The Energy Market Authority (EMA) has promoted efficiency and competition in the electricity market for the benefit of consumers. Aiming to curb the exercise of market power by the power generating companies (the Gencos), EMA introduced Vesting Contracts on 1 January 2004. These contracts reduce the Gencos’ exposure to the market price, the Uniform Singapore Energy Price (USEP), by paying a Vesting Price for a part of electricity demand, the Vesting Contract Level (VCL), regardless the USEP. The VCL is set to a percentage of the total projected Singaporean demand such that the Gencos have no economic interest left to exercise market power when offering their electricity to the market.

Vesting Contracts were mandatory for the three most dominant Gencos but are also allocated to others:

The Vesting Price is set to approximate the Long Run Marginal Cost (LRMC) of a theoretical new entrant, and is estimated by considering the fixed and variable cost of the most efficient new generation technology in operation in Singapore that contributes at least 25 per cent of the total electricity demand, currently identified as an F-class combined-cycle gas turbine (CCGT).


Figure: Uniform Singapore Energy Price (USEP) vs Vesting Prices

For the part of the electricity production covered by the Vesting Contracts, the variable market price USEP is swapped for more stable Vesting Prices. In other words, consumers pay a Vesting Price for a part of their electricity off-take and the USEP for another part. This is achieved to paying the USEP first and adjusting this through Vesting Contract settlements. These settlements are payments from the Gencos to consumers when the USEP exceeds Vesting Prices and the revenues from consumers to the Gencos when the USEP is less than Vesting Prices.

The EMA’s Procedures for calculating the Components of the Vesting Contracts express “no intent for Vesting Contracts to provide revenue certainty for Gencos, nor is the sustainability of Gencos’ revenue a factor that should be taken into account when setting the Vesting Contract Level”1. The result is nevertheless that part of the electricity production is covered by the Vesting Contracts, and that the revenue for Gencos on this production is defined by the Vesting Price, i.e. the LTMC of CCGT plants.

The revenue from the remainder of the production (i.e. the part not ‘contracted’ under the Vesting Contracts) is the variable part in the overall profitability. This ‘remainder’ has now become considerable as the Vesting Contract Levels have been reduced over the years from 65% in 2004 to 25% today.


Figure: Vesting Contract Levels as Percentage of Total Electricity Supply

From the perspective of curbing the exercise of market power, the Vesting Contracts seem to work effectively. In the 2010 “Review of Vesting Contract level and period weighting factors for 2011 and 2012” by PA Consulting Group2 it was suggested that,“as the USEP was usually less than the Vesting Price and greater than the Short Run Marginal Cost (SRMC) from January 2006 up till the 2nd quarter of 2009, the Gencos have generally not been able to exercise sufficient market power to achieve the Vesting Contract price, on average, during this period”.

From 2013 Q2 this became even more profound. The EMA concludes in the Review of Vesting Contract Regime – Draft Determination3, that there is “limited evidence of the likely exercise of market power in the near term”. It is proposed to “gradually phase out Vesting Contracts by maintaining VCL at 25% [of projected total demand] from 1 Jan 2017 to 30 Jun 2018, and reducing to 22.5% and 20% for 2H 2018 and 1H 2019 respectively.” Thereafter, only quantities produced from re-gasified LNG will remain vested until the expiry of LNG Vesting Scheme on 30 Jun 2023.

1. Review of the Vesting Contract Level for the period 1 January 2015 to 31 December 2016 – Final Determination Paper, dated 22 September 2014.

2. Review of Vesting Contract level and period weighting factors for 2011 and 2012 by PA Consulting Group, dated 1 October 2010

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

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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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