Jurisdiction - Singapore
Reports and Analysis
Singapore – An Electricity Futures Market.

3 December, 2014

 

 

An electricity futures market allows the trading of standardised contracts of electricity products into the future at specified prices. Such a market is expected to provide a platform for the electricity industry players and consumers to hedge their risks, thereby resulting in a more efficient and competitive wholesale and retail markets.


Developments In Singapore


The Energy Market Authority (EMA) has been in consultation with the Singapore Exchange (SGX) and various stakeholders in the electricity industry to develop an electricity futures market in Singapore. The implementation of the electricity futures market is now entering into the final phase and trading is targeted to commence end 2014.
The new electricity futures market is intended to:


(1) allow participants to lock-in electricity prices and thereby hedge their operational and commercial risks;

 

(2) grant retailers greater access to trading volume and liquidity;


(3) lower the barriers to entry for new entrants in the electricity retail market; and


(4) provide greater price transparency to contestable consumers1.


To encourage trading and liquidity in the early stages of the programme, SGX will collaborate with six power generating companies (Keppel Merlimau Cogen, Sembcorp Cogen, Senoko Energy, Tuas Power Generation, Tuaspring and YTL PowerSeraya) (GenCos) to establish separate market-making arrangements (MMA) under which each GenCo will both buy and sell futures within a predetermined price spread. The terms of the MMAs will be commercially agreed between each participating GenCo and SGX. EMA will oversee such arrangements by specifying the baseline market-making obligations and requiring SGX to report on each GenCo’s compliance with such obligations.


The Forward Sales Contract (FSC) is the commercial incentive used to encourage Gencos to be voluntary liquidity providers. In consideration for entering into the MMAs, EMA will allocate FSCs to the market-making GenCos, which will entitle the Gencos to provide a specified quantity of electricity to retailers and consumers at a specified price. The FSCs will allow offtakers to hedge against volatile electricity prices while providing GenCos with revenue certainty for their allocated volumes.


The FSC volume allocated to each participating GenCo is based on the market making volume undertaken by that GenCo. An FSC will terminate in the event that the relevant GenCo fails to comply with the market-making obligations imposed by EMA.


As the FSCs are based upon standard financial markets documentation, namely, the International Swaps and Derivatives Association, Inc. (ISDA) standard, these FSCs are expected to prepare the market infrastructure for greater OTC trading activity between generator/retailers. It is hoped that the FSC documentation will be used by the industry as a contractual framework for electricity-related financial instruments in the future, which will lower the transaction costs for entering into such financial instruments.


The introduction of the electricity futures market and the lowering of the contestability thresholdis a significant inroad toward the liberalisation of the electricity industry in Singapore. With SGX recently completing its acquisition of the Energy Market Company, the operator of the electricity wholesale market in Singapore, it is hoped that SGX will be able to integrate the electricity wholesale market with the electricity futures market and provide complementary platforms for the sale and purchase of electricity.

 

End Notes:


1 Contestable consumers are electricity consumers who have the right to purchase electricity directly from a retailer, the wholesale market or through the market support service licensee, SP Services Ltd.

 

2 The contestability threshold will be lowered from 4 megawatt-hours (MWh) to 2MWh from July 2015.

 

ATMD Bird & Bird

 

For further information, please contact:

 

Sandra Seah, Partner, ATMD Bird & Bird
sandra.seah@twobirds.com

 

Khairil Suhairee, ATMD Bird & Bird
khairil.suhairee@twobirds.com

 

ATMD Bird & Bird Energy & Project Finance Practice Profile in Singapore


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