Hyflux Paying the power generators
I am not fully familiar with the  workings of the power generation side of the energy market, so my comments here may not be accurate. 

I have read about the workings from published sources in the website of the Energy Market Authority and gathered the following observations:

a) EMA ask the power generators to bid to supply electricity to the national grid for each time slot
b) They found that the dominant suppliers might withhold supply to jack up the price of electricity under this auction system.
c) They introduce vesting contract to require the suppliers to provide a certain quantity of electricity at a price calculated by a complicated formula to ensure that there is a guaranteed supply.

I find this concept to be quite complicated and subject to manipulation. It also creates problems for the providers. 

Is there a better way to deal with the supply and demand of electricity and balance the market without this bidding system?

Let us suggest this alternative way:

a) Ensure that the total approved capacity exceed the peak demand by 25%. This means that when all the demand is distributed to all the plants, each plant will run at 80% capacity.

b) Make it a requirement that all the plants must provide electricity to meet 60% of their approved capacity in each month. This will prevent the withholding of supply during the peak period. They have to pay a financial penalty if they do not meet this quota for each day or week.

c) EMA should provide a price for the supply of electricity. If the price is high enough to show a profit to the generating company, they will want to supply to their full capacity (less any downtime for maintenance or repair). If the total supply exceed demand, EMA should distribute the supply to the generators in proportion to their approved capacity. If some of the generating companies could not meet their quota, e.g. due to downtime, their quota can be distributed to the other generating companies.

d) Some of the generated electricity can be kept in storage, e.g. in batteries, to smooth out the demand during the peak and off peak periods of the day.

It would be in the interest of EMA to determine a price that allows the generating companies to make a fair profit and reduce the price to the consumers as much as possible.

Some of the plants have higher cost than other plants due to efficiency and cost of fuel. They are compelled to upgrade their plants or withdraw from the market. The withdrawn capacity can be met by new plants.

EMA may wish to encourage certain types of fuels, e.g LNG gas, in a national effort to diversity the source of fuel. This source may be more expensive than other sources. A good approach is to subsidize the cost of fuel so that the plants running on this more expensive fuel can be competitive. In this case, the cost is transferred to the market, but the purpose is to achieve security of supply through diversification.

I believe that the current system adopted by EMA to carry out an auction every time slot is complicated and unnecessary. It also created distortions to the market. 

One big problem caused by this distortion is the losses incurred by Hyflux in operating the Tuaspring power plant. The losses is largely due to the distortions in the energy market leading to a crash in the wholesale energy price. It led to the virtual bankruptcy of Hyflux.

We can operate a simpler system that can avoid this distortion.  I hope that EMA can consider a new approach as suggested in this paper.

Tan Kin Lian

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