Enhancing Competition through the Development of an Electricity Futures Market in Singapore

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1 Enhancing Competition through the Development of an Electricity Futures Market in Singapore The Electricity Futures Market in Singapore, which will enhance competition in the wholesale and retail markets, has been launched. This factsheet explains the key benefits and features of electricity futures trading in Singapore. What is an electricity futures market? An electricity futures market allows the trading of standardised contracts of electricity products into the future at specified prices. For example, an entity can buy or sell electricity at locked-in prices up to a 2-year period. EMA has worked closely with stakeholders such as the Singapore Exchange (SGX) and the electricity industry towards the launch of such a market. Market making on the electricity futures market on SGX, where companies put up both buy and sell prices to facilitate trading, commenced on 1 April Who can benefit from an electricity futures market? The electricity futures market provides a platform for the electricity industry and consumers to hedge their risks. The outcome is a more efficient and more competitive wholesale and retail markets, which will bring about benefits for stakeholders in the electricity market. - For the generation companies, the futures market provides an additional hedging option to manage their commercial and operational risks such as outages of their power plants. - For contestable consumers, the futures market provides an additional avenue for them to lock in long term prices. At the same time, consumers can utilise the transparent prices provided by the futures market to negotiate their electricity retail packages with electricity retailers. - For potential new entrants to electricity market, the futures market helps to lower the barrier to entry for the electricity market by providing new independent retailers the option to use the futures market to secure fixed price contracts for their consumers. This will spur greater competition in the electricity retail market and in turn exert downward pressure on electricity prices.

2 What are the key features of the electricity futures contract? The SGX Uniform Singapore Energy Price (USEP) Quarterly Base Load Electricity Futures contract has the following contract specifications: Parameter Specification Contract Size 0.5MW per half an hour per day (i.e. for each of the 48 half-hourly periods in a day) over the contract length Contract Length Quarterly contracts, with near term (prompt) quarter 1 Cumulative Contract Duration 2 years (i.e. availability of prices for 8 quarters ahead) Settlement Price Uniform Singapore Energy Price (USEP) More information on the product specifications and prices can be found on SGX s website. What is liquidity and why is it important for electricity futures trading? Liquidity is a measure of a market s performance. It is the ability to buy or sell a product in this case the electricity futures contract without causing a significant change in its price and without incurring significant transaction costs. A sufficiently liquid market provides confidence for participants to trade and is typically characterized by a large number of buyers and sellers willing to transact at all times. In the trading of commodities futures products, liquidity is typically created and maintained by having market makers who will put up both buy and sell prices within a pre-determined price spread. For the electricity futures market in Singapore, liquidity is created by having companies participate as market makers in the futures market in return for allocation of Forward Sales Contracts (FSC) to them. The FSC provide these companies with financial certainty in return for their market making obligations and the corresponding costs incurred, particularly in the start-up phase where participants are building the necessary capabilities in the electricity futures market. 1 Trading of near term (prompt) contract refers to the availability of the nearest contract for trading within the contract period itself. For example, a trader should be able to trade an electricity futures contract for the fourth quarter of 2015 (with maturity date 31 December 2015) within that quarter (e.g. on 2 October 2015).

3 How can generation companies and electricity consumers benefit from the electricity futures market? The illustration below shows the different options available to generation companies for their sale of electricity, and how they can benefit from the electricity futures market by directly participating in the market or indirectly using the futures price available on the market to negotiate their commercial contracts.

4 The illustration below shows the different options available to electricity consumers for their electricity purchase, and how consumers can benefit from the electricity futures market by directly participating in the market or indirectly using the futures price available on the market to lock in their electricity price. Consumers can use the futures prices available on SGX as a reference for evaluating their electricity retail packages. For example, a consumer negotiating on electricity retail packages for the 1-year period from January to December 2016 can refer to the prices for quarterly electricity futures contracts for the same period to assess the reasonableness of the retail packages offered.

5 The following table shows some of the available information on the futures market on SGX s website which can help consumers to better assess the competitiveness of their retail packages. Contract Quarter Bid (S$/MWh) Ask (S$/MWh) Prev. Day Settle (S$/MWh) Q $178 $180 $180 Q $184 $190 $183 Q $185 $190 $190 Q $192 $194 $191 Q $197 $200 $195 Q $195 $201 $197 Q $197 $199 $198 Q $200 $205 $200 Note: Figures used are for illustration purposes only. What are Forward Sales Contracts (FSC)? In order to facilitate initial liquidity, market makers in the electricity futures market are allocated FSC, which provide these companies with financial certainty in return for their market making obligations and the corresponding costs incurred. Similar to the Vesting Contract, the FSC is a Contract-for-Difference (CfD) 2 signed between participating market makers and the Market Support Services Licensee (MSSL i.e. SP Services). The interaction between MSSL, market makers and the exchange in the wholesale, futures and retail electricity market is shown in the figure below: Given that the primary beneficiaries of the electricity futures market will be the contestable consumers, the FSC will be allocated to the contestable consumers. As a concept, the FSC mechanism (i.e. FSC credits/debits) does not necessarily mean that contestable consumers will pay more essentially the FSC provides a hedge for contestable consumers against the fluctuating prices in the wholesale market while ensuring the participating market makers 2 A Contract-for-Difference is an arrangement made in a futures contract where differences in settlement are made through cash payments, rather than the delivery of securities or physical goods.

6 have financial certainty in return for providing liquidity service to the market. EMA has dovetailed the introduction of the FSC scheme, which will constitute volumes of about 6% of the total electricity demand over the next 3 years starting in Q3 2015, with the roll back of the vesting contracts level, which is reduced from 40% of total electricity demand in 2014 to 30% in the first half of 2015, 25% in the second half of 2015 and finally to 20% in This will mitigate the impact of the introduction of the FSC scheme on the overall market. The FSC credits/debits are calculated based on the difference between the FSC price (which is pegged to the quarterly vesting price) and the wholesale electricity price. For example, when the wholesale electricity price is above the FSC price, contestable consumers receive the FSC credit through their retailers (if they are buying electricity at retail price) or SP Services (if they are buying at wholesale electricity prices) based on the difference between the wholesale electricity price and the FSC price. Conversely, when wholesale electricity price is lower than the FSC price, contestable consumers pay the difference as an FSC debit. The FSC price and volume, including the FSC credits/debits, will be published on SP Services website starting in Q How the FSC credits/debits are settled for a contestable consumer buying through a retailer is a commercial arrangement between the consumer and retailer. Contestable consumers should also check with their retailers on whether there is a vesting credits/debits component in their current electricity package, in which case FSC credits/debits can be subsumed under the vesting credits/debits line item. If there is no existing arrangement for vesting credits/debits in their retail contracts, contestable consumers can explore with their retailers whether they would like the FSC credits/debits to be a pass-through (in which case the FSC credits/debits would be fluctuating) or to be absorbed in the retail package (in which case the FSC credits/debits would be fixed). 16 Apr 2015 For more information, please contact Mr Law Gee Yong at law_gee_yong@ema.gov.sg or Ms Ren Kejia at ren_kejia@ema.gov.sg