Feb 17, 2014

    Trade electricity futures from Oct

    SINGAPORE is set to launch the trading of electricity futures this October, after a six-month trial starting in April, a Singapore Exchange (SGX) official disclosed on Friday.

    This will enable consumers to lock in their electricity prices as far as two years down the road.

    While the dates are subject to final approval by the Monetary Authority of Singapore, "we think we are on time", the official added.

    Speaking at a Seraya Energy forum organised by the generating company (genco) for its customers, Mr Matthias Obert, SGX vice-president and its director of commodities, said the futures market here will provide new options for consumers to procure and hedge electricity. "It helps cancel the short-term fluctuations in the spot market", where prices can fluctuate widely.

    This was seen in the electricity price spikes last year, when prices doubled during the haze period, and when there was a tight supply cushion, including from a forced generation outage. Therefore, futures are a cost-efficient way of fixing electricity prices.

    The latest SGX timeline tallies with what Mr S. Iswaran, Minister in the Prime Minister's Office, said at the Singapore International Energy Week in October, that the Republic intended to launch the electricity futures market in the second half of this year after a market trial.

    At that time, Mr Iswaran, who is also the Second Minister for Home Affairs and Trade & Industry, revealed that six gencos had indicated their interest to be market makers. They comprise the three biggest players here, Senoko Energy, YTL PowerSeraya and Tuas Power, as well as Keppel Merlimau Cogen, Sembcorp Cogen and desalination player Tuaspring, which is building a 411-megawatt power plant.

    Mr Obert said that to attract liquidity to the electricity futures market, trading hours will be concentrated initially from 2pm-5pm, with a half-hour window from 4.30pm for the market makers.

    For consumers, the advantage of the futures market is that it is exchange-traded and well supervised, cleared, and therefore poses no credit risks. There is also little liquidity risk, given the participation of the gencos. Low capital outlay of a suggested 5-10 per cent is needed, though the numbers have not been finalised, Mr Obert added.

    When the market goes "live" from October, it will start with a limited suite of products with shorter contract duration and will comprise quarterly contracts for nine consecutive quarters. There will also be a wider bid-ask spread of a maximum $7-$15 per megawatt hour.

    The early players will be the gencos (market makers) and large industrials, "although some interested banks are also in talks on this", said Mr Obert.

    In the next planned "market growth" phase from April next year to March 2017, SGX intends to add more instruments, such as caps, months or further quarters. Longer trading hours can be expected. The bid-ask spread will also be tighter, with a maximum spread of $5-$10 per MWh.

    Further down the road, from April 2017 onwards, SGX's plans show that the electricity futures market could be complemented with a physical and then financial gas market that could potentially reach beyond Singapore.