REGULATING SINGAPORE’S ELECTRICITY INDUSTRY 11 April 2011

REGULATING SINGAPORE’S ELECTRICITY INDUSTRY

11 April 2011

•The Electricity Industry Milestones

1) Background

2) Restructuring of Singapore’s Electricity Industry

3) Regulatory Philosophy

4) Regulatory Framework

5) Regulatory Practices

6) Key Lessons

7) Results achieved so far

Outline


• The lead agency for energy matters in Singapore – a statutory board under the Ministry of Trade and Industry.

• EMA is also the regulator of Singapore’s electricity and gas industries.

• EMA’s main goals are to:

(1) ensure a reliable and secure energy supply;

(2) promote effective competition in the energy market; and

(3) develop a dynamic energy sector in Singapore.

About the Energy Market Authority of Singapore (EMA)

Gas from Indonesia

Gas from Malaysia

Overview of Singapore’s Energy Landscape

• No significant energy resources – dependent on imports for energy needs.

• About 80% of Singapore’s electricity is generated using imported natural gas – vulnerable to price fluctuations and supply disruptions

• Singapore faces additional challenge of being alternative energy disadvantaged – limited scope to deploy solar and wind energy on a large scale.


Restructuring of Singapore’s Electricity Industry

Electricity Industry Reforms - 2000

• Singapore’s electricity industry had traditionally been vertically integrated and Government-owned.

• Liberalisation of electricity industry began in 1995, and continued through 2000, where the government decided to press on with further liberalisation of the electricity industry and obtain the full benefits of competition.

Key Initiatives for Restructuring:

• Clear separation of contestable/competitive businesses from natural monopolies to ensure level playing field

• Open access to monopoly infrastructure

Restructuring of the Electricity Industry

ELECTRICITY INDUSTRY STRUCTURE IN 1995

IPPs

SembCorp CogenENV Tuas

Power Singapore Power

Contestable Business

Non-contestable Business

Franchised Consumers

Non-franchised Consumers

Progressive extension of competition

Non-franchised

SectorUtilities Support Services

FranchisedSector

T&D PoolOperations

SystemOperations

PowerGrid Ltd

PowerSeraya Senoko Power

Private Electricity Suppliers

Non-franchised

Sector

Utilities Support Services

Power Supply Ltd

since Apr 98

Electricity Industry Structure in 1995

T&D

PowerGrid

IPPsNEA Tuas Power

Senoko Power

Power Seraya

SP Services (formerly Power Supply)

Franchised (Small)Consumers

Non-franchised (Large Industrial & Commercial) Consumers

Market to be fully opened

ultimately

Electricity Retailers

EMA

Electricity Flow

Singapore Power

Market Operator

Industry Regulator

System Operator

Energy Market Company

ELECTRICITY INDUSTRY STRUCTURE IN APRIL 2001Electricity Industry Structure Today

Note: SP Services is not allowed to compete with the retailers for contestable consumers, it just passes through the pool price.

Regulatory Philosophy

Contestable Sector(Gencos, Retailers)

Monopoly Sector(SP PowerAssets, SP Services,

EMC)

regulate with light touch

rely on market signals

ensure level playing field

Low barriers to entry

Transparent rules and consistent application of rules

regulate revenue/prices

incentivise efficient behaviour

Set performance standards to prevent “cutting of corners”

share cost savings with consumers

Open access


Contestable Sector:Generation

Wholesale Electricity Market

Market Mechanism

• Gencos bid half-hourly to sell electricity

• Energy• Reserve: Primary, Secondary

and Contingency• Regulation

• Retailers/contestable consumers buy electricity

Market Operator

• EMC • Perform market clearing and

settlement functions

Wholesale Electricity Market

Vesting Contracts

• Wholesale Market is dominated by three large gencos, with combined market share of close to 80%.

• Gencos can push prices up by witholding supply.

Market Power in Wholesale Market

Genco A

Genco B

Genco A

Genco B

Genco C

Price

Quantity

P2

P1

At demand = Q, Market Price is P1.

However, suppose Genco A withholds supply, Genco C would now be dispatched.

The market price would increase to P2.

Q

Demand

Vesting Contracts

Solution:

• Introduced Vesting Contracts in 2004 - Gencos to sell a specified amount of electricity at specified price.

2004 Mid-2007 2011 2012 Ultimate Goal

Vesting Cover

65% 55% 60% 55% 0%

Vesting price

LRMC of most economic power plant in Singapore

Vesting Contracts (1)

• Vesting Price set by EMA based on Long Run Marginal Cost of the most economic generation technology in operation in Singapore and that contributes to more than 25% of total demand.

Review of Vesting Price

• EMA reviews the LRMC parameters every 2 years and resets them to reflect the costs of newer and more efficient plants.

• In each round of review, EMA consults the industry before deciding on the value of parameters that would take effect for the next 2-year period.

• EMA is also required to consult all Vesting Contract holders (i.e. gencos) at least 3 months in advance of any amendments to the parameters of the vesting price, or the methodology for setting the vesting price.

• Review process is transparent and gives regulatory certainty to gencos.

Review of Vesting Price


Regulatory Practices


1) Transparency

• Publication of licencing requirements and procedures• Advance publication of new or amended regulations and

procedures• Public consultation process 2) Application Procedures

• Non-discriminatory and consistent application of rules in the processing of applications for a licence

• Incomplete applications: inform applicant and process applications as much as possible in the meantime

• Target timeframe of processing: 12 weeks • Rejection of applications: inform applicant, reasons provided

Key Points on Regulatory Practices


Key Lessons


1) Need for Consultative Approach

• Increased transparency and increased trust. • Valuable source of ideas: better outputs and outcomes at a lower

cost.

• To get buy-in: greater acceptance and compliance with policies

Best Practices:

(a) Need to establish consistent guidelines and procedures on consultation.

(b) Need to allow adequate time for consultation. (c) Need to provide adequate feedback.

(d) “E-Consultation” to rapidly reach large numbers of people at low cost .

Key Lessons (1)


2) Need to Provide Regulatory Certainty

• Given that energy projects typically are planned years in advance and require huge sums of money, investors need to be confident that rules would not be changed in the middle of the game.

• Regulatory uncertainty results in increased regulatory risks, which would increase costs for companies, and deter investment (both local and foreign), thereby affecting security of supply.

Best Practices:

(a) Clear and transparent regulatory regime -> reduces regulatory discretion, and promotes accountability.

(b) Consistency in regulatory decisions -> promotes predictability.

Key Lessons (2)

•The Electricity Industry Milestones• Competition has motivated gencos to switch from oil-fired steam plants to more cost efficient gas-fired plants. If not, electricity prices today would be about 15 per cent higher.

• Liberalisation of the electricity market has also seen consumers benefit from greater choice of retailers, and pricing plans. Today, around 75% of demand have retail choice, and we are working on how to let the remaining 25% also enjoy the benefits of competition.

• In the monopoly sector, regulation has also brought about lower rates, while maintaining the high performance of the grid .

• The results thus far can be attributed to the effective regulatory framework and the close partnership between EMA and the industry. Nonethless, there is scope for further improvement and we are still learning! Moving forward, we recognise that as regulatory frameworks evolve, it is important that we continue to learn from international best practices.

Results achieved so far

THANK YOU

Documents

REGULATING SINGAPORE’S ELECTRICITY INDUSTRY 11 April 2011