HYDROPOWER IN A DEREGULATED ELECTRICITY MARKET

The nation’s hydroelectric resources are of vital importance to the successful culmination of our national experiment to deregulate the electricity market. Hydropower generation has long been an essential component of our electricity market. At present, the hydroelectricity production is about 20% of the total energy produced in the country. In Mindanao, 90% of its energy generated comes from hydroelectric plants. Whereas in Luzon, major reservoirs contribute 9% of the total energy produced. Hydropower facilities, many of which have been in place for decades and are now an integral part of local communities, also support livelihood, flood management, irrigation, water supply and fish and wildlife conservation

Hydropower provides emission-free, renewable electric power. Being environmentally friendly, it carries a premium for the delivery of clean and renewable electricity in a competitive market. It is renewable through annual rainfall. The earth’s water cycle guarantees an endless supply of fuel from rain. The water from river is purely a domestic resource that is not subject to disruptions from foreign suppliers, production strikes or transportation issues that may affect other power generating industries. It reduces the use of foreign oil and allows the nation to conserve its domestic resources of coal and natural gas. But with the manifestation of large-scale weather phenomena like El Niño (dry episode) and La Niña (wet episode), hydropower production will be proportionately affected.

Besides being emissions-free and renewable, hydropower possesses electric benefits that maintain the reliability and stability of the electricity grid. It is unique among other form of generation for its operational flexibility. Hydropower units can come on line nearly instantaneously to meet rapid increases in electricity demand. They can easily respond to emergency power needs and provide a constant energy source through the flow of water. Its ability to change output quickly is highly valued and will become even more so in a deregulated market. With its unique electrical attributes, it can ensure reliable electricity service and meet customer needs in a market driven industry. In a growing deregulated market, the ancillary services provided by hydropower are highly prized.

Hydropower producer operating in a competitive electricity market will change their focus from reliable and cost-efficient supply of electricity to more profit-oriented and competitive objectives. The producer must develop a practical method that will optimize reservoir management in order to be competitive in a deregulated environment. There is a need for the operators of reservoirs to determine how much water is to be released given the volume of water stored, inflow (the volume of water flowing into the reservoir) and the current and expected future electricity market conditions. This is more complicated in a reservoir system where there are several water users. Following deregulation, water releases will not only be limited to water requirements of the different water users but it will also be market driven so to speak.

Financial performance of hydropower producers depends largely on the seasonal behavior of inflow and fluctuations of the electricity prices in an open market. In order to be a dominant player in the market, the producer must be able to forecast inflow and spot prices accurately. Although forecasting inflow is not a new activity, hydropower producers are faced with the problem of coordinating their use of water throughout the time horizon. In particular, they must take into account the seasonal needs of other water users. A situation may arise where they must trade-off the use of water now with saving it for use in later periods when it may be more valuable. As an example, having too little water available for the coming summer represents a risk of water shortfall. Hence, uncertainties on the amount of inflow as well as on the spot price might lead to excessive spill and/or greater probabilities of shortage of water.

As the restructuring of the power industry and the privatization of the power firm progresses, the hydropower with its flexibility and reliability is a market player to reckon with. It is not only a “green” power but also a low-cost alternative.