Perhaps the better question is what happens when the State itself becomes a player in a market that was deliberately opened to competition.
There is a legitimate argument for government intervention where generation shortages threaten energy security. But bringing NAPOCOR back into generation does not simply add another competitor to the market – a government-owned generator does not necessarily face the same commercial constraints as a private generator. Indeed, its mandate is ultimately public welfare, and there may be circumstances where it is expected to operate, contract, or price electricity even when doing so is not economically optimal or commercially profitable.
That creates a difficult problem for the WESM.
The WESM relies on competitive offers and marginal-cost pricing. Generators are dispatched when their offers are competitive, and the market price is generally determined by the marginal generator needed to meet demand. The resulting price signal is supposed to tell the market where additional generation is needed and where investment is economically justified.
A state-owned generator operating under a public-welfare mandate can weaken that signal. If NAPOCOR is prepared to operate or offer generation at prices that a private generator cannot economically sustain because government is willing to absorb the loss, the resulting market price may no longer reflect the underlying economics of supplying the next unit of electricity. Consumers may benefit from lower prices in the short term, but the price signal to private investors may be distorted.
This is particularly relevant because generation investment is capital-intensive and depends heavily on expectations of future revenues. If a private investor sees that government can enter the market whenever prices become politically unacceptable and offer power below what commercial economics would ordinarily support, the investor may reconsider whether the expected return justifies building new capacity in the first place.
The effect can also extend to existing generators. Because dispatch is based on the offers submitted into the market, a lower-priced NAPOCOR may be dispatched ahead of private generators whose offers reflect higher costs. Those generators may consequently operate less frequently, leaving fewer hours over which to recover the substantial fixed costs and financing obligations associated with their plants. Over time, this can make generation capacity that is available only during periods of high demand more costly to the system, because those plants must recover their costs over relatively few operating hours. This is the economics behind peaking plants, which generally have higher costs per unit of electricity but are necessary to meet demand when lower-cost generation is insufficient. During these periods, the market may therefore see higher clearing prices despite the availability of lower-priced NAPOCOR generation during other periods.
There is also the possibility of the opposite problem. If NAPOCOR is directed to operate aging or otherwise uneconomic plants for reasons of energy security, the State may effectively subsidize generation that the market would otherwise retire. The cost does not disappear. It is simply borne somewhere else – by the government, taxpayers, or other consumers.
None of this means that NAPOCOR has no role in ensuring energy security. Government can have a legitimate role where the market cannot, by itself, provide adequate capacity, particularly in isolated systems or areas where the economics of private investment are weak. But there is a material difference between government addressing a market failure and government becoming a permanent participant whose decisions are not governed by the same commercial incentives as other generators.
The answer to the current shortages may therefore not be to reverse EPIRA’s basic policy of competitive generation. It may instead be to examine why generation has not come in fast enough, whether market and regulatory signals are adequate, whether transmission constraints are preventing available capacity from reaching consumers, and whether the rules provide sufficient incentives for timely investment.
For example, the experience in the Visayas and Mindanao illustrates why the problem cannot necessarily be addressed by generation alone. Even where additional generating capacity is needed, transmission constraints can limit the amount of electricity that can be delivered to particular areas. Addressing the shortage may therefore require not only bringing additional generation online, but also ensuring that the transmission system can carry that power to where demand is located. The introduction of a capacity market may also provide an alternative means of addressing the shortages. By compensating generators for maintaining available capacity, a capacity market can strengthen the investment signal for new generation without requiring the state itself to become a competitor. This can also help address the “missing money” problem created by regulation.
The point is that energy security can be addressed through measures that strengthen generation investment and transmission capacity without necessarily requiring the State to become a permanent participant in the generation sector. Energy security is undoubtedly a public objective. But achieving it through a state-owned generator that can operate without regard to commercial returns may solve today’s shortage while weakening tomorrow’s investment signals. Indeed, the challenge is not simply to put more generation into the system. It is to put generation into the system without undermining the market mechanism that is supposed to tell us how much generation is needed, when it is needed, and at what cost.
Atty. Kristoffer Monico S. Ng is a Philippine lawyer whose practice focuses on labor and employment, corporate and commercial law, tax, energy law, and civil and criminal litigation. He advises businesses and individuals on legal risk, regulatory compliance, taxation, dispute resolution, and complex commercial matters, representing clients before courts, quasi-judicial agencies, and administrative bodies, while also providing strategic legal advice outside the courtroom. He also regularly writes on developments in Philippine jurisprudence and regulation, providing practical insights on legal issues affecting businesses and individuals.
If you require legal advice concerning energy regulation, the WESM Rules, electricity markets, regulatory compliance, or other energy-related legal matters, you may reach him through e-mail at nico@nlaw.ph to discuss your particular circumstances.
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