Gas and Coal Economics, page-37

Gents

It is absolutely wrong to attack Skeoch for his views. He did not make a recommendation. he put up some ideas that are absolutely valid concerns about the market in Philipines. DYOR.

Other people may have different views - that is cool. That is what makes a market. Debating different ideas and especially those who disagree with us allows us to strenghten our thesis or identify weaknesses.

His warning is valid and has not been addressed by EWC. That is the price from the WESM will not compensate EWC for the capital cost of the plant and the plant will be stranded. I am pretty sure those slides on the demand-supply balance in the AGM pack are at least two to three years old and do not explain persistent low prices from the WESM.

The problem in the Phillipine is that there are essentially the WESM and a series of "private" and "captured" markets owned by the distributors where the power does not get dispatched at cost. This means the cost of providing new plant does not get reflected in the market - because high cost plant circumvents the WESM. Mercalo cost of electricity is a multiple of the WESM price because it reflects the true mix.

From my experience in designing electricity trading algorithms I know he is wrong when he says that all electricity is bid in an marginal cost. I showed this conclusively by pointing to negative prices and to price caps. Electricity prices are set by "game theory" where marginal cost is a consideration in putting together a strategy but certainly not the only point. believing in marginal cost reminds me on the theoretical underpinning of Long Term Risk Capital just before Wall St turned the steamroller on them and took all their money. Sometimes pricing is a reaction to someones position not to ones own cost curve.