01Contents

Executive Summary 02 Investigations

Introduction 03 Summary of Investigation Activities 31

Market Monitoring Sections 50 and 51 of The Electricity Act

The Energy Market Information Requirements to Assist the Authority 33

Reports to the Authority 33

Energy Market Performance 06

Statistical Properties of Energy Prices 07 Assessment of the Wholesale Electricity Markets

Market Structure 08 State of Competition and Efficiency of theWholesale Electricity Markets

Contributing Factors in Price Fluctuations 10

The Regulation Market

Introduction 15

Regulation Market Performance 16

Statistical Properties of Regulation Prices 16

Market Structure 16

The High Regulation Price Incident 17

Analysis of Outages and Prices

Introduction 20

Historical Outage Statistics 21

Outages and Energy Supply 21

The Relationship between Outages and Price Spikes 23

Significant Price Spikes and Outages in 2007 24

Econometric Model and Outlier Prices

Identification of Outlier Prices 26

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Market Structure and Competition 35

Market Price Behaviour 36

Future Challenges 36

State of Compliance within the Wholesale Electricity Markets

Offer Variations after Gate Closure 37

Rule Breaches 37

Conclusion

User Guide 40

Introduction 05

* All $ currencies refer to Singapore dollars unless otherwise indicated.

02

Beginning with this report, the period of review for the Market Surveillance and Compliance Panel (MSCP) Annual Report will cover one calendar year instead of following an April to March calendar. This report covers the period from 1 January to 31 December 2007. In this year’s report, the MSCP also reviews trends over the last five years commencing from market start on 1 January 2003.

Of the three markets comprising the National Electricity Market of Singapore (NEMS) – energy, reserve and regulation – the energy market is by far the most significant and warrants the closest attention from the MSCP, as it accounts for close to 97 percent of the total value of market transactions. The energy market is typically volatile owing to electricity’s special characteristics as fluctuations in energy prices reflect changes in market conditions such as demand, fuel oil prices, supply cushion and offer prices.

The record regulation prices in January 2007 highlighted the vulnerability of a market with high market concentration. Although the regulation market contributed only 1.1 percent of the total transaction value of the NEMS over the last five years, the potential financial impact to consumers could be substantial, as the incident on January 2007 demonstrated.

In its analysis of the relationship between generation outages and energy prices, the MSCP noted that outages can potentially lead to higher prices due to lower capacity available for dispatch. However, this relationship did not always hold over the last five years, as overcapacity had helped to ensure there was always unused capacity capable of replacing capacity under maintenance.

In 2007, the MSCP developed an econometric model to understand the relationship between the Uniform Singapore Energy Price (USEP) and various fundamental factors such as combined-cycle gas turbine (CCGT) supply, steam turbine (ST) supply, the energy supply cushion, offers lower than $100/megawatt hours (MWh), energy demand, reserve cushion and the lagging fuel oil price. Using data from 2003 to 2007, the model enables identification of outlier USEP prices in 2007. The MSCP identified a total of five outlier prices occurring between January 2007 and December 2007. Three of these occurred between January and March 2007 and were described in the previous MSCP Annual Report. Of the remaining two incidents, there was no evidence to suggest that they had resulted from inefficient market outcomes.

In reviewing the state of competition and efficiency of the wholesale electricity markets, the MSCP arrived at the following conclusions:

Over the five-year period since market start, the NEMS had rapidly transitioned from a market dominated by ST to one dominated by the more-efficient CCGT technology. The total installed capacity from CCGT units had risen sharply, by 57.0 percent, to around 5,390 megawatts (MW). The CCGT market share is 51.8 percent by total installed capacity and 80.5 percent by total metered energy quantities for 2007.

Despite an overall increase in total installed capacity to 10,400MW, the average supply cushion continued to decline due to the decreasing availability of ST capacity for dispatch. Nonetheless, ST units continued to play a pivotal role, especially during periods of tight supply.

• Theenergymarketremainedheavilyconcentrated, with over 80 percent of market share in the hands of three generation companies. Vesting contracts, however, injected significant market discipline.

• WiththeentryofanewMarketParticipant(MP), the combined market share of the three largest generation companies declined from a high of 86.8 percent in 2006 to 82.1 percent in 2007, accompanied by a decline in the vesting contract level from 65 percent to 55 percent of total demand. The increased competition from the two new CCGT units also enabled the average energy price in 2007 to remain relatively low compared to the price trend of the previous four years.

• Althoughtheaveragefueloilpricemorethandoubled in 2007 compared to 2003, the average energy price rose by about 35 percent to $124.57/MWh.

• Energypricespikeshadoccurredoccasionallyover the last five years but they were quickly addressed through market response and did not cause undue concern.

• Thehighcorrelationbetweenenergypricesand vesting contract hedge prices indicates that energy prices in the NEMS closely track the long-run marginal costs. This implies that the market is still sufficiently profitable to attract entry of new generation capacity in the long run. The new market entrant demonstrates this point.

The MSCP is generally satisfied with the state of compliance in the NEMS.

Executive Summary < Contents

03

The Market Rules provide for the Market Surveillance and Compliance Panel (MSCP) to prepare and submit to Energy Market Company (EMC) an annual report on the conduct of its monitoring and investigation activities. The report is then furnished by EMC to the Energy Market Authority (EMA). This is the sixth report by the MSCP on the wholesale electricity markets of the National Electricity Market of Singapore (NEMS).

Previous annual reports followed an April to March calendar; last year’s annual report therefore covered the period April 2006 to March 2007. Beginning with this report, the period of review will cover one calendar year. The current report covers the period 1 January to 31 December 2007. This year’s report also reviews the NEMS over five years of market operation, beginning with market start on 1 January 2003. This review provides the panel with the opportunity to address some important observations and concerns gathered over the last five years.

The current MSCP members are• TheanLipPing,Chair;• LeeKehSai;• ProfessorLimChin;and• TPBMenon.

Supported by the Market Assessment Unit (MAU) of EMC, the role of the MSCP is to monitor and investigate activities in the wholesale electricity markets and the conduct of market participants (MP), the Market Support Services Licensee(MSSL),thePowerSystemOperator(PSO) and EMC to:

• identifybreachesoftheMarketRules,marketmanual or system operation manual;

• assesswhethertheunderlyingstructureofthewholesale electricity markets is consistent with the efficient and fair operation of a competitive market; and

• recommendremedialactionstomitigatetheconduct and inefficiencies referred to above.

The Market Rules require this annual report to include a summary of routine reports on MSCP monitoring and investigation activities, including a summary of any reports regarding the possibility of anti-competitive agreements or the abuse of a dominant position contrary to Sections 50 or 51 of The Electricity Act. The report also includes a summary of all complaints or referrals filed and investigations commenced, and a summary of any investigations conducted by the MSCP concerning offer variations after gate closure reported by EMC. The Market Rules require the report to contain the general assessment by the MSCP of the state of competition and compliance within, and the efficiency of, the wholesale electricity markets.

A Tribute

The members of the MSCP would like to pay a special tribute to Mr Joseph Grimberg SC. Mr Grimberg chaired the MSCP from 1 January 2003 to 31 December 2007.

In his five-year tenure as Chair, Mr Grimberg made significant contributions to developing the role of the panel in market surveillance and compliance.

Faced with new challenges – in the absence of established procedures and precedents – the MSCP was able to rely on a Chair who quickly comprehended the key issues and guided the panel with integrity, clarity of thought and pragmatism. Colleagues on the MSCP fondly remember Mr Grimberg’s skilful chairmanship as he steered their robust debates with both wit and eloquence.

Introduction < Contents

05Market MonitoringThe Energy MarketIntroduction

Since the liberalisation of the electricity market in 2003, three different products have been traded in the wholesale markets of the NEMS. The co-optimised products – energy, reserve and regulation – are traded close to real-time on a half-hourly basis. Energy ensures that all electricity demand in Singapore is met on a half-hourly basis, while the reserve and regulation capacity can be drawn upon when imbalances between supply and demand occur. At the end of 2007, the annual turnover for these products reached $5.26 billion.

Energy is by far the most important of the three products, as it accounts for almost 97 percent of the total value of market transactions since market start. The monetary and social implications of an inefficient energy market are considerably higher than for the reserve and regulation markets. Therefore the MSCP emphasises monitoring activities in the energy market to ensure market efficiency and fairness. As Chart 1 illustrates, the average energy price, using the Uniform Singapore Energy Price (USEP) as the benchmark, has consistently traded at a higher price than the other two products, except in 2007. While the prices for all three classes of reserve were relatively stable, the abnormally high regulation price at the beginning of 2007 pushed the average regulation price for that year beyond the energy price for the first time since market start.

Product Prices ($/MWh)

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Chart 1: Average Prices by Product 2003/20072003 2004 2005 2006 2007

Energy Primary Reserve Secondary Reserve Contingency Reserve Regulation

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06Market MonitoringThe Energy MarketEnergy Market Performance

Table 1: Major Characteristics of the USEP, the WEP and the VCHP

Uniform Singapore Energy Price (USEP)

Wholesale Electricity Price (WEP)

Vesting Contract Hedge Price (VCHP)

Definition The USEP is the price passed on to retailers in the wholesale electricity market.

In addition to the cost of electricity (USEP), the WEP includes the regulation cost, administrative costs and adjustments.

The VCHP is the reference price for vesting contract quantity payments.

Indications The USEP is the best indicator of short-term market imbalances since it is determined half-hourly based on demand and supply for that half hour period.

The USEP and the WEP indicates possible changes in the underlying fundamentals in the regulation market.

The VCHP reflects the long run marginal cost of a CCGT unit. Although the spot price (USEP) may exceed the VCHP occasionally, a persistent trend may signal market inefficiency.

Calculation Weighted average price of all withdrawal nodes.

WEP=∑USEP + EMC Admin + PSO Admin + AFP + HEUC + MEUC

The VCHP is based on the long-run marginal cost of the most efficient generation facility in Singapore, calculated according to a formula set by the EMA.

Frequency Half-hourly Half-hourly Quarterly

Main Price Determinants

√ Forecast electricity demand √ Generator offers √ Plant availability

√ Administrative cost √ Regulation price √ Energy price

√ Fuel oil price √ Currency exchange rate √Long-runmarginalcost

Table 1 offers a comparison of the three energy-related prices monitored by the MSCP.

Chart 2 shows that although the three prices usually move in the same direction, there are periods where deviation or divergence may occur. An example is area ‘A’ in Chart 2. The divergence between the USEP and the Wholesale Electricity Price (WEP) resulted in unusually high regulation prices in January 2007.

Chart 2 also highlights the following major price trends for the NEMS in the last five years:

• Phase 1: In the first year of market operation, both the USEP and the WEP moved sideways, trading within a monthly average band of $80.65/megawatt hours (MWh) and $107.22/MWh.

• Phase 2: After the first year, the average monthly USEP plunged from $95.95/MWh in December 2003 to $65.61/MWh in January 2004, as the market responded to vesting contracts implemented on 1 January 2004 for 65 percent of total market demand. This January price remained the lowest ever recorded since market start.

• Phase 3: The one-off plunge in energy price was followed by a persistent upward trend that lasted for approximately two and a half years, with the USEP eventually hitting a high of $168.34/MWh in August 2006. Energy prices rose along with strong growth in electricity demand and soaring fuel oil prices. In particular, the price for 180-centistoke high sulfur fuel oil (180-CST HSFO) almost doubled in this period.

• Phase 4: The $168.34/MWh price turned out to be the end of the major upward trend that started in February 2004. Both the USEP and

the WEP retreated, with the USEP hitting a low of $109.83/MWh in May 2007. The decline coincided with a softening of fuel oil prices and a rising number of offers in the $50/MWh to $100/MWh range.

• Phase 5: Since the sharp rise in fuel oil prices in the second half of 2007, energy prices have continued to creep up, although the MSCP notes that the rise in energy prices for the NEMS has lagged behind fuel oil prices, which recently hit record-high levels.

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Demand VCHP

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WEP USEP

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AFP = Allocated Regulation Price, HEUC = Monthly Energy Uplift Charge, MEUC = Hourly Energy Uplift Charge

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07Market MonitoringThe Energy MarketStatistical Properties of Energy Prices

The high volatility of prices in liberalised electricity markets can be attributed to electricity’s special characteristics, including non-storability, inelastic demand and short-term constraints in supply. In addition to the high volatility of such prices, a positive skewness and high kurtosis1 is usually observed. In addition, electricity prices are not normally distributed.

As Table 2 shows, the MSCP has observed that the energy prices in the NEMS exhibit statistical properties similar to those in other liberalised electricity markets. With the mean consistently higher than the median, the price distribution for the NEMS tends to skew to the right (positive skewness). Positive skewness indicates that prices are more concentrated to the left of the mean, with a long tail to the right of the mean.

Chart 3 shows the price distribution curve for the USEP between 2003 and 2007. The chart indicates that most prices have settled between $80/MWh and $90/MWh in the last five years.

Table 2: Statistical Properties of the USEP ($/MWh)

2003 2004 2005 2006 2007Mean 92.35 82.35 109.90 132.42 124.57Mode 72.33 80.64 88.84 115.97 117.12Median 86.12 80.63 100.22 120.98 119.02Range- Minimum -5.22 -10.03 0.02 0.14 0.00

- Maximum 4,500.00 4,500.00 4,430.65 4,500.00 4,500.00Standard Deviation 88.15 70.31 85.55 95.68 81.86Skewness 35.89 47.22 25.98 24.85 33.79Kurtosis 1,537.28 2,762.15 986.45 887.33 1,482.06

1 Kurtosisindicatesthelevelofpeakednessorflatness of a distribution.

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Chart 3: Histogram for the USEP 2003/2007Frequency USEP

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08Market MonitoringThe Energy MarketMarket Structure

There were five generation companies at market inception in 2003. Since then, 1,9652 MW of new capacity have been commissioned in the last five years. However, most of the new capacity was introduced by existing market players, with the intention of replacing their less efficient and older steam turbine (ST) units. As a result, although the transition from ST units to combined-cycle gas turbine (CCGT) units has led to gains in efficiency, the market remained highly concentrated.

Chart 4 shows the monthly market share based on metering quantity (the areas) and maximum generation capacity (the broken lines) since 2003 for all generation companies. The chart shows the following regarding the last five years:

• Concentrated market – The NEMS remained highly concentrated, with over 80 percent of market share controlled by three generation companies. With additional CCGT capacity introduced in the last five years, their combined market share grew from an average of 84.4 percent in 2003 to 86.8 percent in 2006. This number has since dropped to 82.1 percent in 2007.

• Close proximity between market share by metered energy quantity and maximum capacity – The total market share based on metered quantity for generation companies owning ST units was generally lower than their maximum capacity. Their market share was reduced because the less-efficient ST units were only scheduled during peak demand periods. By contrast, generation companies owning only CCGT units managed to command a higher market share based on metered quantity than the maximum generation capacity. However, this situation varied depending on supply conditions in the market.

• Strategic role for ST units – Although CCGT is the preferred technology in the NEMS, at around 80 percent of market share by metered energy quantity in the last two years, the older and less-efficient ST units still played a pivotal role in maintaining a stable market. As Chart 4 illustrates, there were occasional spikes (as indicated by arrows in the Chart) in the combined market share of the three big generation companies owning ST units. These spikes usually coincided with a drop in the availability of a Market Participant’s (MP) CCGT units as a result of forced outage or planned maintenance.

• New entrant injects competition – A new MP commissioned two CCGT units in early October 2006; their subsequent commercial operation in April 2007 helped alter the competition scenario in the NEMS. As Chart 4 shows, the combined market share for the three big generation companies (G1, G2 and G3) has been dropping since the entrance of the new MP.

2 Estimate based on maximum capacity in standing data.

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09Market MonitoringThe Energy MarketMarket Structure

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Chart 4: Market Share Based On Metered Energy Quantity and Maximum Capacity

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Chart 5: Index of Supply and Demand

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USEP Demand Fuel Oil Supply Cushion Offers less than $100/MWh

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Market MonitoringThe Energy MarketContributing Factors in Price Fluctuations

The energy price in the NEMS (i.e., the USEP) can be quite volatile, owing to its special characteristics and its close relationship to typically-volatile fuel oil prices. Chart 5 compares the performance of the NEMS energy price with that of various fundamental factors. Table 3 shows the performance of these fundamental factors while Chart 5 translates the first five factors into a common index for easy comparison.

Chart 5 tracks the performance of the energy price and some of the fundamental factors, using January 2003 as a base (i.e., 100 points on the index). The details for each of the indices are discussed below:

•Demand – Since market start, growth in energy demand in the NEMS has been modest, at an average of four percent per year. This translates into a nominal growth rate of 17.4 percent over the five-year period. Although the relationship between the USEP and demand is not immediately apparent from Chart 5, Chart 6 confirms that these two variables generally have a positive relationship.

• Fuel oil prices – With close to 97 percent of the generation units in the NEMS relying on either fuel oil or gas as the source for fuel in generating electricity, higher fuel oil prices in the last several years have had a significant impact on the USEP. The average yearly benchmark 180-CST HSFO has risen by 119.6 percent in five years. The biggest jump was observed in 2005 when the average 180-CST HSFO price leapt from US$28.34 in 2004 to US$40.69 a barrel. This jump could be the primary explanation for a shift in the price duration curve observed in 2005, when the percentage of hours with the USEP lower than $100/MWh dropped sharply from a high of 97.3 percent in 2004 to 49.5 percent in 2005.

Chart 5 shows that the energy price in the NEMS normally tracks closely to the fuel oil price. However, the MSCP observed a departure in 2007. Despite registering an 18.8 percent increase in fuel oil prices that year, the energy price as measured by the USEP actually dropped 5.7 percent. This drop could be the result of greater competitive pressure from the two new CCGT units with a total capacity of 490MW, which became commercially operational in April 2007.

Table 3: The Performance of Fundamental Factors

2003 2004 2005 2006 2007USEP ($/MWh) 92.34 82.38 109.80 132.16 124.59Demand (MW) 3,872 4,042 4,217 4,357 4,546Fuel Oil Price (US$/barrel) 26.55 28.34 40.69 49.08 58.30Supply Cushion (in %) 26.4 28.0 25.2 23.7 23.5Offers (MW)- ≤ $100/MWh 4,206 4,554 4,210 3,794 4,003

- > $100/MWh 1,040 1,051 1,411 1,900 1,926Capacity Ratio (%)- CCGT 78.1 80.5 78.6 78.5 76.0

- ST 36.1 35.1 27.1 22.2 22.7

- GT 0.0 0.3 0.5 0.3 0.2

- OT 45.2 44.7 42.5 41.7 42.5Plant Outages (MW)- Anticipated 627 1,270 1,327 1,208 1,431

- Unanticipated 50 39 42 26 33

GT = open-cycle gas turbine OT = other facilities, i.e., incineration plants operated by the National Environment Agency that convert energy from incinerated refuse.

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11Market MonitoringThe Energy MarketContributing Factors in Price Fluctuations

• Supply cushion – With the exception of 2004, the supply cushion, which measures the level of spare capacity available after dispatch, has been on the decline since market start. This decline was driven by higher growth in average demand as compared to capacity available for dispatch. While six new CCGT units have been commissioned since market start, there has been a significant drop in ST unit availability, as the commercial incentive to run a ST unit weakens with rising fuel oil prices and the availability of more-efficient CCGT units.

Historically, the supply cushion has been one of the best indicators of tight supply conditions when it reaches a certain threshold. Generally, as the supply cushion tightens, there is a greater probability of high prices. As Table 4 shows, the average USEP was $2,567.18/MWh when the supply cushion dropped below 10 percent. This high price is in sharp contrast to the $84.94/MWh price when the supply cushion surged beyond the 30 percent threshold.

Table 4: Breakdown of Supply Cushion by Category (in %)

No. of Average Price Median Price Lowest Price Highest Price Periods ($/MWh) ($/MWh) ($/MWh) ($/MWh)

Less than 10% 15 2,567.18 3,186.19 117.11 4,500.00 10% to 15% 956 338.37 143.42 85.06 4,500.0015% to 20% 15,405 135.02 123.95 73.18 2,229.6120% to 25% 28,789 109.42 106.98 65.48 1,904.5625% to 30% 23,692 97.27 90.83 61.30 1,239.33>30% 18,791 84.94 80.37 -10.03 229.89

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12

•Offer prices – In the NEMS, generation companies can offer up to $4,500/MWh for energy in ten different price-quantity pairs.

Chart 7 demonstrates how changes in

average monthly offers at or below the $100/MWh threshold by generation type

affect the price outcome for each level of demand. Chart 7 also highlights the

relationship between offer behaviour, level of demand and equilibrium prices:

• Correlationbetweensupplyanddemand– Chart 7 shows that the average monthly electricity price (using the USEP as the benchmark) in the NEMS has a negative correlation with the volume of offers below the $100/MWh mark. Generally, electricity prices rise when the gap widens between the level of demand and capacity offered at or below $100/MWh.

• Risingofferpriceband–Duringthemajor

uptrend in the USEP between February 2004 and August 2006 (see Chart 2 for more information), there was evidence of a reduction in capacity offered at or below $100/MWh, especially from ST units. During this period, the 180-CST HSFO price more than doubled, from around US$26 to US$59 a barrel.

• Chart8furtherbreaksdowntheoffersintodifferent price ranges. It is obvious from the chart that the capacity being offered at or below $100/MWh has been shrinking, caused by a substantial drop in offers ranging from $50.01/MWh to $100/MWh. Most of this capacity had shifted to the $100.01/MWh to $500/MWh price range. This shift coincided with the USEP rising from $78.56/MWh in January 2005 to a record high of $167.41/MWh in August 2006. Due to a reversal in offer behaviour, with more expensive offers shifting back into the $100/MWh or less band. However, with oil prices hitting record high levels, the temporary rise in the volume offered at or below $100/MWh has started to reverse.

Market MonitoringThe Energy MarketContributing Factors in Price Fluctuations

Capacity Available Per Period (MW)

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Market MonitoringThe Energy MarketContributing Factors in Price Fluctuations

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14

•Capacity Ratio – The capacity ratio reflects the utilization rate of the various generation units in the NEMS. Six new CCGT units have been commissioned in the past five years. In conjunction with rising fuel oil prices, this competitive pressure has led to a dramatic drop in the capacity ratio for ST units.

Chart 9 shows that, unlike the demand and fuel oil prices discussed above, there does not appear to be a close relationship between the capacity ratio and energy prices. This is not surprising since capacity ratio does not indicate either the level of supply or the corresponding offer price.

• Plant outages – Although unanticipated outages remained relatively unchanged in the last five years, the average anticipated plant outages for a half-hour period hit a high in excess of 1,500MW in 2007 as the total generation capacity in the NEMS continued to expand with the two CCGT units from a new MP. The relationship between energy price and outages depends upon the types of outages and the generation plant involved. For example, the price impact of ST outages is usually less severe compared to CCGT outages. The Analysis of Outages and Prices section starting on page 20 offers a detailed analysis of plant outages and their relationship to energy prices.

Market MonitoringThe Energy MarketContributing Factors in Price Fluctuations

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Chart 9 : Relationship between the USEP and Capacity Ratio

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USEP Capacity Ratio for CCGT Capacity Ratio for ST

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15Market MonitoringThe Regulation MarketIntroduction

In addition to energy, ancillary services such as regulation and reserves are scheduled on a real-time basis. Both regulation and reserves are required to avoid imbalances between load and generation. As Diagram 1 illustrates, while regulation is primarily responsible for very short-term imbalances, reserves cater for larger short-term imbalances. If imbalances between load and generation continue, the persistent, high prices should eventually attract new investment to match the higher load.

With the exception of incineration plants and open-cycle gas turbines (GT), any generator in the NEMS can offer regulation if it is Automatic Generation Control (AGC) capable. Regulation maintains the balance between load and generation by moving the output of selected generators up and down via AGC, as shown in Diagram 2.

Regulation is procured in real time based on offer prices from generators. Since market start, the requirement for regulation has been fixed by the PSO at 100MW. However, effective from 22 November 2007, the PSO has specified for each period a regulation requirement of up to 100MW. With the regulation requirement fixed at 100MW for most of the last five years, the variation in prices primarily depended upon changes in supply conditions, such as volume of outages and available capacity. Generators and consumers share the cost of regulation. Each generator bears the regulation cost of up to 10MW of its output, while consumers bear the remainder based on the amount of energy withdrawn.

Diagram 1: Imbalances between Load and Generation

RegulationReserve

Economic Price Signal

Very Short Term Short Term LongTerm

Diagram 2: Regulation Maintains the Balance between Load and Generators in Real Time

Generation (MW)

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Initial Generation

Scheduled Regulation

Scheduled Generation

Scheduled Regulation

Actual Dispatch Assumed Linear Ramp Up

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16Market MonitoringThe Regulation MarketRegulation Market Performance/Statistical Properties of Regulation Prices

Regulation Market Performance

With only 100MW of regulation traded in the spot market, the total transactions recorded for regulation were just a fraction of the $16 billion transacted in the wholesale market since market start. At the end of 2007, regulation market transactions made up 1.1 percent of the total value of transactions in the NEMS.

Prior to 2007, the price distribution curves for regulation (see Chart 10) were relatively unchanged, with at least 90 percent of the regulation price clearing between $0/MWh and $50/MWh. However, this distribution curve changed dramatically in 2007, with the proportion of prices within this price range shrinking to around 70 percent. In contrast, 2007 saw a substantial increase in prices in the $100/MWh to $500/MWh price range, moving from less than an average of 3 percent between 2003 and 2006 to over 12 percent in 2007.

Table 5: Statistical Properties of Regulation Prices ($/MWh)

2003 2004 2005 2006 2007Mean 36.44 32.60 68.84 70.52 117.97Minimum 0.00 1.00 0.01 0.01 0.01 Maximum 2,750.00 2,750.00 2,750.00 2,750.00 2,750.00Standard Deviation 98.81 90.67 256.74 244.88 251.82Skewness 19.69 21.06 8.84 8.11 3.27Kurtosis 426.55 508.67 81.19 75.53 13.12

Statistical Properties of Regulation Prices

Likeenergyprices,regulationpricesintheNEMSare not normally distributed and skew to the right. Using data since market start, regulation prices also demonstrate high volatility, as shown by their standard deviation and kurtosis.

The volatility of the regulation market, as measured by standard deviation, has increased substantially since 2005, as Table 5 shows. The standard deviation indicates the average variability of regulation prices from the mean. Although the regulation market has a lower price cap of $2,750/MWh compared to $4,500/MWh for the energy market, regulation prices were more volatile than energy prices.

The higher volatility in the regulation market is mainly due to the existence of a number of technical constraints that the market clearing engine (MCE) considers when determining dispatch instructions. In addition to having valid regulation offers, generators willing to supply regulation also need to satisfy the following conditions:

• Thegeneratormustbescheduledforenergy;• Thegeneratormustoperatewithinthe

regulation band3; and • Theinitialconditionofthegeneratormuststay

within the regulation band.

These requirements increase the volatility of the regulation price since some generators may not meet the requirements in certain periods, leading to a sudden fall in regulation supply.

Market Structure

The regulation market is more concentrated than the energy market, with the three largest suppliers controlling more than 90 percent of market share as compared to 80 percent in the energy market. Prior to the participation of the new MP in the regulation market, effective April 2007, there were only four generation companies capable of providing regulation. In contrast to the regulation market, the energy market has vesting contracts which have kept energy prices in check.

3 It is only within this band that the generator can be controlled by the AGC system of the PSO.

% of Prices

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Chart 10: Regulation Price Distribution 2003/20072003 2004 2005 2006 2007

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17Market MonitoringThe Regulation MarketThe High Regulation Price Incident

The High Regulation Price Incident

A substantial increase in regulation prices in the wholesale market towards the end of 2006 and early 2007 had resulted in a significant increase in electricity cost for contestable consumers. This had prompted a contestable consumer to file a request for the MSCP to conduct an investigation, as the contestable consumer felt that this outcome was unacceptable in a competitive market. In its findings issued in March 2007, the MSCP concluded that the increase in regulation prices was mainly due to changes in supply conditions, i.e., the offer behaviour of MPs.

This section reviews the incident using more extensive data from January to December 2007. The aim is to understand the underlying changes in the regulation market since it hit a monthly average high of more than $700/MWh in January 2007.

Supply Conditions for Regulation since Market Start

As Chart 11 shows, the average supply curve for regulation on a yearly basis has gradually changed in shape, indicating increasing average offer prices since market start. Using the same supply data, Table 6 confirms that regulation offers had remained relatively unchanged from 2003–2006 for offer quantities of up to 120MW. During this period, regulation offer prices had fluctuated between $28/MWh and $59/MWh. However, this situation changed dramatically in 2007, as offer prices topped $860/MWh for offer quantities of up to 120MW. Table 6 and Chart 11 also show (compared to 2005 and 2006) that while offer prices were higher for quantities up to 120MW, this was not necessarily the case for quantities beyond 120MW.

Table 6: Estimated Offer Price ($/MWh) for Regulation Using Hypothetical Regulation Requirements

2003 2004 2005 2006 2007100MW 29.00 28.00 29.00 30.00 48.00110MW 39.00 30.00 39.00 41.00 188.00120MW 50.10 49.00 59.00 59.00 860.00130MW 59.07 59.00 1,199.92 940.00 940.00140MW 80.10 1,099.83 2,499.93 2,599.95 1,050.00150MW 110.00 1,999.93 2,699.95 2,748.97 2,299.98

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Chart 11: Yearly Regulation Supply Curve 2003/20072003 2004 2005 2006 2007

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Nevertheless, there is no evidence to suggest that the increasing average offer price was accompanied by any significant fall in the total offer quantity. The average quantity available for regulation dispatch for each half-hour period fluctuated between 182MW to 196MW during the five-year period.

With Table 6 and Chart 11 confirming that the supply curve for 2007 had changed dramatically compared to previous years, we will now look more closely at supply conditions during the high regulation price period, which started in October 2006 and continued into the early part of 2007.

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18Market MonitoringThe Regulation MarketThe High Regulation Price Incident

To further understand how the high price incident occurred, the supply and price patterns for 2006 and 2007 are broken down into quarterly periods, as shown in Table 7, Charts 12 and 13. The table and charts illustrate the following supply and price trends:

Stage 1 – Prior (Quarter 1 to Quarter 3 2006)

As the dotted lines show, the average supply curves (see Chart 12) were relatively unchanged, with approximately 70 percent of the regulation capacity available for dispatch at or below $100/MWh. The level of CCGT anticipated outages remained relatively close to the historical level during this period (see Table 7). These factors accounted for the lower average regulation price of $53.81/MWh during this period. At least 90 percent of the regulation prices also fell into the $0/MWh to $50/MWh price range, as Chart 13 shows.

Stage 2 – Period of Rising Regulation Prices (Quarter 4 2006) Beginning in the fourth quarter 2006, the supply curve shifted to the left, coinciding with the beginning of the high regulation prices in October 2006. During this period, about 62 percent of the available regulation capacity was offered at or below $100/MWh. The level of anticipated outages for CCGT units also rose to an average of 410MW. As Chart 13 shows, the price distribution curve indicates that there were more prices clearing in the $500.01/MWh to $1,000/MWh range, pushing the average regulation price to $120.10/MWh in the fourth quarter 2006.

Stage 3 – Record High Regulation Prices (Quarter 1 2007)

Supply conditions worsened in the first quarter 2007 as the supply curve shifted to the furthest point left in five years, with only about 52 percent of the capacity pricing at or below the $100/MWh benchmark. This shift coincided with an average of 826MW of anticipated CCGT outages. The average regulation price hit more than $700/MWh in January 2007, a record since market start. That record price alone was sufficient to shift the highest frequently-occurring price range from the $0.01/MWh to $50/MWh range to the $100.01/MWh to $500/MWh range (see Chart 13), as the average regulation price for the first quarter 2007 ended at $361.57/MWh.

The average anticipated CCGT outages were higher than normal when the regulation price hit a record in January 2007. However, the total capacity available for regulation dispatch stayed within the level comparable to the period prior to January 2007. In addition, the level of CCGT anticipated outages remained high in February and March, but average regulation prices dropped substantially, to around $209/MWh and $142/MWh respectively.

Table 7: Contribution in Regulation Offers and Outages by Generation Type

Contribution of Regulation Offers (%)

Anticipated Outages (MW)

ST CCGT ST CCGT2003 40.9% 59.1% 424 1672004 35.9% 64.1% 1,046 2062005 26.6% 73.4% 915 3632006 23.3% 76.7% 855 285

- Q1 2006 18.2% 81.8% 858 150

- Q2 2006 23.7% 76.3% 888 309

- Q3 2006 23.2% 76.8% 1,059 273

- Q4 2006 27.9% 72.1% 617 4102007 920 446

- Q1 2007 30.9% 69.1% 742 826

- Q2 2007 27.0% 73.0% 721 620

- Q3 2007 17.7% 82.3% 1,103 67

- Q4 2007 20.3% 79.7% 1,112 270

Offer Price ($/MWh )

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Chart 12: Quarterly Regulation Supply Curve Quarter 1 2006/Quarter 4 2007Q1 2006 Q2 2006 Q3 2006 Q4 2006

Q1 2007 Q2 2007 Q3 2007 Q4 2007

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19

Price (%)

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Chart 13: Regulation Price Distribution Quarter 1 2006/Quarter 4 2007

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Q1 2007 Q2 2007 Q3 2007 Q4 2007

Market MonitoringThe Regulation MarketThe High Regulation Price Incident

Stage 4 – Recovery (Quarter 2 2007)

Despite high CCGT anticipated outages (at over 600MW on average), supply conditions improved with the percentage of offers at less than $100/MWh rising to 56 percent. The shape of the price distribution curve for this quarter looks quite similar to that for the first to the third quarter 2006, except that a higher percentage of regulation prices appear in the $100.01/MWh to $500/MWh range. The average regulation price dropped to $61.75/MWh, which was 82.9 percent lower than the previous quarter.

Stage 5 – New Supply (Quarter 3 to Quarter 4 2007)

With the full effect of additional supply coming from a new MP’s generators and low levels of outages, supply conditions further improved, particularly in the fourth quarter 2007. The low average anticipated outages also helped. These conditions resulted in an average regulation price of only $36.48/MWh and $16.74/MWh in the third and fourth quarter 2007 respectively.

Despite contributing just 1.1 percent of the total transaction value of the NEMS over the last five years, the high regulation price incident demonstrates that the highly concentrated regulation market has the potential for high volatility.

This potential for volatility indicates the importance of hedging for consumers. Despite a small exposure in terms of regulation quantity, the effect of sustained high regulation prices can have a significant adverse effect on contestable consumers who have opted to have regulation prices passed through to them.

Since the publication of the MSCP findings in relation to the high regulation price incident, the EMA has appointed a consultant to conduct a detailed analysis of the regulation market and is looking into possible changes.

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20Market MonitoringAnalysis of Outages and PricesIntroduction

Since market start in 2003, the relationship between generation outages and energy prices has been an area of focus for the MSCP. The occurrence of outages can potentially lead to higher prices due to lower capacity available for dispatch. However, based on data collected and analysis performed by the MSCP over the last five years, the MSCP has observed that this relationship does not always hold, mainly because of overcapacity in the NEMS.

Chart 14 shows the relationship between the monthly average anticipated outages and the USEP since market start. The chart shows that higher average anticipated outages did not necessarily translate into higher average prices.

Overcapacity had helped to ensure that there was always unused capacity on the sidelines capable of replacing the capacity under maintenance. For example, the NEMS is dominated by CCGT and ST units, with all ST units currently owned by the three largest generation companies. During periods in which CCGT units are scheduled for maintenance, generation companies will run their less-efficient ST units, which are usually on the sidelines, to ensure compliance with vesting contract obligations and to minimize loss of market share.

In addition, the variation in energy price also depends on factors such as the supply cushion, offer prices, forecast demand and fuel oil prices.

Anticipated Outages (MW)

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21Market MonitoringAnalysis of Outages and PricesHistorical Outage Statistics/Outages and Energy Supply

Table 8: Average Outages by Generation Type and Technology in MW

Anticipated Outages Forced Outages

Total OutagesYear CCGT ST GT OT Total

2003 167 428 5 30 630 50 6802004 208 1,107 17 3 1,335 39 1,3742005 368 914 22 26 1,330 43 1,3732006 285 855 54 17 1,211 26 1,2372007 446 920 124 39 1,530 33 1,563

As Table 8 shows, with the exception of 2003, the average capacity unavailable for dispatch because of anticipated outages did not change dramatically. The quantity fluctuated between 1,211MW and 1,530MW over the last five years. In addition, Table 8 shows the following:

• High ST maintenance in 2004 – High ST maintenance in 2004 was mainly due to the decision of one MP to repower three ST units to run on Orimulsion.

• CCGT outages hit a record high in 2007 – Higher-than-normal CCGT outages in 2007 were mainly due to technical problems faced by one MP. In addition, the total installed capacity for CCGT units hit a new high with the commercial operation of a new MP’s units. To illustrate how outages might affect either the

capacity available for dispatch or the offer price, Diagram 3 shows the various factors affecting the energy market supply. The diagram shows that the amount of capacity on outage is only one factor ultimately affecting supply decisions. MPs will most likely take into consideration additional commercial factors before deciding on an offer strategy.

Based on Diagram 3, the MSCP estimates the amount of capacity unavailable, taking into account the physical condition of the plant and commercial considerations.

Diagram 3: Decision Tree on Capacity Available for Dispatch

Potential Supply

Unavailable Capacity for Dispatch

Commercial Considerations

Competing Products

Energy Market Supply

Anticipated Maintenance & Outages

Vesting ContractBilateral Contract

Fuel Oil PricesForecast Demand

Reserve & Regulation Offers

Energy Offers

Plant Maximum Capacity

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22Market MonitoringAnalysis of Outages and PricesOutages and Energy Supply

As Chart 15 shows, the capacity available for energy dispatch as a percentage of total installed capacity dropped to 57.0 percent in 2007 from 63.1 percent five years ago. This drop was consistent with the lower average supply cushion during this period.

Chart 15 also shows that, with the exception of 2003, the average unavailable capacity due to anticipated outages has hovered at around 12.2 to 15.7 percent of the total installed capacity in the NEMS.

By assuming that approximately 600MW needs to be set aside for reserve and regulation, the MSCP estimated that around 20 to 26 percent of the installed capacity in the NEMS was not offered for dispatch, probably due to commercial considerations. Further study confirms that nearly all of the capacity not offered was from ST units. ST units are peaking units that typically only run during peak demand periods, as Chart 16 illustrates. In fact, the ST capacity ratio is less than 50 percent compared to over 80 percent for CCGT units.

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Chart 15: Estimated Supply as a Percentage of Installed Capacity Capacity Not Offered as % of Installed Capacity

Outages as % of Installed Capacity Capacity Offered as % of Installed Capacity

Requirement for Ancillary Services as % of Installed Capacity

Supply as a Percentage of Installed Capacity (%) Supply Cushion (%)

2003 2004 20062005 2007

Supply Cushion

63.1% 64.0% 56.1%59.1% 57%

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Chart 16: Average ST Supply by Period2003 2004 2005 2006 2007

Note: In 2004 three ST units were unavailable due to repowering. This accounted for the low Capacity Not Offered as % of Installed Capacity.

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23Market MonitoringAnalysis of Outages and PricesThe Relationship between Outages and Price Spikes

Though outages may not necessarily lead to higher prices, nevertheless, in the last five years, the MSCP has paid close attention to price spikes that may have been caused by either anticipated or forced outages.

Since 2005, the MSCP has been monitoring prices in excess of $1,000/MWh and their relationship to outages and the supply cushion. The result of its findings has been published in previous MSCP annual reports. The appendix lists all periods in which the USEP was in excess of $1,000/MWh, and lists the respective supply conditions, as measured by anticipated outages, forced outages and the supply cushion.

Table 9 shows that since market start, there have been a total of 71 dispatch periods, or 0.08 percent of the total dispatch hours, in which the USEP exceeded $1,000/MWh.

The MSCP has also observed the following:

• Pricecap–Withtheexceptionsof2006and2007, all prices reaching the price cap of $4,500/MWh were the result of interruptions in gas supply from Indonesia.

• Supplycushion–Theaveragesupplycushionduring these periods was substantially lower than in other periods.

• Forcedoutages–Onaverage,closeto67percent of the high prices were accompanied by the occurrence of at least one forced outage.

• Anticipatedoutages–Withtheexception of 2006, the average capacity not available for dispatch due to maintenance was very close to the average capacity on maintenance registered during normal periods (see Table 8 for maintenance capacity during normal periods).

In addition, Chart 17 shows that most of the price spikes had occurred during peak and shoulder periods, with only 5.6 percent during the off-peak.

Table 9: Statistics for Prices Higher than $1,000/MWh

YearDay Count

Period Count

Price Cap

Average USEP ($/MWh)

Supply Cushion (%)

Forced Outages (%)

Anticipated Outages (MW)

2003 7 18 3 2,430 14.0 77.8 4562004 3 12 3 2,204 15.4 50.0 1,3112005 5 17 0 2,109 13.1 41.2 1,5802006 4 12 1 2,870 11.9 91.7 1,7372007 6 12 1 2,573 12.1 75.0 1,357Total: 25 71 8 2,437 13.3 67.1 1,288

38%Peak

56%Shoulder

6%Off-Peak

Chart 17: Price Spikes by Period Type

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24Market MonitoringAnalysis of Outages and PricesSignificant Price Spikes and Outages in 2007

Since market start there have been 71 periods in which the USEP exceeded the $1,000/MWh threshold. Table 10 lists the high price periods that occurred in 2007. The high price incidents typically occurred during shoulder and peak periods, with tight supply conditions illustrated by supply cushions of less than 15 percent.

• 6January2007–Fourpricespikeswereobserved on this day. In period 29, a CCGT unit tripped, resulting in a price spike of $2,974.17/MWh. Despite slightly lower demand compared to period 28, the supply cushion declined 7.3 percent to 13.3 percent. The next few periods saw prices remaining high and eventually peaking at $4,330.33/MWh in period 32. In period 35, prices normalised as a result of lower demand and higher supply.

• 20January2007–Asinglepricespikewasobserved on this day although no forced outages had occurred. However, the planned outage of two CCGT units resulted in a tight supply situation. Therefore, when a commissioning CCGT unit lowered its capacity available for dispatch in period 23, the supply cushion tightened by 2.5 percent to 13.0 percent, causing the USEP to peak at $1,266.71/MWh for the day.

• 10February2007–Thesupplysituationwastight on this day, with total outages above 2,000MW. In period 22, a peak period, demand edged up. This resulted in the tightening of the supply cushion to 13.6 percent, causing the price to spike to $1,126.39/MWh. Prices began to normalise from period 24 when demand retreated from its peak and supply started to increase, bringing the supply cushion to 16.0 percent.

Table 10: Statistics for Prices Higher than $1,000/MWh

Date PeriodPeriod Type

USEP ($/MWh)

Anticipated Outages (MW)

Forced Outages (MW)

Supply Cushion (%)

6 Jan 07 29 Shoulder 2,974.17 1,210 324 13.36 Jan 07 31 Shoulder 3,905.26 1,210 324 12.66 Jan 07 32 Shoulder 4,330.33 1,210 324 11.66 Jan 07 33 Shoulder 2,348.23 1,210 324 13.520 Jan 07 23 Peak 1,266.71 1,805 0 13.010 Feb 07 22 Peak 1,126.39 2,272 0 13.613 Mar 07 22 Peak 1,008.43 1,837 0 12.515 Mar 07 18 Peak 3,447.56 1,837 354 10.728 Jul 07 20 Shoulder 1,238.45 925 876 11.728 Jul 07 21 Shoulder 1,994.02 925 876 11.628 Jul 07 22 Shoulder 4,500.00 925 876 9.528 Jul 07 23 Shoulder 2,736.31 925 876 11.2

• 13March2007–Onthisday,thetotalanticipated outage capacity was above 1,800MW with CCGT units contributing a 52.5 percent. From period 18, the supply cushion tightened to 12.4 percent from 17.8 percent in the preceding period due to increasing demand during peak periods. This tightened supply eventually saw the USEP peaking at $1,008.45/MWh in period 22 with the supply cushion dropping to its lowest of 12.5 percent for the day. The USEP normalised in period 24 when demand declined from its peak with additional CCGT supply being offered into the market.

• 15March2007–Tightsupplyconditionswereevident on this day, with three CCGT units on maintenance and the unavailability of one CCGT unit which had not offered since its forced outage on the previous day. In period 18, two GT units withdrew from the market despite an increase in demand, and the supply cushion declined to 10.7 percent. The USEP peaked at $3,447.56/MWh for the day. The USEP normalised in the next period when the two GT units returned to the market.

• 28July2007–Thetightsupplyconditionsurfaced when the forced outage of a CCGT unit in period 20 pushed the USEP to $1,238.45/MWh. A CCGT unit was also unavailable due to planned maintenance. When another GT unit withdrew its offer in period 22, the USEP hit the price cap of $4,500/MWh as the supply cushion dropped below 10 percent. As the GT unit withdrawal was confined to only one period, the USEP quickly dropped back to $2,736.31/MWh in period 23. With demand beginning to decline and supply supported by the running of more ST units, normal prices returned after period 26.

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25Market MonitoringAnalysis of Outages and PricesSignificant Price Spikes and Outages in 2007

Appendix: Details of all Periods in which the USEP Exceeded $1,000/MWh (2003/07)

Supply Conditions

USEP ($/MWh)

Total Anticipated Outages (MW)

Total Forced Outages (MW)

Supply Cushion (%)Period Date

26 26 May 03 3,693.84 242 462 11.4

27 26 May 03 3,231.82 242 462 13.5

28 26 May 03 4,500.00 347 462 8.3

28 14 Aug 03 4,500.00 624 647 6.6

29 14 Aug 03 4,500.00 624 647 3.6

30 14 Aug 03 3,344.29 624 647 8.2

21 4 Oct 03 1,781.33 484 0 11.2

22 4 Oct 03 1,441.17 484 0 11.9

23 4 Oct 03 1,415.86 484 0 12.4

16 13 Nov 03 1,721.50 1,110 112 11.9

45 15 Nov 03 1,312.70 1,110 729 18.8

46 15 Nov 03 1,312.60 1,110 729 20.2

2 7 Dec 03 1,904.56 0 301 23.7

3 7 Dec 03 1,239.33 0 301 25.1

4 7 Dec 03 1,095.40 0 301 26.5

26 30 Dec 03 1,715.83 242 121 14.3

27 30 Dec 03 2,701.96 242 121 11.9

28 30 Dec 03 2,325.95 242 121 12.3

46 29 Jun 04 4,500.00 970 1,285 9.0

47 29 Jun 04 4,500.00 970 1,285 12.6

48 29 Jun 04 4,500.00 970 1,285 13.0

38 28 Nov 04 1,393.69 1,425 0 17.7

39 28 Nov 04 1,361.01 1,425 0 17.2

40 28 Nov 04 1,322.06 1,425 0 17.6

41 28 Nov 04 1,202.52 1,425 0 18.4

42 28 Nov 04 1,202.43 1,425 0 18.1

43 28 Nov 04 1,017.25 1,425 0 18.6

24 29 Nov 04 1,624.68 1,425 177 15.9

25 29 Nov 04 2,165.18 1,425 296 13.4

26 29 Nov 04 1,658.72 1,425 296 14.0

47 12 Mar 05 3,552.26 1,376 0 14.8

48 12 Mar 05 4,430.65 1,376 0 13.1

32 8 Apr 05 3,569.63 1,544 0 10.3

16 14 May 05 2,229.61 1,618 0 17.3

18 14 May 05 1,628.70 1,618 0 15.6

20 14 May 05 1,020.66 1,618 305 17.5

Supply Conditions

USEP ($/MWh)

Total Anticipated Outages (MW)

Total Forced Outages (MW)

Supply Cushion (%)Period Date

21 14 May 05 1,168.05 1,618 305 16.7

22 14 May 05 1,063.53 1,618 305 15.6

20 23 Sep 05 3,224.19 1,662 263 11.0

22 23 Sep 05 1,187.24 1,794 263 9.4

23 23 Sep 05 2,023.39 1,794 263 9.3

24 23 Sep 05 1,069.16 1,794 263 10.4

29 28 Dec 05 3,409.55 1,487 346 11.7

30 28 Dec 05 2,257.85 1,487 0 12.1

31 28 Dec 05 1,807.54 1,487 0 12.4

32 28 Dec 05 1,212.86 1,487 0 12.7

33 28 Dec 05 1,001.64 1,487 0 13.5

40 19 Mar 06 1,023.25 735 145 14.9

21 12 Aug 06 3,384.38 1,897 249 12.3

22 12 Aug 06 3,799.24 1,897 329 11.0

23 12 Aug 06 3,781.60 1,897 329 11.0

24 12 Aug 06 3,320.70 1,897 329 12.0

25 12 Aug 06 3,707.66 1,897 329 11.0

26 12 Aug 06 3,263.31 1,897 329 12.2

30 12 Aug 06 1,292.77 1,897 329 15.0

17 9 Oct 06 3,186.19 1,532 0 9.9

34 21 Dec 06 4,500.00 1,767 698 9.8

35 21 Dec 06 1,889.41 1,767 698 11.7

36 21 Dec 06 1,288.92 1,767 698 12.0

29 6 Jan 07 2,974.17 1,210 324 13.3

31 6 Jan 07 3,905.26 1,210 324 12.6

32 6 Jan 07 4,330.33 1,210 324 11.7

33 6 Jan 07 2,348.23 1,210 324 13.5

23 20 Jan 07 1,266.71 1,805 0 13.0

22 10 Feb 07 1,126.39 2,272 0 13.6

22 13 Mar 07 1,008.43 1,837 0 12.5

18 15 Mar 07 3,447.56 1,837 354 10.7

20 28 Jul 07 1,238.45 925 876 11.7

21 28 Jul 07 1,994.02 925 876 11.6

22 28 Jul 07 4,500.00 925 876 9.5

23 28 Jul 07 2,736.31 925 876 11.2

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26Market MonitoringEconometric Model and Outlier PricesIdentification of Outlier Prices

In 2007, the MSCP started using an econometric model to identify and analyse high price incidents4. The dependent variable of the model is the daily average USEP and the independent variables include CCGT supply, ST supply, the energy supply cushion, offers lower than $100/MWh, energy demand, reserve cushion and the lagging fuel oil price. The model is also adjusted to differentiate planned outages from generation companies with different portfolios, forced outages, and by month, day-of-week, and year via the use of dummy variables.

This model has been rerun with the inclusion of a total of 1,796 daily average observations between January 2003 and December 2007. Table 11 shows the estimation results for the econometric model. Generally, the results indicate that all coefficients of the variables have the expected signs. This means that the relationship between the USEP and each independent variable is in line with expectations (e.g., as CCGT supply increases, the USEP is expected to decrease). All the coefficients of the variables are also jointly statistically significant. This means that the independent variables are able to jointly explain the changes in the USEP. The adjusted R-squared of the model shows that 78.0 percent of the variations in the USEP can be explained by explanatory factors included in the model.

4 Details of the model and its methodology can be found in the paper, “How Market Fundamental Factors Affect Energy Prices in the NEMS – An Econometric Model”, available on the EMC website at www.emcsg.com.

Table 11: Estimation Results – January 2003 to December 2007

Variable Coefficient P-valueConstant 14.23 0.00

LOG(CCGTsupply) -0.28 0.00

LOG(STsupply) -0.02 0.56

LOG(Supplycushion) -0.80 0.00

LOG(Offers) -1.46 0.00

LOG(Demand) 0.22 0.24

LOG(Reservecushion) -0.21 0.00

LOG(Laggingfueloilprice) 0.20 0.49

CCGT planned outages dummy A -0.03 0.01

CCGT planned outages dummy B 0.08 0.00

Forced outages dummy 0.03 0.00

Model DiagnosticsR-squared 0.79

Adjusted R-squared 0.78

LMtest Present

White heteroskedasticity test Present

Number of observations 1,796

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27

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Chart 18: Actual vs Predicted Log USEP within 3 Standard Error Bands

Log USEP

31 Jan 03 31 Jul 03 31 Jan 04 31 Jul 04 31 Jan 05 31 Jul 05 31 Jan 06 31 Jul 06 31 Jan 07 31 Jul 07

Prediction - 3sds Log USEP Prediction + 3sds Outliers

Market MonitoringEconometric Model and Outlier PricesIdentification of Outlier Prices

Chart 18 illustrates the estimated daily average USEPs, the upper and lower bands, and the outliers identified by the model. A total of five price outliers were identified between January 2007 and December 2007. Three of these occurred between January and March 2007 and were described in the previous MSCP Annual Report. The remaining two incidents are described below.

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28Market MonitoringEconometric Model and Outlier PricesIdentification of Outlier Prices

Date Saturday, 28 Jul 2007 All Saturdays in Jul 2007Daily USEP ($/MWh) 350.35 172.08Max USEP ($/MWh) 4,500.00 4,500.00No. of USEP ≥ $1000/MWh 4 4Demand (MW) 4,173 4,337Supply Cushion (in %) 23.4 25.1Offers ≤ $100/MWh (in %) 60.4 63.0

The supply was tighter than normal on 28 July despite there being only one CCGT unit on planned maintenance and despite the slightly lower average demand for that day of 4,173MW compared to average demand in July as a whole. The tightened supply was mainly due to the failure of two CCGT units to return after tripping the previous day. Further, two more CCGT units did not offer on this particular day.

As a result, when another CCGT unit tripped in period 19 while demand was slowly on the rise, the USEP stayed above $1,000/MWh for four consecutive periods starting from period 20, as shown in Chart 19. The energy price also hit the cap price of $4,500/MWh in period 22, coinciding with a peak daily demand of 4,712MW and the lowest supply cushion for the day at 9.5 percent.

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Chart 19: Demand and Supply Conditions - 28 Jul 2007 CCGT Supply Others Supply USEP DemandST Supply

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29Market MonitoringEconometric Model and Outlier PricesIdentification of Outlier Prices

Date Friday, 21 Sep 2007 All Fridays in Sep 2007Daily USEP ($/MWh) 242.99 160.73Max USEP ($/MWh) 702.92 702.92No. of USEP ≥ $1000/MWh 0 0Demand (MW) 4,914 4,830Supply Cushion (in %) 20.9 22.2Offers ≤ $100/MWh (in %) 62.3 62.7

The tight supply on 21 September was mainly the result of higher than normal total outages, as the figure jumped above 1,800MW, as shown in Chart 20. The average demand on this Friday was also on the higher end at 4,914MW compared with other Fridays in September 2007.

Although there were no incidents in which the half-hourly USEP hit more than $1,000/MWh, the daily average USEP was on the high side, reaching more than $240/MWh. This was due to persistent high prices of more than $300/MWh for 14 periods. During these high-price periods, demand was rising and then remained high, with the consecutive occurrence of two forced outages of a CCGT unit.

Chart 20: Demand and Supply Conditions - 21 Sep 2007 CCGT Supply Others Supply USEP DemandST Supply

USEP ($/MWh) Demand/Supply (MW)

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31InvestigationsSummary of Investigation Activities

Under the Market Rules, the MSCP may initiate an investigation into any activities in the wholesale electricity markets or into the conduct ofamarketparticipant,theMSSL,EMCorthePSO that is brought to the attention of the MSCP by way of a referral or complaint from any source, or that the MSCP of its own volition determines as warranting an investigation.

The MSCP may refuse to commence or may terminate an investigation when the MSCP is of the view that a complaint, referral or investigation is frivolous, vexatious, immaterial or unjustifiable, not directly related to the operation of the wholesale electricity markets, or within the jurisdiction of another party.

Table 12 reflects the position with regard to investigation and enforcement activities from market start on 1 January 2003 to 31 December 2007, with the last column focusing on the period under review.

Reports of determinations of breach made by the MSCP are published in accordance with the Market Rules.

Table 12: Investigation and Enforcement Statistics

Rule Breaches1 January 2003 to 31 December 2007

1 January 2007 to 31 December 2007

(A) Total number of offer variations after gate closure received 24,279 1,264 Total number of cases closed 24,070 1,791

- cases in which the MSCP determined a breach 105 0

- cases in which the MSCP determined no breach 4,587 1,604

- cases in which the MSCP took no further action 19,378 187

(B) Origin of cases (excluding offer variations after gate closure) 122 16

- self-reports 107 16

- referrals or complaints 8 0

- initiated by the MSCP 7 0

Total number of cases closed 117 21

- cases in which the MSCP determined a breach 83 17

- cases in which the MSCP determined no breach 10 3

- cases in which the MSCP took no further action 24 1

(C) Number of formal MSCP hearings 1 0

(D) Enforcement Action - Highest financial penalty imposed on a party in breach $66,000 0

- Total financial penalties imposed on parties in breach $138,500 0

(E) Costs - Highest award of costs imposed on a party in breach $23,000 $1,500

- Total costs imposed on parties in breach $96,300 $17,500

Market Efficiency and Fairness Total number of cases: 3 0

- referrals or complaints 2 1

- initiated by MSCP 1 0

Total number of cases closed 2 1

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33Sections 50 and 51 of The Electricity Act

Information Requirements to Assist the Authority

The Market Rules provide for the MAU, under the supervision and direction of the MSCP, to develop a set of information requirements to assist the EMA in fulfilling its obligations to prohibit anti-competitive agreements and abuse of a dominant position under Sections 50 and 51 of The Electricity Act.

The first set of information requirements was finalized in consultation with the EMA and published on 27 March 2003. As the market evolved, modifications to the information requirements were published on 18 August 2003 and 28 January 2004.

The MAU regularly provides data to the Authority according to the information requirements.

Reports to the Authority

The Market Rules provide for the MSCP to include in its report a summary of reports that have been made to the EMA regarding any complaint that may have been received or any information that may have been uncovered that may indicate the possibility of anti-competitive agreements, or the abuse of a dominant position, contrary to Sections 50 or 51 of The Electricity Act.

The EMA has also clarified that the role of the MSCP is to report possible cases of anti-competitive behaviour to the EMA should any be detected. All investigations into anti-competitive behaviour are under the purview of the EMA.

In the course of monitoring and investigative activities carried out from January to December 2007, the MSCP and MAU did not make any report to the EMA regarding any complaint that may have been received or any material evidence that may have been uncovered that may indicate the possibility of anti-competitive agreements, or the abuse of a dominant position contrary to Sections 50 or 51 of The Electricity Act.

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35Assessment of the Wholesale Electricity Markets Assessment of the Wholesale Electricity MarketsState of Competition and Efficiency of the Wholesale Electricity Markets

Market Structure and CompetitionTransition from ST to CCGT units

One of the major transformations in the NEMS has been the rapid transition from a market dominated by ST to the more efficient CCGT technology. Over a five-year period since market start, the total installed capacity for CCGT units has risen sharply by 57 percent to around 5,390MW. Around 75 percent of this capacity was contributed by two incumbent generation companies, with the remaining from a new entrant. With greater installed capacity, CCGT units have become the preferred technology in the NEMS, with a generation market share of nearly 80 percent at the end of 2007. This percentage is significantly higher than the average market share of slightly over 40 percent prior to market start in 2002.

Since CCGT units run on gas rather than on 180-CST HSFO, the transition from ST to CCGT technology not only helps improve market efficiency, but is also more environmentally-friendly.

Although CCGT units run on gas, they are still negatively affected by the increasing fuel oil prices of recent years, as the gas price in Singapore is benchmarked to fuel oil prices.

Decreasing ST Availability

Despite an overall increase in the total installed capacity, the MSCP has observed a continuing fall in the average supply cushion since market start. The main reason for the falling supply cushion is the decreasing availability of ST capacity for dispatch.

With the more efficient CCGT units having a competitive edge over ST units, ST units usually run only during peak periods. This is further emphasised in a climate of rising fuel oil prices.

The NEMS remained highly concentrated Although the transition from ST to CCGT in recent years was the main contributor to improved market efficiency, the NEMS remained highly concentrated. The combined market share of the three largest generation companies has in fact risen from 84.4 percent in 2003 to 86.8 percent in 2006. The combined market share has increased because the existing companies contributed additional capacity. Yet the high concentration has been partly mitigated by overcapacity and by the implementation of vesting contracts.

Although the methodology and assumptions used in the calculation of VCHP is beyond the scope of this analysis, the MSCP is of the view that vesting contracts have injected significant market discipline into a highly concentrated NEMS.

As the purpose of the vesting contracts is to mitigate market power, the level of vesting contracts is intended to decline as more new market participants enter the NEMS. This process has begun as the introduction of a new MP led to the first revision of the vesting contract level from 65 to 55 percent of total demand effective from July 2007.

Early encouraging signs from new MP’s CCGT units

Nonetheless, the competitive impact of the two CCGT units from the new MP has been encouraging. With the commercial operation of the new MP’s two CCGT units in early second quarter 2007, the additional supply has enabled the average energy price in 2007 to remain relatively low compared to the price trend of the previous four years. The average energy price for 2007 actually dropped just after a 12 percent jump in fuel oil prices. Although part of the lower spot price can be attributed to a lower average VCHP in 2007, the increased capacity available because of the new MP had also helped to improve the supply cushion in the second half of 2007, and therefore played a pivotal role in the recent drop in the USEP. Furthermore, the introduction of this new MP has managed to cut the total market share of the three largest generation companies in the NEMS to 82.1 percent in 2007, a decline of 4.6 percent from 2006.

Lookingforward,theprospectofanadditionalpotential generation company, along with the aforementioned new MP’s plans to commission up to four more CCGT units in the future looks attractive from the viewpoint of market competitiveness.

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36

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Chart 21: Projected Excess Capacity 2007/2016Installed Capacity Peak Demand Excess Capacity

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Market Price BehaviourRising energy prices driven by significantly higher fuel oil prices

Although the average energy price rose by nearly 35 percent to $124.57/MWh in 2007 compared to 2003, the fuel oil price more than doubled over the same period. Fuel costs appear to be the main driving force behind the rising energy price trend.

In such an environment, an efficient price signal from the electricity market is one that reflects the true cost of production. To ensure sufficient investment in new capacity to meet future demand, it is essential that generation companies have the ability to recover both their short-run and long-run marginal costs.

Occasional price spikes not a concern

It is not unusual to observe energy price spikes in a liberalised market, owing to electricity’s special characteristics, including non-storability and inelastic demand. The MSCP closely monitors price spikes and situations in which price spikes persist for a prolonged period. Some price spikes were attributable to a disruption in electricity supply due to forced outages of generation plants. In some cases, the forced outages were brought on by gas supply interruptions.

Tight supply cushions during periods with high levels of planned maintenance for base-load CCGT units were also responsible for price spikes. As the price spikes occurred occasionally and were quickly addressed through market response, they did not cause undue concern.

High regulation prices

However, the high regulation price incident in early 2007 highlighted the potential vulnerability of a liberalised electricity market that is highly concentrated and in which consumer demand is inelastic. The incident also demonstrates the importance of hedging arrangements for consumers.

Future Challenges

In 2007, the EMA released a document5 highlighting the probability that excess capacity will decline from the current level of over 70 percent to nearly 40 percent in 2016 (see Chart 21). This is mainly due to the higher estimated growth in demand over that of new capacity:

• Newcapacitycomingonstream–Based on EMA estimates, nearly 1,755MW of new capacity will be added during the next ten years. Two generation companies will contribute to the bulk of this capacity expansion. A third MP plans to build an 800MW CCGT plant, which is expected to be completed in 2009/2010. However, this MP will simultaneously retire some ST units in order to stay within its licensed capacity.

• Peakdemandof8,589MWby2016–Basedon EMA estimates, the average daily demand could top 6,895MW6, with a peak demand of 8,589MW. Both the estimated average and peak daily demand is slightly more than 50 percent higher than the level registered for 2007.

This change in excess capacity over the next ten years is likely to have an impact on the level of competition.

Assessment of the Wholesale Electricity MarketsState of Competition and Efficiency of the Wholesale Electricity Markets

5 “Statement of Opportunities for the Electricity Industry” provides an overview of the outlook for the NEMS over the next ten years.

6 Based on 60,399 gigawatt hours (GWh), as stated in the “Statement of Opportunities for the Electricity Industry”,

released by the EMA.

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37

Ensuring compliance with the Market Rules is important in the operation of a competitive and reliable electricity market. MPs who breach the rules may be subject to sanctions if the MSCP considers it appropriate.

The MSCP’s assessment of the state of compliance within the wholesale electricity markets is set out below.

Offer Variations after Gate Closure

Table 13 compares the number of offer variations after gate closure submitted by MPs in 2006 and 2007.

The 41.0 percent reduction in offer variations after gate closure was mainly due to two factors:

• fewercasesofforcedoutagesand• bettermanagementofoffersbyMPs.

The MSCP was also satisfied that the offer variations made after gate closure did not give rise to any significant concerns.

Rule Breaches

For the period 1 January to 31 December 2007, the MSCP made 17 determinations regarding rule breaches. All 17 determinations were made against the market operator, EMC.

The rule breach determinations were made against EMC for the following reasons:

• failuretodetermine,releaseorpublishinformation relating to dispatch schedules, or failure to do so on time (15 cases);

• failuretoprovidecorrectpriceconfirmation (1 case); and

• failuretosendtimelyfundtransferinstructions(1 case).

The MSCP notes that these breaches were all self-reported and did not have any significant impact on the wholesale electricity markets.

Overall, there were no major compliance issues arising within the wholesale electricity markets.

Assessment of the Wholesale Electricity MarketsState of Compliance within the Wholesale Electricity Markets

Table 13: Comparison of Offer Variations after Gate Closure

Offer variations made after gate closure from 1 January 2006 to 31 December 2006 2,141

Offer variations made after gate closure from 1 January 2007 to 31 December 2007 1,264

% reduction in offer variations made after gate closure for year 2007 from previous year 41.0%

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39Conclusion Conclusion

The MSCP is generally satisfied with the state of compliance in the NEMS. Five years after market liberalisation, the effects of competition are apparent in the technological shift from ST to CCGT generation and from the conversion of a MP’s ST plants from 180-CST HSFO to the more cost-effective Orimulsion.

Although the market remains highly concentrated, the high correlation between the USEP and the vesting contract hedge price indicates that the energy price in the NEMS is tied to market fundamentals, closely tracking long-run marginal costs. This implies that the market is still sufficiently profitable to attract entry of new generation capacity in the long run. The market entry of a new MP in April 2007 demonstrates this point.

Occasional price spikes are a natural consequence of the inelastic demand associated with electricity. More importantly, such occurrences were infrequent and non-persistent in the NEMS.

In terms of diversification, the development of anLNGterminalprovidesanalternativefuelsource for the NEMS. This diversification of fuel sources is necessary given the two occasions since the commencement of the NEMS when the interruption of Indonesian gas supplies had led to price spikes and nationwide blackouts. Along with the shift towards CCGT generation, gas market liberalisation is an important initiative. Further, the Singapore government has been promoting the development of alternative or clean energy. Although the potential benefit of alternative energy sources to the NEMS in the immediate future is limited, owing to the higher cost of production and limited capacity of alternative sources, alternatives will complement current energy sources which are heavily dependent on fuel oil and gas, especially given the outlook for excess capacity decline.

Finally, the impending sale of the three biggest generation companies marks a watershed for the NEMS. We look forward to the changes in the competitive landscape that this sale may potentially bring about.

TheanLipPingChairMarket Surveillance and Compliance Panel

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40User Guide

Definition of Peak, Shoulder and Off-peak Periods

Sunday/Public Holidays Weekday Saturday

Peak - Period 18-41 -

ShoulderPeriod 22-33Period 38-47

Period 1Period 16-17Period 42-48

Period 1-2Period 17-48

Off-peakPeriod 1-21Period 34-37Period 48

Period 2-15 Period 3-16

Data

• Allreal-timeandforecastpricesandsettlementdata are provided by Energy Market Company (EMC).

• Vestingcontracthedgeprices(VCHP)arecomputed by SP Services based on a formula set by the Energy Market Authority (EMA).

• FueloildataisbasedonthemonthlyOilMarket Report published by the International Energy Agency. A copy of the report is available from www.oilmarketreport.org.

• Dataforforecastdemandandoutagesarecompiled from reports prepared by the Power System Operator (PSO), including advisory notices.

• Meteredenergyquantitiesaresuppliedby SP Services as the Market Support Services Licensee(MSSL).Allmetereddatausedinthisreport is final data, derived after any settlement reruns.

• Throughoutthisdocument,thedemandfigures are based on the forecast demand supplied by the PSO, except where metered energy quantities are indicated.

Supply Indices

• Capacityratiomeasuresthescheduled(bytheMarket Clearing Engine) output of energy, reserve and regulation as a ratio of a generation registered facility’s maximum generation capacity at a given time.

• Supplycushionistheratiobetween(a)thesupply and demand gap (i.e., the difference between total offered volume and demand) and (b) supply. This index measures supply adequacy. It indicates the level of unused capacity that was offered but not scheduled, and could be called up if required. The total offered volume refers to the total amount of energy offered by all generation registered facilities. Demand refers to the demand forecast by the PSO used to determine the real-time dispatch schedule for energy.

• Marketshareiscomputedbasedonthegeneration output of each company. The maximum capacity for each generation company is the registered maximum capacity in the standing data.

• UndertheMarketRulesandSystemOperationManual, outages of generation registered facilities are defined as follows:

(a) planned outage is defined in the System Operation Manual to “include both the Annual Outage plan for overhaul, retrofitting or inspection and the Short-term Outage Plan for urgent repair or maintenance”;

(b) unplanned outage is defined in the System

Operation Manual as “the case in which the generation licensee has to carry out immediate rectification works and has less than 1 business day to inform the PSO before intentional de-synchronisation of the generation unit”; and

(c) forced outage is defined in the Market Rules as “an unanticipated intentional or automatic removal from service of equipment or the temporary de-rating of, restriction of use or reduction in performance of equipment”.

Anticipated outage is the sum of planned and unplanned outages.

There may be slight differences in the calculation of outages in the Annual Report of the MSCP and the NEMS Market Report due to differing methodologies.

Vesting Contracts

TheVCHPiscalculatedbytheMSSLeverythreemonths. It is determined using the long-run marginal cost of the most efficient technology in the Singapore power system, i.e., the combined-cycle gas turbine (CCGT). EMC’s settlement system uses the VCHP to settle the vesting quantitybetweentheMSSLandthegenerationcompanies.

Periods Each day is divided into 48 half-hour periods. Period 1 is from 0000 to 0029 and Period 48 from 2330 to 2359.

Source:MSSL

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