Singapore Plans to Regulate Power Futures to Prevent Speculation

Singapore will seek to regulate electricity trading to prevent speculation as Asia’s oil hub prepares to open the region’s first power futures market.

Singapore Exchange will begin a trial for the contracts in 2014 and intends to start trading by the end of next year, S. Iswaran, the second minister for trade and industry, said in a speech during Singapore International Energy Week today. Six power generation companies have said they are interested in the market, including Keppel Merlimau Cogen Pte, Sembcorp Cogen Pte, Senoko Energy Pte, Tuas Power Generation Pte, Tuaspring Pte and YTL PowerSeraya Pte, he said.

“We do not want to become the object of speculative activity, we are quite clear about that,” Iswaran told reporters on the sidelines of the conference. “We want to ensure that even as we create derivatives, that they serve the purpose that they are designed for.”

The island nation of 5.4 million people has about 10.5 gigawatts of installed generation capacity operated by 14 licensees, according to the website of the Energy Market Authority. By contrast, the U.K. has capacity of about 93 gigawatts. Singapore generated 46.9 terawatt hours last year.

The government wants the futures market to help larger electricity consumers better manage price volatility by allowing them to secure longer-term prices, Iswaran said.

“A futures market will also provide an alternative avenue for independent retailers to enter the market by enabling them to purchase longer-term hedges,” he said. “The entry of such independent players can in turn further spur retail competition to the benefit of end-consumers.”

Market Makers

Households in public and private housing consume on average about 369 kilowatt hours and 778 kilowatt hours of electricity per month, respectively, according to the EMA. The average U.K. household consumed 352 kilowatt hours a month last year, according to government data.

An industry group is developing the electricity futures contracts and establishing a market-making arrangement to ensure sufficient trading liquidity, Iswaran said.

“We will want to make sure the rules, and the way players participate in this market are carefully structured,” he said. “Our market is small, which is why it’s important the key players in the market come in. If that doesn’t happen then that will be a difficult task.”

Singapore is also vying to become a hub for liquefied natural gas, supercooled gas shipped by tankers rather than pipelines. It opened its first LNG terminal in May with an initial annual capacity of 3.5 million metric tons, increasing to 6 million tons by the end of the year. Natural gas supplied 84 percent of electricity in 2012, according to the EMA.

Spot LNG

A fourth tank is planned to take capacity to 9 million tons by 2016. That will allow Singapore to offer last-minute deliveries, or spot cargoes, to buyers in Asia seeking an alternative to long-term contracts.

“We are starting to see some evolution in gas contracts,” Iswaran said, adding that “several large traders” have set up in Singapore to establish a gas-trading base. “Increasingly now, we’re seeing greater diversity in contract durations, contract volumes, more spot traded. And also the opportunity to find new indices are arising.”

Solar energy is Singapore’s most viable source of renewable energy, Iswaran said in his speech. As the government seeks to prepare for solar power in the energy mix, it started a public consultation today on the regulatory framework for “intermittent generation sources,” or energy that isn’t continuously available.

“One area for consultation is how the market registration procedures can be simplified to allow small consumers with intermittent generation sources to be paid for supplying their excess electricity to the grid,” he said. “Another is the procurement of reserves to manage intermittency.”

The EMA lifted a cap on how much power that intermittent generation sources such as solar can supply to the grid to 600 megawatts at peak from 350 megawatts previously, Iswaran said.

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