IESAdvisory recently completed its review of the newly formed Singapore Futures Market (EFM). The results found that vertical integration is significantly impacting market liquidity. ‘Gentailers’ (or retailers who own generators) make up 63% of the total electricity consumed in Singapore and in many cases they do not need forwards market hedge coverage. Adding to the challenges is the fact that there is surplus generation capacity, and that currently there are more sellers than buyers in the market. The success of the market will be dependent on increased participation by these buyers.
The review examined risk tolerances for participants and the potential P&L impacts as a result of electricity price volatility. These were carried out under a number of trading limit scenarios. A fully functioning market with high trading volume shows the highest risk but this is due to the potential to carry higher amounts of that risk (as represented by the higher volumetric limit). These scenarios also show a significantly higher average level of P&L.
What is clear from our analysis is that the EFM has the potential to enable participants to make a profit from participation – even if the market is illiquid. Managing a successful outcome in this new market requires an understanding of the risk – reward trade-offs, as this is key to setting and quantifying trading limits.
A copy of IES Asia Newsletter regarding this news can be found here.