In the wholesale market model that is used in Singapore, generation plants are dispatched based on their offers for electricity. The generation companies (the Gencos) offer electricity based on a Short Run Marginal Cost (SRMC) of their available plants.

The SRMC includes only the costs that can be avoided in the short term when a plant does not produce electricity, or likewise, cost that are incurred when a plant is producing. These costs are mainly defined by fuel costs and some other variable costs.

The cheapest possible plants with the lowest SRMC will be selected for dispatch first up to the level of generation capacity that meets total demand. The USEP is expected to be equal to the SRMC of the most expensive of these plants required to meet demand.

Nowadays, more than 95% of Singapore’s electricity demand is met by modern combined-cycle gas turbine (CCGT) generation. The Long Run Marginal Cost (LRMC) of CCGT plant, as approximated by the price set in the Vesting Contracts, is therefore often used as benchmark verses the market price, or the Uniform Singapore Energy Price (USEP), to analyse the overall profitability of the power sector.

One needs to realise that there is no direct relationship between the LTMC and the USEP. It is by no means logical that USEP was around the LTMC of CCGT before 2012, nor is it abnormal that the USEP dropped to the SRMC of CCGT after 2012.

Before 2012, total electricity (peak) demand exceeded the availability of CCGT (or other cheaper) generation capacity. To meet this demand, additional generation capacity was provided by more expensive steam turbines (ST). For the ST plants to be dispatched by Gencos, the USEP must have been equal to or exceed the SRMC for ST.


The gross profit margin of the CCGT plant is the difference between the market price (equal to the more expensive SRMC of the ST plant) and the SRMC of CCGT.

In the market model used, the gross profit margin made by the Gencos must cover all non-fuel related costs. For the power industry to be profitable, the gross margin must cover all other costs. This include all non-variable costs, financing costs and return on investments, i.e. all other costs that are include in the LTMC. It also needs to include the costs of the ST plants as they are not making a gross profit margin themselves.


After 2012, with the introduction of LNG to the fuel mix in 2013 and the commissioning of over 3,000 MW CCGT capacity, demand is mainly met by CCGT. The ST plant fuelled by oil are standing idle and the market price drops from the SMRC of ST to the SRMC of CCTG.

The gross profit margins for the CCGT plants are now eroded away and not sufficient to cover all non-fuel related costs. The Gencos are operating at a loss.

As the SRMC of ST until 2012 was more or less the same the LTMC of CCGT (and therefore the Vesting Price), it might have looked like the market had a logical equilibrium close to the Vesting Price. However, the real reason is that peak demand could only be met by plants which are on the increasing part of cost curve of production (i.e. ST plant) and that the SRMC of ST set the USEP.

Consistent with Singapore’s Market Model, after the commissioning of more than 3,000 MW of new CCGT capacity, the ST capacity has moved beyond the requirement of peak demand. As a result, the USEP has dropped from the SRMC of ST to the SRMC of CCGT (with one exception in Jul 2015)1In July 2015, some coincidental events resulted in an unexplained price spike. Although investigated by the EMA and Market Surveillance & Compliance Panel, no prove of market rigging or irregularity was found. and taken away the ability of the power industry to be profitable.


Figure: Uniform Singapore Electricity Price (USEP) vs Short Run Marginal Cost of Steam Turbines and CCGT

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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.

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