The changing energy landscape, new sources of supply risks and volatility have emerged:

• Risks of gas supply disruptions and price shocks. The global energy market is becoming more volatile amidst geopolitical tensions and the global energy transition. This is particularly salient for Singapore as we rely on imported natural gas for almost all our electricity production. As fuel prices surged in 4Q 2021, the domestic electricity market was severely tested– generation companies (“Gencos”) were reluctant to contract for term gas, for fear that they would be left holding on to expensive gas should prices moderate subsequently. This in turn increased the risks of gas shortfalls and contributed to wholesale electricity price volatility.
• Risk of insufficient generation capacity. Today, investments in new generation capacity are driven by each Genco’s commercial considerations. This can lead to prolonged periods of over- and under-supply (since it takes ~four to five years to plant a new generation unit) and in turn lead to highly volatile electricity prices. These cyclical mismatches in supply and demand could worsen with the global climate imperative, arising carbon taxes and the energy transition could discourage investments in thermal generation units which will still be needed to meet electricity demand in the near and medium-term.
• Risks of market failure. As observed in the ongoing global energy crisis, Gencos’ risk aversion inhibited the self-equilibrating mechanisms in the power market which led to a vicious cycle of more volatile conditions and extreme electricity price movements. This led to six electricity retailers exiting the market in 4Q 2021 as they were not sufficiently prepared to deal with the extreme market volatilities. While affected consumers did not experience any disruption to their power supply, some of them experienced inconvenience and a sharp rise in electricity cost when sourcing for alternative electricity retail contracts.

Governments around the world are reviewing their approach towards energy markets to ensure energy security and stability. In October 2022, the Ministry of Trade and Industry (MTI) announced that the Energy Market Authority (EMA) will be introducing guardrails to strengthen the existing competitive market structure and ensure that Singapore is well-positioned to navigate the energy transition. This consultation paper sets out EMA’s plan to introduce a guardrail to mitigate extreme price volatility in the Singapore Wholesale Electricity Market (“SWEM”).