Vesting Contracts

1. Vesting Contracts to Control Market Power

On 1 January 2004, the Energy Market Authority (EMA) introduced vesting contracts. The policy objective of the vesting contracts is to curb the exercise of market power by the three large incumbent generators in order to promote efficiency and competition in the electricity market for the benefit of consumers.

The three large generation companies, Senoko Power Ltd, PowerSeraya Ltd and Tuas Power Ltd, together supply about 90% of Singapore's electricity demand. These companies can exercise market power to drive prices up by withholding supply. Conversely, these companies may also drive prices down to such low levels that would not attract new gencos to invest in new power plants. Without new generation plants, demand would eventually outstrip supply.

2. What are Vesting Contracts?

Vesting contracts impose on the generation companies a contractual obligation to produce a specified quantity of electricity (vesting contract level) at a specified price (vesting price). The vesting contracts are bilateral contracts made between the generation companies and SP Services Ltd (who is the Market Support Services Licensee or "MSSL") on behalf of consumers.

It was made mandatory for the three large generation companies, Senoko Power Ltd, PowerSeraya Ltd and Tuas Power Ltd to hold Vesting Contracts. The other smaller generation companies which were already licensed namely SembCorp Cogen, Keppel Merlimau Cogen and Island Power Company were offered voluntary Vesting Contracts.

Who determines the level of cover (vesting contract level)?

The EMA determines the vesting contract level once every 2 years. At the start of the vesting regime in 2004, the vesting contract level was set at 65% of the total electricity demand. This contract level will be progressively reduced over time by the EMA. For more details on the rollback schedule, please refer to EMA's website www.ema.gov.sg.

Who determines the vesting price?

The EMA determines the vesting price every 2 years taking into account the long run marginal cost (LRMC) of the most efficient technology that accounts for at least 25% of our system demand and the policy objective of the vesting regime.

3. Role of the MSSL in Vesting Contracts

Under its electricity licence, the MSSL is to provide assistance to the EMA in the prevention of misuse of market power. To fulfill its obligation, the MSSL has entered into vesting contracts with generation companies on behalf of consumers as a whole. Since vesting contracts should be revenue neutral to the MSSL, the MSSL passes on the contract debits/credits to the retailers, the non-contestable consumers and those contestable consumers who purchase electricity from the pool. Retailers may or may not pass on the vesting credits/debits to their customers depending on the commercial arrangement made between the retailer and their customer.

4. Quarterly Hedge Price and Hedge Quantity for Generators

The vesting contract hedge price (HP) and quantities are calculated by the MSSL every three months, and settled between the parties through the Energy Market Company's (EMC) settlement system. Hedge quantities (HQ) are calculated as a proportion of total electricity demand rather than generating capacity. For peak periods, the hedge quantity will be a larger proportion of total demand, while for off-peak periods; it will be a smaller proportion. The average hedge quantity or vesting contract level will progressively reduce, as new generation companies enter the market and diminish the market power of the incumbents. The hedge quantity allocated to each generation company is based on the proportion of the generator's installed capacity to total capacity of generators under vesting contracts.

5. Quarterly Hedge Price and Hedge Quantities for Consumers

Vesting contract hedge price to consumers, termed as the Payment Reference Price (PRP), is calculated by the MSSL every quarter to recover the expected cost of the contracts allocated to generation companies. Payment Reference Price also includes a shortfall or surplus for the previous quarter between the amount paid by vesting contract consumers and the amount paid to vesting contract generators. This shortfall or surplus (Previous Net Shortfall, PNS) arises because generators' hedge quantities are determined before the contracts are applied based on forecasted consumption data, whereas loads are settled on actual consumption data.

Non-contestable consumers (NCC) are fully hedged by vesting contracts; hence the hedge quantity is equal to their electricity consumption. Vesting contract hedge quantity to contestable consumers (CC) is referred to as Vesting Hedge Proportion (VHP). The amount of vesting contract quantity left after having covered all non-contestable consumption is allocated to contestable consumers. That means that the energy consumption of CC is not fully hedged and vested portion is limited to VHP.

6. Vesting Contract Calculator (VCC) Application

A system calculator has been developed to ensure equitable and accurate calculation of vesting contract data (HP, HQ, PRP, VHP) by the MSSL. This calculator has been professionally audited and satisfactorily certified to be of operation performance in adherence to the EMA's methodology.

7. Impact of Vesting Contracts on Consumers

7.1 Non-contestable Consumers

Non-contestable consumers (NCC) will continue to buy their electricity from SP Services based on regulated tariffs, which are reviewed quarterly. The tariffs will be based on the vesting price to consumers (Payment Reference Price, PRP). Vesting contracts protect non-contestable consumers from fluctuations in pool prices.

7.2 Contestable Consumers

For contestable consumers' (CC), a portion of their consumption would be covered by vesting contracts. CC under retailers may or may not see vesting contract credits/debits as a line item on their electricity bills, depending on their contract terms with their retailer. For the CC under the MSSL, where vesting credits/debits would be passed through, a separate line item is reflected for vesting contract credits/debits on CC's electricity bills. These vesting contract credits/debits are to adjust consumers' energy payment at vesting contract reference price (VCRP) for the vested portion to the vesting contract price for consumers (PRP).

8. Vesting Contract Reference Price

A vesting contract reference price (VCRP) is used in the calculation of vesting contract credits/debits. VCRP is calculated by the EMC and is, in turn, used by the MSSL to derive vesting credits/debits applicable to contestable consumers. The VCRP can be viewed from EMC website: www.emcsg.com.

9. An example of Vesting Contract Credits/Debits

The allocation of vesting contract credits/debits is calculated by the following formula:

Σ (VCRPhh- PRPhh) * (Energyhh * TLF * VHPhh)

Example
For a given half-hour period;
Energy = 5,000 kWh
TLF = 1.10
VHP = 0.50
VCRP = S$ 0.10 (per kWh)
PRP = S$ 0.08 (per kWh)

(VCRPhh- PRPhh) * (Energyhh * TLF * VHPhh) = (0.10-0.08) * (5000*1.10*0.50) = S$ 55

This is a vesting contract credit; customer receives a refund of S$ 55 against his/her electricity payment for this half-hour period.

Note: This appears as a negative value on the bill - it is a credit to customer.

References

• Nomenclature
  
  VCRPhh = Vesting Contract Reference Price
  
  *PRPhh = Payment Reference Price
  
  Energyhh * TLF * VHPhh = Vested Quantity
  
  Energyhh = Energy consumed
  
  TLF = Transmission Loss Factor
  
  *VHPhh = Vesting Hedge Proportion; proportion of contestable consumption covered by vesting contract
  
  *HPhh= Hedge Price to generators
  
  *HQhh = Hedge Quantity allocated to the generator
  
  Note:
  *output components from VCC application
  hh refers to a given half hour period

• Additional readings
  
  EMA's Procedures for Calculating the Components of Vesting Contracts (October 2003)
  Regulated Supply Services Code, Section 7.2.1
  Market Support Services Code, Section 6.1.3
  http://www.ema.gov.sg
  
  To view FAQs for Vesting Contracts click here