1. REGULATING SINGAPORE’S ELECTRICITY INDUSTRY 11 April 2011

2. The Electricity Industry Milestones 1) Background 2) Restructuring of Singapore’s Electricity Industry 3) Regulatory Philosophy 4) Regulatory Framework 5) Regulatory Practices 6) Key Lessons 7) Results achieved so far Outline

3. The Electricity Industry Milestones The lead agency for energy matters in Singapore – a statutory board under the Ministry of Trade and Industry. EMA is also the regulator of Singapore’s electricity and gas industries. EMA’s main goals are to: (1) ensure a reliable and secure energy supply; (2) promote effective competition in the energy market; and (3) develop a dynamic energy sector in Singapore. About the Energy Market Authority of Singapore (EMA)

4. Gas from Indonesia Gas from Malaysia Overview of Singapore’s Energy Landscape No significant energy resources – dependent on imports for energy needs. About 80% of Singapore’s electricity is generated using imported natural gas – vulnerable to price fluctuations and supply disruptions Singapore faces additional challenge of being alternative energy disadvantaged – limited scope to deploy solar and wind energy on a large scale.

5. The Electricity Industry Milestones Restructuring of Singapore’s Electricity Industry

6. Electricity Industry Reforms - 2000 Singapore’s electricity industry had traditionally been vertically integrated and Government-owned. Liberalisation of electricity industry began in 1995, and continued through 2000, where the government decided to press on with further liberalisation of the electricity industry and obtain the full benefits of competition. Key Initiatives for Restructuring: Clear separation of contestable/competitive businesses from natural monopolies to ensure level playing field Open access to monopoly infrastructure Restructuring of the Electricity Industry

7. ELECTRICITY INDUSTRY STRUCTURE IN 1995 IPPs SembCorp Cogen ENV Tuas Power Singapore Power Contestable Business Non-contestable Business Franchised Consumers Non-franchised Consumers Progressive extension of competition Non- franchised Sector Utilities Support Services Franchised Sector T&D Pool Operations System Operations PowerGrid Ltd PowerSeraya Senoko Power Private Electricity Suppliers Non- franchised Sector Utilities Support Services Power Supply Ltd since Apr 98 Electricity Industry Structure in 1995

8. T&D PowerGrid IPPs NEA Tuas Power Senoko Power Power Seraya SP Services (formerly Power Supply) Franchised (Small) Consumers Non-franchised (Large Industrial & Commercial) Consumers Market to be fully opened ultimately Electricity Retailers EMA Electricity Flow Singapore Power Market Operator Industry Regulator System Operator Energy Market Company ELECTRICITY INDUSTRY STRUCTURE IN APRIL 2001 Electricity Industry Structure Today Note: SP Services is not allowed to compete with the retailers for contestable consumers, it just passes through the pool price.

9. Regulatory Philosophy Contestable Sector (Gencos, Retailers) Monopoly Sector (SP PowerAssets, SP Services, EMC) regulate with light touch rely on market signals ensure level playing field Low barriers to entry Transparent rules and consistent application of rules regulate revenue/prices incentivise efficient behaviour Set performance standards to prevent “cutting of corners” share cost savings with consumers Open access

10. The Electricity Industry Milestones Contestable Sector: Generation

11. Wholesale Electricity Market Market Mechanism Gencos bid half-hourly to sell electricity Energy Reserve: Primary, Secondary and Contingency Regulation Retailers/contestable consumers buy electricity Gencos bid half-hourly to sell electricity Energy Reserve: Primary, Secondary and Contingency Regulation Retailers/contestable consumers buy electricity Market Operator EMC Perform market clearing and settlement functions EMC Perform market clearing and settlement functions Wholesale Electricity Market

12. Vesting Contracts Wholesale Market is dominated by three large gencos, with combined market share of close to 80%. Gencos can push prices up by witholding supply. Market Power in Wholesale Market Genco A Genco B Genco A Genco B Genco C Price Quantity P2 P1 At demand = Q, Market Price is P1. However, suppose Genco A withholds supply, Genco C would now be dispatched. The market price would increase to P2. Q Demand

13. Vesting Contracts Solution: Introduced Vesting Contracts in 2004 - Gencos to sell a specified amount of electricity at specified price. 2004Mid-200720112012Ultimate Goal Vesting Cover 65%55%60%55%0% Vesting price LRMC of most economic power plant in Singapore Vesting Contracts (1) Vesting Price set by EMA based on Long Run Marginal Cost of the most economic generation technology in operation in Singapore and that contributes to more than 25% of total demand.

14. Review of Vesting Price EMA reviews the LRMC parameters every 2 years and resets them to reflect the costs of newer and more efficient plants. In each round of review, EMA consults the industry before deciding on the value of parameters that would take effect for the next 2-year period. EMA is also required to consult all Vesting Contract holders (i.e. gencos) at least 3 months in advance of any amendments to the parameters of the vesting price, or the methodology for setting the vesting price. Review process is transparent and gives regulatory certainty to gencos. Review of Vesting Price

15. The Electricity Industry Milestones Regulatory Practices

16. The Electricity Industry Milestones 1)Transparency Publication of licencing requirements and procedures Advance publication of new or amended regulations and procedures Public consultation process 2) Application Procedures Non-discriminatory and consistent application of rules in the processing of applications for a licence Incomplete applications: inform applicant and process applications as much as possible in the meantime Target timeframe of processing: 12 weeks Rejection of applications: inform applicant, reasons provided Key Points on Regulatory Practices

17. The Electricity Industry Milestones Key Lessons

18. The Electricity Industry Milestones 1)Need for Consultative Approach Increased transparency and increased trust. Valuable source of ideas: better outputs and outcomes at a lower cost. To get buy-in: greater acceptance and compliance with policies Best Practices: (a) Need to establish consistent guidelines and procedures on consultation. (b) Need to allow adequate time for consultation. (c) Need to provide adequate feedback. (d) “E-Consultation” to rapidly reach large numbers of people at low cost. Key Lessons (1)

19. The Electricity Industry Milestones 2)Need to Provide Regulatory Certainty Given that energy projects typically are planned years in advance and require huge sums of money, investors need to be confident that rules would not be changed in the middle of the game. Regulatory uncertainty results in increased regulatory risks, which would increase costs for companies, and deter investment (both local and foreign), thereby affecting security of supply. Best Practices: (a)Clear and transparent regulatory regime -> reduces regulatory discretion, and promotes accountability. (b) Consistency in regulatory decisions -> promotes predictability. Key Lessons (2)

20. The Electricity Industry Milestones Competition has motivated gencos to switch from oil-fired steam plants to more cost efficient gas-fired plants. If not, electricity prices today would be about 15 per cent higher. Liberalisation of the electricity market has also seen consumers benefit from greater choice of retailers, and pricing plans. Today, around 75% of demand have retail choice, and we are working on how to let the remaining 25% also enjoy the benefits of competition. In the monopoly sector, regulation has also brought about lower rates, while maintaining the high performance of the grid. The results thus far can be attributed to the effective regulatory framework and the close partnership between EMA and the industry. Nonethless, there is scope for further improvement and we are still learning! Moving forward, we recognise that as regulatory frameworks evolve, it is important that we continue to learn from international best practices. Results achieved so far

21. THANK YOU