DOE proposes schemes in IPP administrators’ biddings

The Department of Energy (DOE) is studying several schemes in bidding out the contracts of the independent power producers (IPPs) to administrators.

These proposals, the DOE said, are part of overall preparations to bid out the IPP contracts of the National Power Corp. (Napocor).

The privatization of the IPP contracts is mandated under the Electric Power Industry Reform Act (EPIRA). This process will help spur competition in the market as private companies will now trade the IPP contracts, unlike the present set-up where state-run PSALM (Power Sector Assets and Liabilities Management Corp.) runs and manages these IPP contracts.

The DOE said although the variations are unconstrained by the general guidelines in the EPIRA and the specific guidelines proposed for the IPP administrators (IPPAs), they have been highly instructive in the development of the general process of the IPPAs bidding.

The World Bank has earlier commissioned a study on how to undergo the IPPA bidding process and has already finalized a proposal to PSALM).

The DOE said among the approaches it is considering involves: an operation and management (O&M) contractor; contractor/trader/supplier contract buyout; the IPP as IPPA; the supply company approach; and the combined generator/IPPA/supplier.

The O&M contract approach would essentially replicate the current mechanism used by PSALM by splitting the IPP contracts into groups, then contracting the management of the contracts with appropriate operators.  Under this scheme, the contracts may involve an incentive mechanism to encourage the operator to maximize revenue in the wholesale electricity spot market (WESM) within the IPP contract parameters.

For the contractor/trader/supplier approach, this builds on the O&M contractor and allows the IPPA to sell on the IPP energy they are managing to distribution companies and end-customers outside the franchises when open access starts.

In addition to this scheme, trading the IPP output in forward markets would be encouraged and permitted to hedge WESM risk and to generate additional revenue as and when such markets are set up.

The contract buyout approach, on the other hand, involves the full buyout of some or all the IPP contracts. In the case of a build-operate-own contract, this would then require the privatization of the power station as part of the current Napocor/PSALM plant sale process.  In the case of a build-operation-own contract, the IPP would then take on the role of bidding the plant into the WESM and seeking alternative markets for the electricity generated.

Under the IPP  as IPPSA, this approach would involve the IPPs themselves becoming the IPPA such that each IPP would become its own IPPA.  This would mean the IPP taking on responsibility for bidding the plant into the WESM, and would be incentivized to maximize revenue.  The IPP contract would remain whole, and capacity and energy payments would continue to be made.

The more radical approaches, the DOE said, are the supply company scheme and the combined generator/IPPA/supplier.