Regulation of Power Sector in Singapore: Development and Current Practices

Transcription

1 Regulation of Power Sector in Singapore: Development and Current Practices Youngho Chang School of Business Singapore University of Social Sciences 13 December 2017 The 11th Capacity Building for Officers of Electricity Regulatory Commissions December 2017 Holiday Inn Orchard City Centre, Singapore

2 World at Night from Satellite 2

3 Agenda Descriptive statistics on electricity Why regulate the power sector Natural monopoly and social losses Social optimum in a natural monopoly market Rate of return regulation Models for restructuring the electricity sector Regulation of the power sector in Singapore Milestones, regulatory framework, industry structure and players Market power, measures and tests Vesting contracts Game-theoretic approach based on the Cournot Model Controlling market power and effectiveness Regulatory Sandbox Open Electricity Market 3

4 Electricity Consumption per Capita (kwh) in Source: World Bank (2012) 4

5 Electricity Consumption per Capita by Region in 2009 (kwh) Region Consumption Arab World 2,154.8 East Asia and Pacific 2,797.4 Euro Area 6,588.7 European Union 6,063.6 Latin America and Caribbean 1,901.2 Middle East and North Africa 2,445.2 North America 13,167.1 OECD South Asia Sub Saharan Africa World Source: World Bank (2012) 2,

6 World Population Without Electricity (Millions of People) Rural Urban S. America 38 7 North AfricaMiddle East SubSahara Africa S. Asia S.E. Asia , Total Worldwide 1.3 billion continue to live without access to electricity. This is equivalent to 18% of the global population; 22% of those living in developing countries (IEA, 2014) Source: World Energy Outlook 2006 (IEA) 6

7 Why Does Economics Concern Power Supply? Motivations Cost structure is rather unique Continuity requirement in power supply Efficiency Generation technologies and cost structures Long-Run Marginal Cost (LRMC) Fixed and variable costs Short-Run Marginal Cost (SRMC) Variable costs or avoidable costs 7

8 Various Cost Structures of Firms TC = FC + VC(Q) 8

9 Electricity Generation, Transmission and Distribution: A Schematic Diagram 9

10 Inverse Demand and Cost Curves in a Decreasing Cost Industry 10

11 Monopoly Production, Price and Profit Objective: Maximize Profits P = 75 4Q TC = 19Q 0.25Q2 ATC = Q MC = Q TR = P*Q = 75Q 4Q2 MR = 75 8Q Profit (πm) = (Pm ACm)*Qm 11

12 Social Losses from Monopoly: Illustration 12

13 Social Optimum in a Natural Monopoly Market Objective: Maximize Social Welfare Social Optimum: P(Q) MC(Q) = 0 13

14 Government Policy for a Natural Monopoly Rate of Return Regulation The utility is allowed to earn a normal rate of return on their capital stock or their rate base (RB) The accounting equation n PQ i i expenses s( RB ) i 1 where Pi the price of the i - th service class Qi the quantity of the i - th service class n the number of service classes s the allowable of " fair" rate of return RB the rate base of the regulated firm' s investment 14

15 Merit Order by Marginal Running Cost 15

16 Generating Costs D' D 16

17 Structures of Electricity Market Under regulation Vertically integrated, mostly government owned, natural monopoly Instruments for regulation Price and quantity Under deregulation Separation of industry by ownership Horizontally unbundled Full competition in generation and wholesale/retail Still monopoly in transmission and distribution (T&D) Motivations for unbundling? 17

18 In a Deregulated Electricity Market Market becomes competitive Non-existence (or little abuse) of market power Easy entry and exit of players Efficiency of allocation and lower and/or stable prices Market functions properly Informed decisions Allocation of risk Transactions at minimal cost and lower production costs Market leads close to marginal-cost pricing Prices would be close to the marginal cost under workable competition and a reasonably well-functioning market environment What do we expect? Right and Stable Prices Competition and Reliability 18

19 Models for the Electricity Sector Model 1 No competition, vertically integrated, publicly or privately owned Model 2 Model 1 but with competition in generation. A single buyer (a distribution company) may buy from a number of different producers Model 3 Model 2 but with common or contract carriage of high voltage transmission lines offered to all wholesale sellers and buyers Model 4 Model 3 but retail customers also choose their suppliers in full retail competition 19

20 4 Electricity Restructuring Models Model 1 Hunt and Shuttleworth (1996) 4 models depend on competition at each stage Model 1: no competition - vertical integration Local Distribution 20

21 Electricity Restructuring Models Model 2 Model 2: competition generation (gencos) 21

22 Electricity Restructuring Models Model 3 Model 3: distribution companies (distcos) own the distribution wires distcos and large buyers choose their supplier competition in generation and wholesale open access wholesale market 22

23 4 Electricity Restructuring Models Model 4 Model 4: all customers choose suppliers full retail competition open access 23

24 Model 4 is the Most Economically Efficient If there are A well-established electricity retailing system Mature market institutions Constant vigilance against market power Appropriate methods of dispatch 24

25 Electricity Prices and Taxes, $/kwh, 2011 Chile U.K. New Zealand Norway Sweden U.S Price (Tax) Price (Tax) Price (Tax) Price (Tax) Price (Tax) Price (Tax) Industrial 0.18 (N/A) 0.12 (0.00) 0.06 (N/A) 0.04 (0.01) 0.08 (0.00) 0.07 (N/A) Households 0.25 (0.04) 0.19 (0.01) 0.18 (0.02) 0.10 (0.03) 0.18 (0.05) 0.12 (N/A) Observations: 25

26 The Electricity Industry Milestones Corporatisation of PUB s gas and electricity undertakings, Oct 1995 Singapore Electricity Pool commenced operation, Apr Government decision on further deregulation, Mar 2000 Energy Market Authority formed, Apr Commencement of National Electricity Market of Singapore, Jan 2003 Commencement of Phase 1 Retail Market Liberalisation, Jun 2003 Commencement of Phase 2 Retail Market Liberalisation, Dec 2003 Vesting Contract & Interruptible Load scheme introduced, Jan 2004 Completion of Temasek s divestment of the 3 gencos, Dec Contestability to all consumers (being studied) Source: EMA (2012) 26

27 The Electricity Industry Milestones (Cont d) June 2011 Electric Vehicle (EV) test-bed for the testability of EV prototypes and technologies was launched October 2011 The Singapore Energy Statistics report was launched March 2012 An industry-led Power Manpower taskforce was formed May 2013 The LNG terminal received its first commercial cargo and started commercial operations October 2013 A micro-grid incorporating solar photovoltaic technology was launched Demand response programme February 2014 The official opening of the LNG Terminal 27

28 The Electricity Industry Milestones (Cont d) April 2015 Electricity Futures Market October 2017 Launch of Regulatory Sandbox (for energy sector innovations) April 2018 Open Electricity Market in Jurong (Soft Launch) 28

29 Schematic Diagram of Market Structure Energy Market Company Market Operator Wholesale Electricity Market Electricity Spot Market Gencos* Retailers Consumer s Spinning Reserve Market Market Support System * Generation Companies Source: EMA Bilateral Contracts 29

30 Policies and Regulations Goals To ensure a reliable supply of electricity to consumers at competitive prices Reliability Reasonable (or competitive) price Action Forward-looking or proactive regulation New policies reflecting the latest environment of the industry Regular and timely update or change of regulation Example: vesting contracts 30

31 Policies and Regulations: Scope Electricity Legislation and Regulations Codes of Practice Enforcement Actions Market Rules Performance Standards Exemption Orders Agreements Electricity Licences Electricity Licensed Workers/Installation Licences Policy Papers Vesting Contracts 31

32 Electricity Legislation and Regulations The Energy Market Authority of Singapore Act (Chapter 92B) The Electricity Act (Chapter 89A) 32

33 Regulatory Framework Electricity Act EMA Act Key Features Authorized activities Separation of contestable and noncontestable sectors Powers to request for information Preparation for emergencies and security arrangements Licence fees Powers to audit Electricity Market Rules RCP (Rules Change Panel) Source: EMA (2012) MSCP (Market Surveillance and Compliance Panel) EMA Licences Licensees Codes of Practice Transmission Code Metering Code Market Support Services Code Regulated Supply Services Code Code of Conduct for Retail Electricity Licences Performance standards 33

34 Electricity Industry Structure Non-Contestable Sector Source: EMA (2012) Contestable Sector 34

35 Codes of Practice Five Codes of Practices Market Support Services Code Metering Code Code of Conduct for Retail Electricity Licensees Transmission Code Regulated Supply Service Code Two enforcement actions Red Dot Power Pte Ltd s contravention PacificLight Energy Pte Ltd s contravention 35

36 Market Rules Energy Market Company (EMC), the market operator or company, administers the Market Rules The Rules Change Panel (RCP) reviews all proposed modifications to the Market Rules 36

37 Performance Standards: SP PowerAssets Ltd., the Transmission Licensee Service Dimension Service Indicator Service Standard Performance Target (%) 7 c.d hours 2 hours Availability of Supply Minimum advance notice for planned interruption of electricity supply Reliability of Supply Number of power failure incidents*caused by failure of, damage to, or operation of Licensee s equipment or cables Restoration of Supply Time taken to restore electricity supply for each power failure due to failure of, damage to, or operation of Licensee s equipment or cables rated at 22kV or above Quality of Supply Time taken to rectify voltage complaint or limit violation 2 c.d. 95 Time taken to correct a voltage complaint that requires network reinforcement 6 months 99 Number of voltage dip incidents*due to failure of, damage to, or operation of Licensee s equipment or cables Time taken to implement electrification scheme requiring new substation after take-over of substation (up to 22kV) 10 weeks 90 Time taken to implement service connection requiring cable installation work, after premises to be supplied with electricity is ready to receive cable 6 weeks 90 Providing Supply Customer Contact Time taken to reply to a written complaint 7 w.d. 95 Metering Services Time taken to attend to meter problem at site upon notification 8 c.d. 95 Notes: * only incidents where the Licensee is determined by the Authority to be at fault will be counted c.d. is calendar days; w.d. is working days 37

38 Performance Standards: SP Services Ltd. the Marker Support Services Licensee Service Dimension Providing Supply Service Indicator Service Standard Performance Target (%) Time taken to process application for electricity supply and reply to applicant 14 c.d. 85 Lead time taken to inspect large electrical installation (supply capacity greater than 45kVA) and turn-on electricity supply upon request 7 w.d. 90 Lead time taken to test small electrical installation (supply capacity less than or equal to 450kVA) and turn-on electricity supply upon request 10 c.d. 90 Time taken to inspect pre-tested electrical installation and turn-on electricity supply upon request after opening of account 3 w.d hours 90 7 w.d. 95 Queuing time at customer service counter (enquires and opening/closing of accounts) 20 minutes 90 Time taken by customer service officer to pick up telephone call 30 seconds 90 Time taken to attend to meter disputes at site notification 8 w.d. 95 Time taken to attend (make appointment, reply) to meter reading issues upon notification 5 w.d monthly 95 Waiting time at site for appointment to turn on or cut-off electricity supply Customer Contact Metering Service Time taken to reply to a written enquiry or complaint Time interval between successive reading of billing meter(s) Notes: c.d. is calendar days; w.d. is working days 38

39 Exemption Orders The EMA may exempt any person or class of persons from complying with the licensing requirement 39

40 Agreements Agreements among various entities participating in the Singapore electricity market Market Support Services Licensee (MSSL)-Market Participant Agreement (a generation licensee/a contestable consumer) Power System Operator (PSO)-Market Participant Agreement PSO and each market participant under Market Rules Market Support Services Agreement (Retailer) MSSL (provider) and retailers (procurers) Market Support Services Agreement MSSL (provider) and demand response participants (procurers) Retailer Use of System Agreement The Transmission Licensee and an electricity retailer Generation Facility Operation Agreement Power System Operator (PSO) and a generation licensee 40

41 Financial Flow between Market Players Source: EMC (2012) 41

42 Electricity Licences Generation Companies One or more generating units of 10 MW or above each Retailers Retail electricity to contestable consumers Wholesalers One or more generating units of 1 MW or more each but less than 10 MW Market Support Services Licensee SP Services: Metering, managing metered data and facilitating access to a wholesale electricity market, and supplying electricity to non-contestable consumers Transmission Licensee/Transmission Agent Licensee SP PowerAssets Ltd: Managing the electricity transmission system SP PowerGrid Ltd: transmitting electricity Market Company Energy Market Company (EMC): Operating and administering Singapore s wholesale electricity market (NEMS) 42

43 Industry Structure and Players Source: EMC (2012) 43

44 Schematic Diagram of NEMS with Financial Flows 44

45 Electricity Licensed Workers/Installation Licences Electrical Worker Licence Electrician s Licence Electrical Technician s Licence Electrical Engineer s Licence Electrical Installation Licence An electrical installation of approved load exceeding 45 kva for non-domestic purposes Cable Detection Worker Licence Cable detection work prior to the commencement of any earth works 45

46 Electricity Tariff Tariff revised quarterly to reflect cost of electricity Forward fuel prices for 2.5 month period to set tariff Regulated tariff only for Non-contestable Consumers (households and small businesses, using less than 10MWh monthly) Forward fuel price from Jan SPS calculates and to mid-mar 2012 used in announces tariff computation of tariff Jan Feb Source: EMA (2012) Mar Apr Electricity tariff set for 2Q 2012 May Jun 46

47 Electricity Tariff Breakdown Energy Costs /kwh Generation Companies Network Costs 4.78 /kwh SP PowerAssets SP Services MSS Fee 0.22 /kwh Market Admin & PSO Fee 0.05 /kwh Power System Operator & Energy Market Company Tariff for Jul to Sep 2012: /kwh Source: EMA (2012) 47

48 Targeted Assistance for Households GST Voucher - U-Save: a rebate to help lower- and middle-income households with their utilities bills. Eligible households will receive their U-Save rebates once every 6 months, in January and July Lump sum rebate encourages people to save electricity Source: EMA (2012) 48

49 Policy Papers Nine policy papers Handbook for Photovoltaic (PV) Systems (2011) Developments in the Singapore Electricity Transmission Network (2011) Policy on Self-Supply of Electricity (2008) Net Treatment of Embedded Generators (2006) Exemption of Embedded Generating Units in Operation Prior to 1 Jan 2003 from the Licensing Requirement (2006) Guidelines on Evaluation of Merger and Acquisition Proposals in the Electricity Industry (2004) Briefings on the Procedure for Application for Electricity Supply in the New Electricity Market Framework (2002) Application for Exemption form Compliance with Code of Practice (2002) Policy on Direct supply of Electricity by Generating Sets to On-site Loads (2002) 49

50 Singapore Load Curve Daily peak production tends to occur during the day, Shoulder production early in the morning and later in the evening, Off-peak during the night Source: Energy Market Authority (EMA) Singapore 50

51 Determination of Market Clearing Price Price ($/MWh) Total demand 100 The market clears at this point Clearing price = $50/MWh Offers below the clearing price are accepted Marginal unit Offers above the clearing price are not accepted above Company A Source: EMA (2012) Company B Company C Quantity (MW)

52 Physical and Economic Withholding Source: EMC (2012) 52

53 Market Power and Measures 53

54 Lerner Index The relative mark-up over marginal cost The difference between price and marginal cost as a fraction of the price A ratio of price less marginal cost of supply to price Price-cost margin Zero (0): no market power One (1): infinite market power It measures a firm s ability to maintain prices above competitive level at its profit-maximizing level of output 54

55 Test Results of Market Power: An Example Measures CS4 CS8 HHI SMA RSI Lerner Index Values and Remarks 96% Close to 100% Negative for all gencos Larger than 1 for all gencos Source: Compiled from Chang (2007) Energy Policy, 35:

56 Three Game-theoretic Models Cournot model Each firm chooses quantity to maximize profits given the other firms output Duopoly Stackelberg model One firm is a leader in the market setting the quantity knowing how the other firm will react Bertrand model The two firms set price instead of quantity The Bertrand solution is the same as the competitive solution 56

57 Perfect Competition Solution 57

58 Cournot Game without Contracts 58

59 Cournot Game with Contracts 59

60 Vesting Contracts A contractual agreement between generation companies and SP Services Ltd (MSSL) To sell a specifies amount of electricity (the vesting contract level) at a specified price (the vesting contract price) The vesting price is set by taking account both the long-run marginal cost of the most efficient generation technology that account for at least 25% of the total electricity demand in Singapore The EMA reviews the vesting parameters every two years or when necessary 60

61 Definition of Net Generation Capacity Net Capacity = N x [G-C-R-(A+S+F+O) x G] N: Number of Units G: Gross Unit Capacity C: Cogeneration Use A: Auxiliary Usage Rate R: Reserve S: Scheduled Outage F: Forced Outage O:Other De-Rating 61

62 Market Power in NEMS Various price levels in 2004 and 2005 The Generation Weighted Average (GWA) Pool Price The price observed in the wholesale market, presumed a perfectly competitive solution Average Market SRMC The average price of all generators offered at their SRMC, presumed a perfectly competitive market VC Strike Price LRMC of the next efficient new generator 62

63 Evidence of Market Power 1 Vesting Contract (VC) strike price (LRMC) is close to the Generation Weighted Average (GWA) pool price Price ($/MWh) VC Strike Price GWA Pool Price N/A Average Market SRMC 63

64 Evidence of Market Power 2 The 2004 prices were lower compared to the VC Strike price (quarterly basis); The 2005 prices were much closer to the VC Strike price Price ($/MWh) VC Strike Price GWA Market Price

65 Evidence of Market Power 3 Average Market SRMC is far lower than actual market price in 2005 Price ($/MWh) Load Block GWA Peak Shoulder Off-Peak Average Market SRMC Actual Market Price

66 Vesting Contract Level (%): Suggested, Scheduled and Actual Suggested Scheduled Actual */ Suggested: PA Consulting or EMA Consultant Scheduled: establish prior to 2004 Actual: EMA s decision by every two-year review *: For the first two quarters of 2007 (Jan Jun 07) 66

67 Vesting Contract Level (updates) Period Vesting Contract Level (%) H H H H

68 Market Share (%) and CS4: Updates 68

69 CS4:

70 HHI: Updates 70

71 Total Capacity and SMA: Updates 71

72 RSI: Updates 72

73 Monthly USEP Monthly USEP from SGD

74 USEP in 2008 USEP (S$/MWh)

75 USEP in 2009 Half hour USEP in Jän Feb Mär Apr Mai Jun Jul Aug Sep Okt Nov Dez

76 Lerner Index with LRMC 76

77 Lerner Index with SRMC 77

78 Regulatory Sandbox Framework To provide a safe space in which interested parties can experiment with innovative solutions without being subjected to the prevailing regulatory requirements Safeguards will be introduced during the experiment to minimize risks to consumers and industry The duration of the trial or the maximum number of consumers 78

79 Regulatory Sandbox Regulation: Illustration 79

80 Soft Launch of Open Electricity Market A pilot program It starts April 2018 A total of 108,000 household and 9,500 business accounts in Jurong will have the option of buying electricity from a retailer of their choice or SP Group (the current MSSL) Currently businesses with an average monthly electricity consumption of at least 2,000 kwh have the option of buying electricity from a retailer of their choice or SP Group The Energy Market Authority (EMA), the regulator, will extend the option to the rest of consumers in Singapore (about 1.3 million accounts) in the second half of

81 Map of Soft Launch in Jurong 81

82 Thank you for your attention! If you have any question or comment, please contact me at 82