Ahead of the electricity futures market launch in October, Singapore Exchange (SGX)’s CEO shares what this means for stakeholders.
SGX has been working towards the development of Asia’s first electricity futures market. How would the introduction of this market bring about benefits for consumers, electricity retailers and generation companies?
The electricity futures market is an important achievement for Singapore’s electricity industry and a significant milestone for SGX. This will be the first centralised electricity futures market in Asia, outside of Australia. Customers and stakeholders can take advantage of the platform to price energy, manage price risks, and benefit from better price discovery and transparency.
With a futures market, the generation companies are able to reduce market risk by locking in prices for their production. Electricity users will benefit when price transparency and competition lead to lower electricity prices. Local market participants can also expand their business by tapping on Asia’s growing appetite for energy.
Taking a more holistic view, can you share your views on how the electricity futures market would complement Singapore’s efforts to enhance competition in the wholesale and retail electricity market?
Electricity futures market development is not a quick and linear process. Markets are dynamic. We will continue to develop our own market while we observe and learn from international experiences.
Contestable market participants can access www.sgx.com on a daily basis and actually see the electricity prices for the next two years. Electricity buyers can use the curve to compare prices with a contract offer they get from a retailer. We can expect new retailers to enter the market and new products, such as fixed price contracts, to be offered. Basically, this means healthy competition, more product choices and transparency for electricity buyers.
What do you think is the level of interest from the financial institutions or overseas electricity players to participate in Singapore’s electricity futures market?
With feedback from the industry, there will be a period of discovery during which spreads will be wider and trading activity slower. Once spreads are tightened and related markets such as gas and LNG open up, the electricity market will draw in financial participants and international energy players. We are prepared for a gradual start and will continue to work closely with market participants to attract more players and grow the market.
There is at times a perception that futures trading is a risky activity. What are your views on this, and if there are any misperceptions, how would you dispel them?
The level of vesting contracts, which mandates utilities to sell defined production volumes at pre-determined prices into the market, continues to decrease. This may expose utilities to possible electricity price risks. The electricity futures market supports utilities in reducing such risks and eliminates counterparty defaults in the process. A prudent risk policy will make use of the futures market as part of a well-designed risk mitigation strategy. Furthermore, the prices quoted for the exchange traded instrument are transparent and anonymous, thereby creating a level playing field for traders.