Things have gone really well for the Singaporean electricity markets and power generation sector. Since the creation of the Singapore Electricity Pool in 1998, the start of the National Electricity Market of Singapore (NEMS) in 2003, and the stepwise deregulation of the consumer market, the electricity supply has become one of the most reliable in the world. The Energy Market Authority (EMA), set up in 2001, has successfully promoted an efficient and competitive market. But while the last group of retail consumers is about to be deregulated, darker clouds have arrived which will affect the future of the development of the electricity market.

For the period up to 2012, the market price of electricity, or the Uniform Singapore Energy Price (USEP), has been on average more or less in line with a Long Run Marginal Cost (LRMC) of a modern combined-cycle gas turbine (CCGT) power plant. This price provided for profitability and economic sustainability of the power generating companies (the Gencos) running such CCGT plant.

In 2013, however, the market took a different turn and moved the sector into an investors nightmare. The USEP dropped to a Short Run Marginal Cost (SRMC) of CCGT plants instead and no longer recovers more than the variable costs of electricity production, mainly the costs of fuel. This price is too low for the Gencos to operate profitably and it eliminates any return on the long term investments made and provides no reimbursement for other fixed costs.

This is best illustrated by comparing (see figure, numbers derived from Vesting Contracts):

  • the gross profit margin (the market price USEP minus the cost of the fuel plus an adjustment for Vesting Contract settlements), also called the Adjusted Spark Spread, and
  • all other costs, like fixed and other non-fuel related costs including financing costs and a return on equity,

as the total net profit is equal to the gross profit margin minus all other costs.


Figure: Vesting Contract Adjusted Spark Spread vs Non-Fuel Costs 

During the period 2004 to 2012 the Adjusted Spark Spread has been more or less the same as all non-fuel related costs (except at the end of 2008 following the financial crisis and slowdown of the world economy which resulted in fuel and energy prices to slump). However, since 2013, as the electricity prices converged to the SRMC, the non-fuel and fixed costs were no longer covered by the Adjusted Spark Spread. The Gencos started to operate on steep losses as they had to pick-up these costs.

One might say that these lower electricity prices are good for consumers. But in the long run its undermines the Gencos’ solvency, it limits the funds available for sustainable maintenance and it discourages new investments in power generation. The seriousness of the situation is shown by the comments recently made by some of the large incumbent Gencos:1

Market participants are likely to enter financial distress and require restructuring of their balance sheets.

Senoko Energy

It is quite apparent that the current regime in Singapore makes it impossible for the generators to be confident of a reasonable mid to long term return on any new investment.

YTL PowerSeraya

Hence, it can be seen in that the […] regime has effectively prevented generation companies from recovering their costs through the market.

Tuas Power

Some suggest that the EMA is responsible for the current state of affairs by imposing Vesting Contracts on the incumbent Gencos which had incentivised their investment decision making. And, now the regulator reduces the Vesting Contract Levels while the power generation sector is unable to recover its costs, the Gencos are looking for the regulator to provide support. The EMA is of the opinion that investments and operation in new or re-powered generation capacity (including embedded and co-generation) in Singapore have always been commercially driven and that the Gencos should take action in response to the current market conditions themselves.

It is generally acknowledged that the Gencos are facing challenging market conditions. It is also a recognised feature of the Vesting Contracts that it provides stable revenue sufficient to sustain prudent operations including financing costs and a return to shareholders of CCGT plant. However, it is inconceivable that a phasing out of the Vesting Contracts in itself is the cause for the challenging market conditions and the reason that the USEP has converged from the LTMC to the SRMC of CCGT plant.

Consistent with Singapore’s Market Model, after the commissioning of more than 3,000 MW of new CCGT capacity in 2012-13, the costs of the more expensive Steam Turbine (ST) power plants have moved beyond the required level to satisfy peak demand. As a result, these ST plants are now standing idle, the USEP has dropped from the SRMC of ST to the SRMC of CCGT and taken away the ability of the power industry to be profitable.

Building new efficient power generation lowers the cost of production and therefore improves the margins for Gencos. However, and at the same time, when too much is being build and the more expensive part of the production cost curve (i.e. ST capacity) is moved out of reach of peak demand, the market price drops and the gross profit margin is eroded away.

The question arises why Gencos have decided to invest in so much new efficient CCGT capacity. The Gencos claim that they had presumed that the Vesting Contracts were to continue to provide revenue protection up to the LTMC of CCGT:1

Vesting has provided a de facto capacity remuneration mechanism to accompany Singapore’s ‘energy only’ electricity market design.

Seneko Energy

Although vesting contracts may be intended to reduce market power, the reality is that they are seen by all investors as a revenue support to ensure resource adequacy and a part of the deal which investors bought into.

YTL PowerSeraya

It is suggested that, if it was recognised at the time that the Vesting Contracts were to be phased out, the Gencos might have made different investment decisions:1

If generators had understood this would be the case, they would have been more reluctant to support the LNG terminal.

YTL PowerSeraya

While investments in new/repowered generation capacity in Singapore are commercial decisions made by the generation companies, the vesting contract regime did influence the investment decisions made by the generation companies in ways that a vesting contract regime designed around a pure ‘market power mitigation’ objective would not.

Tuas Power

In any case, the Gencos have taken enormous regulatory risk by allowing the flatting the supply cost curve though adding new efficient CCGT capacity, moving the ST capacity out of reach of peak demand, and becoming dependent on the Vesting Contracts for profitability and economical sustainability.

However, there is one aspect which was out of control of the incumbent Gencos. A significant part of the newly build capacity is fuelled by LNG which is subject to the LNG Vesting Scheme.

To support the investment decision of the Singaporean LNG terminal, the LNG Vesting Scheme was put in place to eliminate new plants dependency to the USEP when fuelled by re-gasified LNG. In other words, the investments in new CCGT, fuelled by re-gasified LNG, have a secure revenue level and a sufficient return for its investors for a period of up to 10 years. New Gencos which do not own other existing production capacity in Singapore are not exposed to the drop in USEP as a result of the commissioning of their newly build CCGT when fuelled by re-gasified LNG.

In this case, the LNG Vesting Scheme provides a biased advantage and incentive to these new investors at the expense of existing incumbent Gencos. This might have caused more new CCGT capacity being built than would have been done otherwise if the LNG Vesting Scheme not implemented.

It is clear that the power sector is in dire straight and requires a long term solution. It is also clear that the Vesting Contracts, and even more so the LNG Vesting Scheme, have contributed to the current situation. One would expect a discussion to take place on how to resolve this. Unfortunately, there are no clear indications that this is happening. The Q&A related to EMA’s biannual review of the VCL shows that the incumbent Gencos prefer an increased and continuing dependency on the Vesting Contracts.

A more structural and logical solution would be to rebalance the sector by either to

  • decrease supply through strategically mothballing certain plants together with a sector-wide cost sharing arrangement, or
  • increase demand by exporting electricity through inter-connectors to new development areas around Singapore.

No time should be wasted to avoid further financial distress in the sector.

1. Review of Vesting Contract Regime – Draft Determination, dated 31 August 2016

, , , , ,
Martin J. van der Lugt

Martin works as an independent consultant for the energy industry. He gained wide ranged experience in the gas and power markets in Northwest Europe working for European and American energy companies and as an independent consultant. He has a particular interest in the developments of the Southeast Asian markets and is open to discus opportunities.


  1. Dear Sir,

    Could you explain why the adjusted spark spread has such a steep drop in Q4-2008 and Q1 2009? From your graph, it seems that the Gencos were not able to adjust their pricing during the rapid decline of energy prices following the financial crisis of same period. Why would they be producing when they are not able to recover their marginal production costs?

    1. As Vesting Contract prices are set at the start of each calendar quarter, the fuel costs projected in these prices are not necessarily representative for the actual fuel cost. Fuel costs changes are passed on to the Vesting Contract prices, but with a delay of a quarter. This clarifies why in some periods the Adjusted Spark Spread as calculated from the Vesting Contracts is negative. It suggests that during these periods the Gencos would run at a gross margin loss. This is however not the case. The Vesting Contracts projected cost of fuel (natural gas) has been larger than the actual cost of fuel during these periods as a result of the delay.

      We have illustrated this in our post Loss-making Power Generation Sector – the Spark Spread Revisited.

  2. No matter what the EMA claims about investment decisions in this sector being commercially driven, it is still their responsibility to ensure that the market is well balanced and that involves properly forecasting expected future demand and encouraging sufficient, not excess, supply to be introduced into the system. The 3GW increase in the early 2010s were an unprecedented and poorly planned expansion phase which led to the market imbalance today and putting the entire sector’s sustainability in peril.

    1. Hi Andrew,

      The unprecedented and poorly planned expansion was a direct result of the LNG Vesting Scheme as this provided incentives for new investments above and beyond the pricing signals of the market.

  3. Sir, thank you for an interesting article. The status quo remains to this day which has brought the power generation sector to a critical state. We are seeing the first casualty in Hyflux (but they certainly do have other issues, not just the Tuaspring pant). There is however, one thing I do not understand. You have computed a negative spark spread for the vesting contracts, which is aka the LRMC. How can SP make a 3 month projection for the LRMC that ends up with a negative spark spread? It does not make sense.

    1. Dear Pat Chashmal,

      Thank you for your comments. You are correct that a spark spread should not be negative, as generators would simply not produce when the price is below the Short Run Marginal Cost. The computations made in this figure are based on the data derived from the Vesting Contracts parameters. The Vesting Contracts take previous quarter gas prices as a proxy for actual gas prices. Particularly when there are large movements in the dated Brent or HFO market prices, these proxies can overstate the gas price used to calculate the spark spread. This is what happened in the cases where the spark spread (as derived from the Vesting Contracts parameters.

      We have used our own calculations for the quarterly natural gas price to amend for the anomaly in Loss-making Power Generation Sector – the Spark Spread Revisited. When using our more accurate proxies, the spark spread (amended for Vesting Contracts payments) is always positive.

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