LNG Vesting Scheme

In 2010, the Energy Market Authority (EMA) introduced the LNG Vesting Scheme, where LNG is factored in as a source of fuel when determining the Vesting Price of the Vesting Contracts.

In its efforts to diversify energy supplies, improve energy efficiency and to create more competitive markets, Singapore has had an extensive development of energy infrastructure during the past years. With the commissioning of Singapore’s LNG Terminal in 2013, also a number of newly developed CCGT power plants entered operation. During the period 2012-2014 more than 3,000 MW additional capacity was added to the electricity supply pool.

Genco NEW CCGT Capacity (MW)
Senoko Energy 862
Keppel Merlimau 813
PacificLight Power 800
Tuas Power 406
Sembcorp 404
Tuaspring 396

To support the investment decision of the LNG terminal, the Energy Market Authority (EMA) introduced:

  1. controls on new piped natural gas imports to allow the build-up of LNG demand to provide clear signals to LNG terminal investors that there will be demand for LNG, and
  2. the LNG Vesting Scheme upon completion of the LNG Terminal in 2013 for a period of 10 years. Contrary to the initial Vesting Contracts, this LNG Vesting Scheme is meant to provide a certainty to revenue and earnings for new generation plants at the LNG Vesting Price, i.e. the Long Run Marginal Cost (LRMC) of LNG fuelled CCGT.

Incentives for CCGT Investments

The revenue and earnings certainty for newly build plants fuelled by re-gasified LNG has removed any dependency to the market price of electricity, i.e. the Uniform Singapore Electricity Price (USEP). As a result, the incentives provided by the LNG Vesting Scheme for the investments of new plants differ from the incentives provided by the electricity market.

These skewed incentives has led to the addition of all this new capacity, a substantial overcapacity of CCGT capacity, and consequently a reduction in the USEP. The profit margins of most other generation capacity has disappeared and now the Loss-making Power Generation Sector in Singapore requires Bold Steps to restore profitability.

As the LNG Vesting Scheme sets a Vesting Price, it also provides curbing of market power in the same way as the initial Vesting Contracts and therefore the EMA deducts the LNG Vesting Level from any required total Vesting Level to be allocated to the initial Vesting Contracts.

 

About the Author

Martin J. van der Lugt
Martin works as an independent consultant for the energy industry. He gained wide ranged experience in the gas and power markets in Northwest Europe working for European and American energy companies and as an independent consultant. He has a particular interest in the developments of the Southeast Asian markets and is open to discus opportunities.

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