Empirical Validation of a Dual-Defense Mechanism Reshaping Wholesale Electricity Price Dynamics in Singapore

TL;DR

This paper empirically evaluates Singapore's unique dual-defense mechanism in the electricity market, revealing its effectiveness in balancing price stability and liquidity, especially after a 2023 reform.

Contribution

It provides the first empirical analysis of Singapore's dual-defense mechanism, highlighting its structural trade-offs, reform impacts, and synergistic effects on market stability.

Findings

VC quantity suppresses average prices but increases instability.

VC price stabilizes extreme price risks, especially when VC quantity is less effective.

The 2023 reform re-mapped price dynamics, reducing offer ratio pass-through.

Abstract

While ex-ante screening and static price caps are global standards for mitigating price volatility, Singapore's electricity market employs a unique dual-defense mechanism integrating vesting contracts (VC) with a temporary price cap (TPC). Using high-frequency data from 2021 to 2024, this paper evaluates this mechanism and yields three primary findings. First, a structural trade-off exists within the VC framework: while VC quantity (VCQ) suppresses average prices, it paradoxically exacerbates instability via liquidity squeezes. Conversely, VC price (VCP) functions as a tail-risk anchor, dominating at extreme quantiles where VCQ efficacy wanes. Second, a structural break around the 2023 reform reveals a fundamental re-mapping of price dynamics; the previously positive pass-through from offer ratios to clearing prices was largely neutralized post-reform. Furthermore, diagnostics near the TPC threshold show no systematic evidence of strategic bid shading, confirming the TPC's operational integrity. Third, the dual-defense mechanism exhibits a critical synergy that resolves the volatility trade-off. The TPC reverses the volatility penalty of high VCQ, shifting the elasticity of conditional volatility from a destabilizing 0.636 to a stabilizing -0.213. This synergy enables the framework to enhance tail-risk control while eliminating liquidity-related stability costs. We conclude that this dual-defense mechanism successfully decouples price suppression from liquidity risks, thereby maximizing market stability.