The Philippine electricity market was designed to allow generators, distributors and other participants to respond to changing supply and demand.
In theory, this should encourage power plants to operate when they are economically competitive and reduce output when cheaper electricity is available elsewhere in the system.
But Mike Thomas, co-founder of The Lantau Group, believes the way some power contracts are structured may be limiting that flexibility.
Thomas raised the issue during the AmCham Annual 9th Energy Forum: Powering Through the 2026 Energy Disruption: Strategies for Resilience, Recovery, and Transition, held on August 13, 2026
His argument is not that Philippine power contracts are necessarily wrong. Rather, he suggested that their design and the way they are interpreted may create incentives for generators to operate more rigidly than the market was intended to allow.
“It’s long been argued that contracts in the Philippines are more physical in their orientation,” Thomas said.
That distinction between a physical contract and a financial contract may sound technical, but it can have important implications for electricity prices and system efficiency.
A Contract Does Not Always Mean a Plant Has to Run
A traditional way of thinking about a power supply agreement is relatively simple.
A distribution utility agrees to buy electricity from a generating company. The generator then produces the electricity required under the contract.
Thomas described this mindset as: “I am buying from you. You dispatch for me, or I dispatch you for me.”
But he argued that many electricity markets are not supposed to operate in such a strictly physical manner.
If electricity available from the wholesale market is cheaper than the electricity produced by a contracted generator, the economically efficient response may be for the generator to reduce production while the buyer purchases cheaper electricity from the market.
The contract can still protect both parties financially.
Thomas explained: “It’s supposed to be if the WESM is cheaper, you stop and you buy from the WESM and you satisfy your contract from the WESM.”
The important idea is that a contract does not necessarily have to determine which physical plant produces every unit of electricity.
Instead, the market can determine the most efficient dispatch, while the contract manages the financial relationship between the buyer and seller.
Why Physical Contracts Can Reduce Flexibility
Thomas suggested that problems can arise when power supply agreements are treated too physically.
“If somebody had a physical contract and they operate that contract physically, ignoring the rest of the market, it will cost more,” he said.
Consider a simplified example.
Suppose a distribution utility has a contract with a power plant at a certain price. At a particular time of day, however, WESM electricity becomes much cheaper because demand is weak or renewable generation is abundant.
If the contracted plant continues producing simply because it has a physical obligation to run, the system may end up generating electricity from a more expensive source while cheaper electricity is already available elsewhere.
In a more flexible arrangement, the plant could reduce output and the distribution utility could buy electricity from the market.
The financial contract would still determine how gains or losses are settled between the two parties.
This distinction becomes increasingly important as more renewable energy enters the grid because electricity prices can change much more dramatically during the day.
The Pass-Through Problem
Thomas also raised another possible issue: incentives created by cost pass-through arrangements.
“What happens if I have a contract and I can pass it through?” he asked.
This creates a potential behavioral problem. If a company can pass certain electricity costs through to customers, its incentive to minimize those costs may differ from that of a company whose own profits are directly affected.
Thomas also raised the possibility that companies may hesitate to stop taking power from contracted plants because doing so could raise questions about why they entered those contracts in the first place.
He described the issue this way: “What happens if I’m worried that I really know I shouldn’t pass it through, but if I’m not actually generating what that unit people will ask me why I contracted with them in the first place?”
Thomas did not claim that this behavior necessarily explains what is happening in the Philippine market.
His point was that incentives created by contracts deserve closer examination if actual dispatch appears inconsistent with market economics.
Could Market Rules Also Be Part of the Problem?
Contracts are not the only possible explanation.
Thomas also raised questions about the design of the market itself, particularly the must-offer rule.
Under such a framework, generating companies are generally expected to offer available capacity into the wholesale electricity market.
The objective is understandable. Requiring available plants to participate can help prevent generators from withholding supply and potentially manipulating electricity prices.
But Thomas suggested that a rule designed to reduce market power could have unintended consequences if generators become too reluctant to shut down.
“Maybe people are making offers,” he said. “They’re afraid of the penalties of being calm and not being able to fulfill, and so they’re not able to shut down.”
He then raised the broader question: “Maybe it was thought of as market power, but really what we need is market flexibility.”
A market rule designed to ensure that enough power is offered to the system could become less effective if the larger challenge shifts from insufficient supply to insufficient flexibility.
Price Caps May Matter Too
Thomas also pointed to price caps as another possible source of distortion.
“Or maybe the price caps aren’t high enough,” he said.
Electricity price caps are intended partly to protect consumers from extreme market prices.
But very low caps can also reduce the potential earnings available to generators during periods when electricity is genuinely scarce.
In some international power markets, additional mechanisms such as capacity payments exist partly because generators cannot recover enough revenue from the energy market alone.
Thomas earlier described this as a form of “missing money,” where market rules, price caps or other restrictions prevent the energy market from providing sufficient revenue.
The Philippines, however, was designed more closely around an energy-only model.
That places greater importance on the quality of the price signals coming from the market itself.
Contracts Were Created for a Different Power System
Many long-term power contracts were created when the electricity system looked very different.
Large thermal power plants provided most of the electricity, demand patterns were more predictable and renewable generation accounted for a smaller share of supply.
As solar and other variable energy sources expand, the value of flexibility increases.
A generator that can reduce production when solar power is abundant and increase it when solar output falls becomes increasingly valuable.
But contracts written around steady physical generation may make that behavior more difficult. Thomas also noted that technical issues can limit flexibility.
Generators may have long-term service agreements, equipment warranties or operating requirements that restrict how frequently plants can start, stop or change their output.
“This never happens overnight,” Thomas said.
“People learn how much it will cost to operate their units differently. They may have warranties. They may have agreements. It will take some time to renegotiate.”
This suggests that reform may require more than simply changing market rules.
It could also require renegotiating contracts and reconsidering how the economics of generating plants are structured.
A Market Designed for Flexibility
Thomas ultimately framed his argument as a question rather than a definitive diagnosis.
“Why are people doing what they’re doing in a market which is designed fundamentally to provide more flexibility, where that flexibility would be very valuable?” he asked.
He cautioned that he could not say with certainty exactly which factor was responsible.
Contract design, pass-through incentives, market rules, technical constraints and other considerations could all play a role.
But the outcome, in his view, deserves greater scrutiny.
“The market itself is not behaving like it should,” Thomas said. “There is less flexibility, more rigidity, more non-technical constraints. We should explore them.”
This may become increasingly important as the Philippines moves further into its energy transition.
More solar, wind and battery projects will change the way electricity is produced. But if contracts and market rules continue to encourage power plants to behave as if the system has not changed, adding new technology alone may not be enough.
The question is therefore not simply whether the Philippines has enough electricity contracts.
It is whether those contracts allow the electricity market to work the way it was intended.
