The Energy Market Company (EMC) determines the Singaporean wholesale electricity price based on supply and demand. It uses a sophisticated model which takes into account the physical characteristics of the Singaporean electricity network. This includes things like network constraints, location of producers and off takers, etc.
The EMC calculates the optimal dispatch of generation capacity and electricity price for each half hour of the day. The dispatch is such that the total of supply matches the total demand in each half hour. At the same time, it results in the cheapest overall cost of electricity production for Singapore as a whole.
Does it mean that changes in demand and/or supply result in changes in electricity prices? In other words, when the availability of supplies goes up, electricity prices go down. Or, when demand goes up, electricity prices go up.
It is what the EMC implies in their weekly market update messages. Are we able to check whether this is actually true?
A way to look at this is comparing changes in the supply cushion to changes in electricity prices. The supply cushion is the amount of available, but not used, supply or capacity. It represents both the total potential available supply as well as the total required demand. This means that the supply cushion goes down when practically available supply decreases and/or actual demand increases.
One would expect, when the supply cushion goes down or up, that electricity prices go up or down. But when plotting one versus the other in a graph, it does not show an obvious relationship. It suggests that the reasons for the increase in prices mentioned by the EMC don’t really exist.
Why is this?
Since 2014, the Market Model used by the EMC results in the Marginal Generation Type to be CCGT. This is the generation type of the most costly supply in the dispatched supply mix. It sets the wholesale electricity price.
In this period, the power generation sector has been crushed by massive overcapacity of CCGT capacity. And this capacity can easily generate any additional demand at a same or similar marginal cost.
The wholesale electricity price does not significantly change unless there is a change in the Marginal Generation Type. The overcapacity of CCGT capacity makes sure that this will not happen. In other words, the supply curve of the Market Model is practically flat.
We discussed this characteristic in the context of the difficulty the Loss-making Power Generation Sector in Singapore is in. It also means that changes in demand and supply do not materially change average wholesale electricity prices.