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

Huang Zhenyu and Yuan Zhao

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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.

Date: 2026-02
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