Forward contracts under study to minimize volatility in electricity bills

THE Energy Regulatory Commission (ERC) said it is exploring the use of forward contracts that will allow power distributors to lock in prices of electricity for future delivery to minimize so-called “bill shock” for consumers.

At a roundtable discussion on Monday, ERC Chairman and Chief Executive Officer Francis Saturnino C. Juan said the agency is studying the use of such contracts for distribution utilities (DUs) and electric cooperatives (ECs) to ensure greater price stability and reduce exposure to price swings on the spot market and in power deals.

Short-term price movements transfer the burden to end users and can result in bill shock.

Mr. Juan underscored the volatility of the prices on the Wholesale Electricity Spot Market (WESM), the venue where energy companies can buy power when their long-term contracted supply is insufficient.

A forward contract is a deal between parties to buy or sell certain commodities at a predetermined price that must be delivered within a specified future time. This serves as an alternative mode for procuring electricity in addition to the WESM and bilateral contracts.

While this mechanism can protect consumers from price volatility and bills shock, it also carries the risk of locking in higher-than-market prices if the market price swings in a direction unfavorable to the contracting party.

“As the regulator, the ERC’s primary mandate is to protect the public interest by ensuring reasonable, just, and affordable rates. In line with this duty, we continuously examine mechanisms that can enhance market efficiency and consumer welfare,” Mr. Juan said.

He said that forward contracting serves as a hedging tool for managing the financial risks associated with spot market volatility.

For consumers, forward contracting arrangements allow utilities to mitigate extreme price spikes, ensure price stability and predictability for end-users over time, and prevent bill shocks.

On the part of power generators, the mechanism can provide revenue certainty to facilitate the financing of new power generation projects, Mr. Juan said

Green Tiger Markets, an operator of electricity forward markets, said that financial hedging could serve as a risk management tool for DUs and ECs, provided there is regulatory clarity and proper governance around cost pass-throughs.

“Financial hedging allows utilities to manage price risk proactively… companies can reduce the impact of short-term market swings on consumers’ monthly bills without changing how electricity is physically delivered,” Green Tiger Markets Founder and Chief Executive Officer John Knorring said. — Sheldeen Joy Talavera