Why are there no investments in the power generation sector when more capacity is needed?
I believe there are three reasons: First, there is no mechanism to tell the market when, where, and what to build. Second, if the generator sells to the power distribution utility, the "deregulated" generation market becomes wholly regulated. A third reason is that the grid network cannot accommodate these capacities in time. But I will tackle this in another column.
Today, the government cannot demand that the private sector build a power plant. Theoretically, the Wholesale Electricity Spot Market (WESM) should signal when, where, and what type of plants to build.
The WESM has exhibited high prices in the past few years. These high prices should have been enough to send a market signal to build new plants.
Unfortunately, the WESM market is still unreliable from a project finance perspective. Investors who rely on the WESM will find it challenging to get non-recourse financing.
In short, WESM has yet to be able to play its role in dictating when, where, and what power plant to build. So, who is left to answer the demand for generation capacity?
The power distribution franchise holders are empowered to contract long-term power sales agreements (PSAs) with private generation companies. However, it's important to note that “empowered” does not mean “required”. If a power distribution company fails to contract a PSA, it is not legally liable for such failure. Its defense is that a power distribution company can only own a power generation facility for up to 25% of its peak demand.
Assuming the utility successfully attracts investors in the power generation capacity it needs, this is where the “deregulated" market becomes regulated again. First, the government requires a competitive selection process (CSP) — a bidding process — and dictates the rules and regulations for such a process.
Second, the Energy Regulatory Commission (ERC) then dictates what should be in the PSA. The PSA's tenor and the assets' type and age that can form part of the capex calculations are among the terms dictated by the ERC.
The PSA between the utility and the private generator must go through another re-regulating process: the approval of the PSA by the ERC.
So, a market-driven price (presumably through the CSP) must now be subjected to the judgment of a government body. In effect, the electricity generation sector is regulated.
We are now in a situation where the government cannot build power plants when needed, and the private sector is not required to build them even when needed.
When the private sector decides to invest, the government, through the ERC, decides it is a better arbiter of electricity prices than the market.
It's time for a decisive choice. Should we continue with deregulation or opt for regulation? Without a clear direction, those yellow alerts will soon escalate into red alerts.
A power industry expert with over 40 years in experience as chief executive officer in firms ranging from banking, power, and advisory services.
