Vesting Contracts made Singapore Consumers pay 2.7 Billion SGD over last 4 years

The Energy Market Authority (EMA) introduced Vesting Contracts in 2004 to curb the exercise of market power by the power generating companies (the Gencos). These contracts work well when the market price of electricity hoovers around the Vesting Price set by the Vesting Contracts. But when the market price is determined structurally below the Vesting Price, consumers end-up paying the Gencos extra for their electricity.

Vesting Contracts might cure the illness of market power. But, like medical drugs, it comes with side-effects. Singapore’s Market Model determines the cost of the most expensive of the power plants required to meet total demand. The market price of electricity, or the Uniform Singapore Electricity Price (USEP), is set equal to this cost. Gencos with market power could replace cheaper power plants with more expensive ones to enforce an increase in the USEP.

Over the period from 2004 to 2012, the Vesting price has been on average at the same level as the market price of electricity. Consequently, the costs of the Vesting Contracts to consumers over this period has been very modest. Notwithstanding some annual movements up and down, the total cost to consumers has been estimated SGD 112,500,000, or less than only SGD 21.60 on average per annum per Singaporean household or small business.

Figure: Total Annual Cost to Consumers of Vesting Contracts in Singapore

In 2013 the market faced some structural changes. With the commissioning of Singapore’s LNG Terminal in 2013, also a number of newly developed power plants entered operation. During the period 2012-2014 more than 3,000 MW additional capacity was added to the electricity supply pool. To support the investment decision of the LNG terminal, the EMA introduced a LNG Vesting Scheme besides the regular Vesting Contracts.

The enlargement of the power supply pool has resulted in a sharp drop of the market price of electricity compared to the Vesting Price. Previously, the Gencos paid consumers when the market price was pushed over the Vesting Price. Now, the consumers pay the Gencos as the market price has structurally dropped below the Vesting Price. We estimate that, in the last 4 years, consumers paid a staggering SGD 2.7 billion (more than SGD 515.00 on average per annum per household or small business) extra to the Gencos as a result of the Vesting Contracts and the LNG Vesting Scheme.

These numbers are particular surprising as the actual size and scope of the Vesting Contracts has been aggressively reduced. In 2011 the Vesting Contract Level (VCL) was still at 60% of the total power demand. But after 2011, the EMA concluded that the Gencos have generally not been able to exercise sufficient market power. The VCL has been stepwise reduced to 25% in 2016.

On top of the Vesting Contract payments, Singaporean consumers also paid a premium for electricity which is produced using LNG. But the cost of LNG has been more than cost of conventional pipeline gas. Over the last 4 years, the add-on cost attributable to this higher fuel cost is an estimated SGD 290 million.

The payments made by the consumers can hardly be described as a gain for the Gencos. The reduced market price of electricity has caused the profit margins for the power generation sector to completely disappear. The Loss-making Power Generation Sector in Singapore requires Bold Steps to restore profitability.

Who are these consumers footing the bill?

The EMA has progressively opened the retail electricity market to competition to give eligible consumers the option to choose their energy supplier (Contestable Customers). Currently, any commercial or industrial consumer with an average monthly electricity consumption of at least 2,000 kWh is eligible to become contestable. Everyone else, 1.3 million small consumers, mainly households and small businesses, buys electricity at a regulated tariff (the Non-Contestable Consumers).

The Vesting Contracts are firstly allocated to Non-Contestable Consumers. Only when the Vesting Contracts are bigger in volume than the total Non-Contestable Consumers electricity usage, the remainder is allocated proportionally to the Contestable Consumers. It has turned out that since 2013 the allocation to Contestable Consumers has been rapidly reduced from 40% of the total Vesting Contract Allocation to almost nil, see figure.

Figure: Quarterly Vesting Contract Allocations to Contestable and Non-Contestable Consumer load

 

The burden of the Vesting Contracts is now almost completely carried by the Non-Contestable Consumers. I.e. the 1.3 million small consumers, mainly households and small businesses. And, as the add-on premium for LNG Vesting Scheme is also incorporated in the Vesting Contracts payments, even the LNG premium add-on is solely carried by them. These charges are included in the regulated tariff for Non-Contestable Consumers

We don’t think that it was the intention of the EMA in 2004 that the Vesting Contracts would levy these large charges predominately on the Non-Contestable Consumers. Unfortunately, there is no indication that the EMA is considering to make any amendments. And, as it stands now, Non-Contestable Consumers can’t do anything to avoid these extra charges.

However, The EMA is working towards enabling small consumers to have the option to buy electricity from other retailers rather than remain on the regulated tariff. This is known as Full Retail Competition (FRC). When they choose a new retailer they will become a Contestable Consumer. And, as a Contestable Consumer, they will share the charges only (and proportionally) like any other Contestable Consumer.

 

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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