2004 IEEE International Conference on Electric Utility Deregulation, Restructuring and Power Technologies (DRPT2004) April 2004 Hong
Kong
Deregulation in the National Electricity Market
of Singapore: Competition and Efficiency
Y. H. Chang
Abstract - The National Electricity Market of Singapore
(NEMS) is a horizontally unbundled electricity market
under an industry regulator. It sustains competition and
regulation in its market structure. Its deregulation reform
has started in 1995, and generation is fully open to
competition and wholesale and retail markets are gradually
being opened to competition. At the end of 2003 the
contestable market covers 75 percent of the total electricity
demand and is expected to increase as more consumers
become contestable in 2004. Concentration measures like
CS4 and the HHI show that the generation market of the
NEMS is highly concentrated but the market has more than
effective numbers of competitors. The NEMS has seen a 9.5
percent reduction of the electricity tariff during 2002/2003
and it remains to be seen whether the benefits continue to
come as the NEMS moves to a full competitive market.
Keywords - Electricity market deregulation, competition,
Efficiency gains, Price responsiveness
I. INTRODUCTION
he power industry in Singapore is horizontally
T connected under the Energy Market Authority
(EMA) as an industry regulator and system operator, and
the Energy Market Company (EMC) as a market operator.
Generation is now open to full competition while
wholesale and retail markets are partially open.
Generators supply power to consumers through a
wholesale market operator, retailers or market support
services licensees (MSSLs) while the generated electricity
is conveyed through the transmission and distribution
network owned by PowerGrid.' There are two types of
consumers by electricity usage level - contestable and
non-contestable. Retailers sell the power to contestable
consumers while the MSSLs provide power to small
contestable consumers who have not chosen retailers and
non-contestable consumers.
As a sole market operator, the EMC connects power
generators to consumers through wholesale and retail
markets. There are two markets in the National Electricity
Market of Singapore (NEMS): a wholesale market and a
retail market. The wholesale market consists of two more
sub-markets. The real-time or spot market for energy,
Y. H. Chang is with the Department of Economics, National
University of Singapore, Singaporc I 17570 (c-mail: ecscyh@ns.edu.sg).
' PowerGrid has been split into two companies in November 2003 -
SP PowerAssets (SPPA) and SP PowerGrid (SPPG). SPPA owns all grid
assets and licenses while SPPG is the management agent for SPPA. For
the purpose of this paper, SP PowcAssets and SP PowcrGrid are rcferred
to collectively as PowerGrid.
0-7803-8237-4/04/$17.0002004IEEE
16
regulation and reserve is one and the procurement market
for other ancillary services to ensure the security and
reliability of the power system is the other. Generators are
required to provide electricity to the spot market and
reserve capacity to the spinning reserve market. The
electricity spot market is a real-time market to meet
projected demand while spinning reserve market is served
as backup for securing the power system, which is a spot
market established to enable generators to bid to sell
spinning reserves. Among the two types of consumers,
contestable consumers may purchase electricity from a
retailer, a MSSL or directly from the wholesale market
while non-contestable consumers are required to remain
served by a MSSL until the full completion of contestable
electricity market.
This paper reviews the paths taken in deregulation of
the power sector in Singapore in section 11. It overviews
the market structure of the NEMS and presents a few
studies relating to competition and corresponding
efficiency gains in the NEMS in section 111. Section 1V
concludes this paper with a few remarks.
11. PATH TO DEREGULATION IN THE ELECTRICITY
MARKET
The electricity industry in Singapore was a wholly
government-owned vertically integrated monopoly. The
Public Utility Board (PUB) was responsible for supplying
electricity, piped gas, and water in Singapore. With the
eventual aim of introducing competition into the energy
sector, the government of Singapore transferred the
electricity and piped gas functions of the PUB to
Singapore Power Ltd (SP) in 1995. Although SP is a
corporate entity, it is still wholly government-owned as it
is held under the govemment holding company -
Temasek Holdings. PUB subsequently fulfilled a
regulatory function with regard to the energy sector.
Singapore set up an electricity pool in April 01, 1998
as a primitive step or forerunner for competitive
electricity trading. Generation companies sold their
electricity via the mandatory Singapore Electricity Pool
(SEP), a day-ahead electricity market and precursor to
competitive electricity trading. PowerGrid, a wholly
owned subsidiary of SP, was the grid owner and also the
system operator for the SEP. Following a review in 1999,
additional reforms were carried out in 2000 to liberalize
the electricity industry. Liberalization takes the form of
unbundling of the potentially competitive retail and
generation sectors and non-competitive elements of SP so
that SP divested its two power generation subsidiaries,
2004 IEEE Intemational Conference on Electric Utility Deregulation, Restructuring and Power Technologies (DRPT2004) April 2004 Hong Kong

PowerSeraya and PowerSenoko to its parent company, works as the market support services licensee (MSSL) for
Temasek Holdings. Therefore, Temasek Holdings owns market participants. Generators supply power to
all three largest generators in Singapore including a third consumers through a wholesale market operator, retailers
generator, Tuas Power, which was formed in March 1995 or the MSSL, and retailers sell the power to contestable
as its subsidiary.’ The interim structure with SEP lasted consumers while the MSSL provides power to small
until April 2001 when a new market regulator and a new contestable consumers who have not chosen retailers and
market operator were formed and power generation non-contestable consumers. The MSSL provides market
capacities were fully divested from SP. support services such as the reading of electricity meters,
Thus, at this stage of deregulation, the generation sector facilitation of consumer transfers between retailers, sale of
is already fully open to competition while that for the electricity to non-contestable consumers and provision of
retail sector, partially so. Under the partial deregulation, other services related to access to the wholesale market.
consumers are deemed “contestable” if they have For example, it provides contestable consumers, who wish
maximum power requirements exceeding 2MW and can to buy directly from the market, with access to the
choose to buy power from either retailers or Power wholesale market. SP Services sheds its previous role as a
Supply Ltd (now it is known as SP Services Ltd), the retailer to fulfill the role of a MSSL. The NEMS is
retail arm of SP. Power Supply Ltd is also the designated divided into two markets - wholesale and retail markets.
Public Electricity Supplier (PES) and retails electricity to The wholesale market consists of two markets - a real-
the non-contestable consumers. time or spot market for energy, regulation, and reserve,
As liberalization proceeds, a new statutory board - and a market for other ancillary services. Auction pricing
the Energy Market Authority (EMA) was established to is used to settle transactions in the real-time market, and
regulate the energy industry in April 2001. At the same overall least-cost dispatch schedule and market prices are
time, the Energy Market Company Pte Ltd (EMC) was set determined each half-hour based on both price-quantity
up as a joint venture between the EMA and the M-CO(the offers by generators and the load forecasts from the PSO.
Marketplace Company) Pte Ltd of New Zealand to Since July 2001, the consumers with maximum power
implement and operate the new wholesale electricity requirements exceeding 2MW are able to purchase
market. However, electrical output was still transmitted electricity from retailers of their choice. The retail market
via the transmission and distribution (T&D) network is being further opened up in three phases. In Phase I, all
owned and operated by PowerGrid, a wholly owned consumers with an average annual consumption
subsidiary of Singapore Power Ltd, and T&D prices exceeding 240MWh targeted to be able to choose their
remain regulated. The NEMS has started on January lst retailers. In Phase 11, all consumers with an average
2003. The NEMS consists of seven players: an industry annual consumption exceeding 120MWh targeted to be
regulator, a market operator, a grid owner-cum-operator, a able to choose their retailers six months after Phase I is
market support services licensee, generators (seven completed. The rest of the one million consumers would
generation licensees), retailers (six retail licensees) and be open to competitive retailing in Phase 111 by 2004. In
two types of consumers (contestable and non-contestable). the meantime, contestable consumers have a choice of
Next section presents the market structure of the buying from either the retailers or from the wholesale
NEMS and examines how the introduction of competition market via the MSSL or by trading directly in the market.
into the electricity market has brought expected efficiency Electricity tariffs for non-contestable customers will
gains from the competition in the NEMS. continue to be regulated until the successful conclusion of
Phase 111 above. About 250 consumers had become
111. MARKETSTRUCTURE, COMPETITION AND EFFICIENCY contestable since July 2001, which represent about 40
Although NEMS is still a mandatory pool, it is percent of the total electricity demand. Since June 2003,
fundamentally different from its precursor SEP. It is a 5,000 non-domestic consumers with average monthly
spot market for electricity and reserves operated by the electricity consumption of more than 20MWh have
EMC. An independent Power System Operator (PSO) become contestable. Another 5,000 consumers with
under EMA instead of PowerGrid carries out dispatch average monthly consumption of lOMWh have become
while electrical output continues to be transmitted via the contestable at the end of 2003 and the total contestable
T&D network owned and operated by PowerGrid. Along market covers 75 percent of the total electricity demand
with the EMA as the market regulator and the EMC as the PI.
market operator, there are other players in the NEMS. As Among others, perceived failure of cost of service
mentioned, the PSO, a division of the EMA, works as the regulation, availability of economically viable small-scale
system operator while PowerGrid serves as the power generation and the faith of market forces are
transmission and metering provider and SP Services Ltd suggested as main drivers for a market reform in the
electricity industry [3]. What is expected to result from
’ The ownership structure of the elcctricity companies under the the market reform are mainly lower prices, more choices
for consumers and consumer savings. Through the
investment arm of the Singapore government, Temasek Holdings, will
remain intact until its electricity assets are privatized [ 13.

17
2004 IEEE Intemational Conference on Electric Utility Deregulation, Restructuring and Power Technologies (DRPT2004) April 2004 Hong Kong
electricity market reform, competition is believed to bring
forth less inefficiency, lower and stable prices, reliable
services and even timely investment. Hence, a successful
reform could be evaluated through examining mainly
three aspects of the market: how competitive the market
is, how the market is functioning and whether the price is
leading close to the marginal cost [3].
For analyzing concentration-cum-competition in a
market, three measures are commonly employed: the
concentration measures, the Herfindahl-Hirschman Index
(HHI) and the Lemer Index [4], [ 5 ] , [6]. The four-firm
concentration measure (CS4) or the eight-firm
concentration measure (CS8) is commonly used, but
rudimentary. The CS4 is defined as the sum of market
shares accounted for by the four largest f m s in a market.
The HHI shows the degree of a market concentration of a
particular industry in a particular geographic region. It is
defined as the sum of the squares of the market share of
firms in the industry. It takes on a maximum value of one
and approaches zero. The higher HHI is, the more
concentrated the market is. The market is possibly less
competitive. For example, if there is only one firm in the
market (i.e., a monopoly), the HHI is one. If there are four
firms with an equal market share, the HHI is 0.25. The
inverse of the HHI may give a more intuitive
interpretation as it gives the number of effective
competitors. The Lemer Index is the relative mark-up and
is defined as the difference between price and marginal
cost as a fraction of the price. It measures a firm’s ability
to maintain prices above competitive level at its profit-
maximizing level of output. The Lemer Index of zero
means a firm does not have market power while one the
firm has infinite market power.
The four-firm concentration measure (CS4) of
Singapore’s generation market by the installed generation
capacity is more than 95 percent. (Three largest
companies’ market share by the installed capacity ranges
from 22 to 35 percent.) This implies that the market is
highly concentrated. The HHI of Singapore’s generation
market by the installed generation capacity is 0.2662,
which is greater than a measure (0.18) regarded as highly
concentrated in the U .S. Horizontal Merger Guidelines
[7]. This HHI is greater than that of England and Wales
(HHI = 0.16) where number of firms is 32, but smaller
than that of Sweden (HHI = 0.32) where the number of
firms is 8 [8]. By the inverse of the HHI, the number of
effective competitors in the NEMS is three or four. The
Lemer Index could give a more meaningful explanation
on the dominance or abuse of market power in the NEMS,
but its calculation requires a firm level cost and price data,
which is highly confidential and difficult to acquire.
Hence the Lemer Index of Singapore’s generation market
is not available. However, the CS4, the HHI and the
inverse of the HHI altogether show that the generation
market in Singapore is highly concentrated while the
market is considered to have the effective number of
18
competitors as there are seven generation companies in
the NEMS.
In principal, the NEMS combines competition and
regulation in its market structure: a fully-contestable
market for generation, wholesale and retails, and
regulated grid operations. However, there is an interim
structure until a full transition to the competitive
electricity market - vesting contracts for non-contestable
consumers. The vesting contracts are basically designed
to protect non-contestable consumers from being exposed
to excessive price volatility during the transition to full
competition [ 11. Unlike contestable consumers who
actively participate in the wholesale electricity market, the
non-contestable consumers are supported by these
contracts. As the CS4 has hinted above, three largest
power companies in Singapore - PowerSeraya, Senoko
Power and Tuas Power have more than 90 percent of the
installed generation capacity. Hence, the market power of
the generation companies has been checked by a
mandatory 100 percent price cap set for the total demand
and the generation companies are not allowed to cause
prices to rise beyond the price cap. However, they could
use their market power to keep electricity prices to the
allowed price cap. From January 1, 2004, vesting
contracts are imposed on 65 percent of total demand [9].
The vesting contracts impose a contractual obligation on
the generation companies so that they have to produce a
specified quantity of electricity. The effect of the vesting
contracts is to cap the price of this 65 percent of total
demand and the price for the remaining 35 percent is
determined by competition in the wholesale market.
The authorized electricity generation capacity in
Singapore is 11,490MW while the installed capacity is
8,919MW as of June 2003 and the system peak demand
was 5,139MW recorded on May 23, 2003 [IO]. The total
electricity sales were 31,089.3GWh in 2002, which is a
4.8 per cent increase over the total electricity sales in
2001 [ 111. Average electricity tariffs from 1995 to 1999
were between 10 cents per kWh and 12 cents per kWh.
However, the average tariff in 2000 rose to 14.38 cents
per kWh and 15.78 cents per kWh in 2001 [l]. A lower
electricity tariff is often cited as evidence for the success
of electricity reforms [2]. A study that examines
production efficiency of the NEMS with actual and
counterfactual data suggests that cost reduction in
electricity generation would be eight per cent of current
production cost over 30-year time horizon or in the order
of 600 million Singapore dollars [12]. However,
Chairman of the EMA highlighted in the annual report
that the possible benefits of a competitive electricity
market in Singapore have already been realized through a
total reduction of 9.5 percent in electricity tariff [ 13].3The
One quarter of the staffs or 1 I O workers were laid off at one of the
Singapore’s three largest power generation companies in February 2004.
It was told that the lay-off aimed to reduce manpower costs, make better
use of generating facilities and remain competitive [ 141.
2004 E E E International Conference on Electric Utility Deregulation, Restructuring and Power Technologies (DRPT2004) April 2004 Hong Kong
introduction of a competitive electricity market shows that
the focus of the electricity industry has shifted to
economic efficiency from technical efficiency. It is
subject to further verifications whether a competitive
electricity market would bring improvement in economic
efficiency such as lower prices along with enhancement in
technical efficiency, but the issue is not explored further
in the paper as it goes beyond the scope of the paper.
Another study that analyzes price-responsiveness of
contestable and non-contestable consumers in the
Singapore Electricity Pool (SEP), a precursor of the
NEMS shows that the two groups of consumers respond
differently to price movements [ 151. The analysis reveals
that contestable consumers are responding to changes in
electricity price with the low degree of the elasticity while
non-contestable consumers are not responding to changes
in electricity price. This implies that the market with
contestable consumers would bring about consumption-
efficiency gains. The finding of the consumption-
efficiency gains among contestable consumers could have
been affirmed if the price-responsiveness of contestable
consumers in a year-old NEMS would have been
e ~ a m i n e d .The
~ low demand elasticity, however, may
prove there would not be much gain in consumption
efficiency under deregulated electricity prices. Further it
implies that the current system of regulated tariffs facing
the non-contestable consumers is presented to distort their
consumption choice by obscuring the true cost of their
consumption.
IV. CONCLUDING
REMARKS
The main governing principle of the NEMS is the
separation of competitive activities like electricity
generation and trade in the market, and monopolistic
market support activities such as transmission, metering,
consumer transfers between retailers, and other
facilitation services. Hence, no crossover is allowed
between the competitive activities and the monopolistic
ones. Another major governing principle is a gradual
transition of retail markets to full competitive electricity
market as we have seen in vesting contracts. At the end of
2004 a gradual liberalization of electricity retail markets
in the NEMS has made about 10,000 consumers
contestable, which allows them purchase electricity from
a retailer, a Market Support Services Licensee or directly
from the wholesale market. This covers 75 per cent of the
total electricity demand in Singapore [2].
The regulatory framework of the NEMS is subject to
revision as the market evolves to full competition and is
also contingent on future developments in the market such
as concentration of market power, congestion in
transmission or mismatch in demand and supply. The
performance of the NEMS in the initial period of its
The EMA claimed that the vesting contracts, which had startcd
from January 01, 2004 helped the wholesale clcctricity prices fall from
S 9 2 . 6 4 MWh to Ss83.74 MWh [16].
19
implementation is solid as Chairman of the EMA put in
the annual report that the NEMS is competitive and robust
in the nature and it has helped consumers through
lowering electricity tariffs resulting from efficiency gains
in generation companies and a transmission company, and
cost competitiveness from performance benchmarking of
the transmission company [13]. In addition, the vesting
contracts are believed to help the wholesale electricity
prices fall [16]. However, whether the full transition to the
competitive electricity market will smoothly progress and
whether the NEMS will bring the expected benefits to the
market remain to be seen as the deregulation proceeds and
the market evolves.
V. REFERENCES
Energy Market Authority of Singapore. 2003. Introduc/ion to the
Singapore New Electricity Market - February 2003. Available:
h l l l . ’ : l l \ ~ \ v ~ v . c m a . g o v . s ~ / ~ l ~ c t r i c i t y i i cCO sgphp
tiO n
Energy Market Authority News Release on October 10, 2003.
C. K. Woo, D. Lloyd, and A. Tishler, “Electricity market reform
failures: UK, Norway, Alberta and California,” Energy Policy, vol.
3 1, pp. 1 103-1 1 15,2003.
D. W. Carlton and J. M. Perloff, Modern Industrial Organization,
3‘d ed. New York, Addison-Wesley Longman, 2000, pp. 246-250.
T. P. Daniel, ‘‘Where Herfindahl can lead you astray: An analysis
of FERC’s approach to vertical mergers,” Electricily Journal, pp.
69-74, April 2000.
P. Mollgaard and C. K. Nielsen, “The competition law and
economics of electricity market deregulation,’’ Center,for Zndustrial
Economics Discussion Papers, 2003-04, Institute of Economics,
University of Copenhagen.
Horizontal Merger Guidelines, U S . Department of Justice and the
Fcdcral Trade Commission. April 8, 1997 (revised).
R. W. Jones and J. Besant-Jones, “Global elcctric power reform,
privatization, and libcralization of the electric power industry in
developing countries,” Annual Review of Energv and Environment,
vol. 26, pp. 331-359,2001.
Energy Markct Authority News Release on December 04,2003.
Energy Market Authority of Singapore. 2003. Statistics f o r 2’Id
Quarter 2003. Available:
http:!l\~ww.ema.yov.s~/~l~ctrieil~/~ta~is tics.php.
Singapore Department of Statistics 2003. Yearbook of Statistics
Singapore 2003
Y. H. Chang and T. H. Tay, “Efficiency and deregulation of the
electricity market in Singapore,” Energy Policy, to be published.
Energy Market Authority of Singapore. 2003. EM4 Annual Report
FY 2002103,
The Straits Times, “PowerScraya to lay off 110 workers,” February
25,2004.
Y. H. Chang and T. H. Tay, “Price-responsiveness of the
deregulated clcctricity market in Singapore,” in Proc. 2004 IEEE
Electric Urility Deregulation, Restructuring and Power
Technologies Conj. to be published.
Thc Straits Times, “Firms may pay less with new electricity
contacts,” February IS, 2004.
VI. BIOGRAPHIES
Youngho Chang is Assistant Professor in the
Dcpartment of Economics, National University
of Singapore. He has worked as a landscape
architect and as a financial analyst for a multi-
national financial company before joining
academia. His research works appcar in
Econometric Theow and Energy Policy. He
was a degree fellow at the East-Wcst Ccntcr,
Hawaii and received his Ph.D. from the
University of Hawaii at Manoa, U.S.A.