ERC pushes generators toward cheaper reserve deals

Power generators face tighter pricing arrangements for backup electricity as regulators curb expensive spot market trading that has discouraged long-term contracts and driven up electricity costs, particularly in the Visayas.

The Energy Regulatory Commission (ERC) said Monday evening it is shifting reserve procurement toward regulated contracts after finding that suppliers have little incentive to commit capacity under lower-priced agreements when they can earn substantially more from the Reserve Market.

The ERC said it temporarily suspended the commercial dispatch and settlement of the Reserve Market under the Wholesale Electricity Spot Market (WESM), pending reforms to how ancillary services are procured and priced.

The decision could reshape how power generators earn revenue from reserve capacity, with the National Grid Corp. of the Philippines (NGCP) directed to accelerate contracting instead of relying on expensive spot purchases.

The pricing disparity was particularly pronounced in the Visayas, where Reserve Market costs reached P19.57 billion in 2025, more than 11 times the P1.69 billion spent on contracted ancillary services.

These spot purchases added P1.29 per kilowatt-hour (kWh) to electricity rates, compared with just P0.02 per kWh from contracted reserves.

The ERC found that average Regulation-Up reserve prices in the Visayas remained at around P21 per kWh, four to six times the prevailing spot price of electricity.

In Luzon, Reserve Market purchases cost P24.53 billion, compared with P12.75 billion under Ancillary Service Procurement Agreements (ASPAs), while Mindanao recorded P3.71 billion and P3.90 billion, respectively.

The regulator said the wide pricing gap has discouraged reserve providers from entering into firm contracts, leaving a larger portion of the grid’s requirements exposed to costly spot market transactions.

Previous interventions, including reducing the reserve offer price cap from P32,000 to P25,000 per megawatt-hour, failed to address the problem.

“This is a corrective and temporary intervention, not a retreat from the reserves market. Consumers, especially in the Visayas, have been paying reserve prices that are far more expensive than the energy they use and what contracted reserves cost.

The ERC could not stand by while these costs piled up on consumers’ bills. We acted together with the DOE, which shares our concern, to pause the market, keep every contracted and must-run reserve in place so the grid stays reliable, and fix the rules on how reserves are bought and how their costs are passed on to consumers,” ERC Chairperson and CEO Francis Saturnino C. Juan said.

During the suspension, NGCP will source reserve requirements from existing ASPAs at approved rates and designated must-run facilities compensated on a regulated cost-recovery basis.

This arrangement will keep backup capacity available while limiting further exposure to elevated spot reserve prices.

NGCP must submit an assessment of its remaining uncontracted reserve requirements within 30 days and pursue additional contracts through competitive selection and direct negotiations where permitted.

It must also publish future reserve requirements to help potential suppliers, including battery storage developers, plan investments.

Meanwhile, NGCP, the Philippine Electricity Market Corp. and the Independent Electricity Market Operator of the Philippines have six months to propose a redesigned Reserve Market.

The reforms will examine technology-specific price caps, prevent contracted reserves from being displaced by spot market bids, and review reserve requirements amid growing renewable energy and battery storage capacity.

Regulators will also study a more detailed regional market structure for the Visayas and the participation of generators connected to distribution utilities.

“The ERC remains fully committed to competition and to a well-functioning reserves market, including the investment in battery storage and other flexible capacity that the grid needs. A market that works is one that gives investors predictable returns and gives consumers fair prices. We are suspending the market now so that it can return stronger, with better design and a reliable supply of reserves at a price consumers can bear,” Juan added.

The suspension takes effect upon receipt of the order by NGCP and the market operators and remains in force until further ERC action.

Transactions covering billing periods before the order are unaffected.

According to ERC, it will evaluate the proposed market redesign before deciding when commercial reserve trading may resume.