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

TL;DR

The study investigates Singapore's dual-defense mechanism, consisting of vesting contracts (VC) and a temporary price cap (TPC), and its impact on wholesale electricity price dynamics. Using high-frequency data from 2021–2024, it employs regime-switching, quantile regression, and EGARCH-based volatility analysis to quantify how vesting contract quantity (VCQ) and vesting contract price (VCP) interact with the TPC to shape prices and tail risk. Key findings show that VCQ suppresses average prices but can elevate volatility in normal periods, while VCP anchors extreme price realizations; the 2023 policy reform neutralizes pass-through of strategic bidding and enhances tail-risk mitigation through policy synergy, yielding a regime-dependent stabilization without liquidity costs. Collectively, the results support the effectiveness of the dual-defense design in decoupling price suppression from liquidity risks and offer design insights for balancing efficiency and security in electricity markets during the energy transition.

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.