Please use this identifier to cite or link to this item: https://hdl.handle.net/10356/67338
Title: Electricity market : growth, efficiency, and price discovery
Authors: Guo, Huicong
Niramansakul, Salisa
Seng, En Quan
Keywords: DRNTU::Humanities
Issue Date: 2016
Abstract: Our report evaluates the importance of efficiency in the electricity market in Singapore and how various regulatory instruments contribute to this efficiency. The report comprises of three main parts. Chapter 2 examines the Granger causality between energy and growth to understand the nature of the energy-growth causal relationship in Singapore. A bivariate model (of energy and income), a multivariate demand model (which uses energy, income, and energy price), and an augmented production model (which uses energy, income, capital, and labour) are used for the analysis. Three different energy metrics—Total Primary Energy Consumption (1980-2011), Total Primary Energy Supply (1990-2013), and Total Electricity Generation (1975-2014)—are used. The models are described using a Vector Error-Correction Model framework when possible. Otherwise a Vector Auto-Regression in first differences is used. As a whole, the Granger causality test results suggest that the conservation hypothesis holds in the Singapore, for both energy and electricity consumption. An efficient electricity market is important for Singapore to grow efficiently, as deregulation brings efficiency gains and lowers electricity costs, and is essential. In Chapter 3, we generalise Allaz-Vila (1993) model which does a reasonable job in predicting a USEP mean price. We also show that vesting contracts are effective in reducing the electricity price and containing market power, even as the vesting contracts level is being relaxed over recent years. A downside to vesting contracts is higher price volatility due to a lower price level. As such, futures contracts can be implemented to complement vesting contracts. Chapter 4 examines the Singapore electricity futures market, which is postulated to serve a forward pricing function by providing a low-cost platform for market participants to provide simultaneous quotations for prospective trading. A futures market that fulfils this function provides rational prices that inform operation decisions that are ex-ante allocative efficient. Futures-spot price empirical relationship can be studied by modelling the futures price as the sum between the expected spot price and an ex-ante risk premium component. We investigate the efficiency of the futures market by testing the null: the mean spillover between the two price series is not significantly different from unity. To circumvent data insufficiency as the market is young (started operation in April 2015 with only one type of contract), we assume that the average realised spot price—from the start of contract till date of concern—can be considered as an ex-ante forecast of the final settlement price, and an interim indicator of the general price trajectory within the contract period. Hence, we test if the daily settlement futures price incorporates a rational expectation of the week-ahead average realised spot price till date. Results from estimation in a cointegration framework show reasonable evidence for futures price rationality for all three contract quarters. This indicates that market participants should incorporate the futures market as part of their operation strategy, while regulators can consider rolling out new futures contracts with shorter delivery periods (e.g., weekly contracts) as part of the continual efforts towards electricity market deregulation.
URI: http://hdl.handle.net/10356/67338
Rights: Nanyang Technological University
Fulltext Permission: restricted
Fulltext Availability: With Fulltext
Appears in Collections:HSS Student Reports (FYP/IA/PA/PI)

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