ELECTRICITY VESTING CONTRACT REGIME (Benefits)

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ELECTRICITY VESTING CONTRACT REGIME:

(Benefits): 9.

Ms Olivia Lum Ooi Lin asked the Minister for Trade and Industry (a) whether the industry has been fully consulted on the decision to introduce an electricity vesting contract regime; (b) what benefits will the industry derive from such a regime; and (c) as vesting contract prices will change every quarter, (i) will these be published; (ii) how far in advance will these price changes be published and (iii) where will these be published.

Dr Vivian Balakrishnan (for the Minister for Trade and Industry): Mr Speaker, Sir, as part of the restructuring of the electricity market, the Energy Market Authority has introduced the vesting contract regime, which commenced in January 2004. Due to the small overall electricity market in Singapore, the three major generation companies (or "gencos" for short) could potentially exercise undue market power. Vesting contracts have thus been introduced to curtail such market power. They require gencos to sell at least 65% of electricity demand at no higher than the vesting price, which is the Long-Run Marginal Cost of the most efficient generation technology within the system. The price for the remaining 35% of demand will be determined by competition in the wholesale electricity market.

The Energy Market Authority (EMA) conducted extensive consultations with industry participants between 2001 and 2003. It obtained feedback from the industry on market power analysis, as well as the design of the vesting contract regime in order to reduce risks and minimise costs.

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Vesting contracts will enable market forces to work better in the electricity market, as they will curb the ability of gencos to hike prices by withholding supply. This will encourage more competitive bidding among the gencos to sell electricity, and ultimately benefit consumers. The proper price signals will be established in the energy market, and this will in turn facilitate the decisions of gencos and their investors, and whether or not to invest in new capacity to meet rising electricity demand.

The vesting price will be adjusted quarterly to reflect changes in fuel oil prices. SP Services Ltd will publish the vesting price for each quarter on its website, which is www.mssl.com.sg, one month before the commencement of the quarter.

Ms Olivia Lum Ooi Lin (Nominated Member): Sir, in the new energy market, contestable consumers are faced with the challenge of electricity planning around their variable electricity consumption, and budget their forecast expenditure on electricity. So, therefore, in balancing resources committed to the electricity market, it appears that off-peak consumers may be unfairly penalised rather than incentivised. Can the Minister of State further comment on this?

Dr Vivian Balakrishnan: Mr Speaker, Sir, there are two sources of variability. First, there is fuel oil price variability that affects the general prices of electricity. In the case of Singapore where we do not have access to cheap fuel oil, this risk is something which all of us will be faced with. The Member's specific question on off-peak users refers to the fact that in off-peak periods, the price of electricity in the pool may fall. I think this is something which the EMA and the

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retailers will have to study, in consultation with the big users, to see how we can smoothen out our electricity demand. One way to do this would be to incentivise off-peak users by giving them the appropriate pricing signals. If we can smoothen out our demand for electricity, our overall system will become more efficient.