivery. There is no incentive for the lone provider to improve the services and lower down costs, anyway.

Our flawed power procurement rules should also be reviewed. At present the Energy Regulatory Commission (ERC) procurement rules do not require DUs or Electric Cooperatives (ECs) to differentiate between baseload, peaking and mid-merit, and fail to take account that some power sources are better used for baseload and others for peaking or mid-merit. The classic example is the use of coal-fired power plants during mid-merit, which when done, diminishes the cost advantages of the plant. Such practice results in inefficient deployment of energy sources.

Unfortunately, procurement rules do not differentiate the power requirements to the detriment of the consumers as they are not enjoying the cost advantages of a particular power source. Instead, our practice only benefits the DUs or ECs.

There is a remedy for this as the ERC can refuse to grant Power Sales Agreements (PSAs) that does not define the limits on the use of a particular power source. We can use each energy source more efficiently and at the same time help level the playing field for generators if the ERC puts such restrictions in the PSAs.

These are just some of the few issues that prevent competition to flourish within the power distribution sector. There are more that requires the attention of our regulators. Change is necessary if we want to move to where the EU is heading.

There are many reasons why countries and regions like EU are embracing technology such as the concept of dynamic pricing by changing and drafting new regulations. Lowering the cost of power rates is just one of them.

The Filipinos can enjoy lower power prices, too. They can even choose where or from whom to source their power as well as select their meters rather than merely accept the ones from the distributor. Consumers can also become generators and distributors themselves if they wish. All these are possible if major policy shifts take place and when our regulators finally prioritize the welfare of the public rather than those of the few.

References:

Currents of Competition in Electricity Markets by Vernon L. Smith

Utility of the Future by Massachusetts Institute of Technology

Run Your Dishwasher When the Sun Shines; Dynamic Power Pricing Grows

https://www.reuters.com/article/us-europe-electricity-prices-insight/run-your-dishwasher-when-the-sun-shines-dynamic-power-pricing-grows-idUSKBN1KN0L7

For European utilities, demand for dynamic pricing on the rise
https://www.accenture.com/us-en/blogs/blogs-european-utilities-demand-dynamic-pricing