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

2026-02-13

Technology Category

• Game Theory and Economic Paradigms: Auctions and Market-Based Systems
• Multiagent Systems: Mechanism Design
• Humans and AI: Voting

Application Category

• Economics, Online Markets and Human Computation: Uses of LLMs and GenAI for marketplace design, bidding, and strategic interactions
• Security and Privacy: Large-scale security measurements
• Systems and Infrastructure for Web, Mobile and WoT: Energy management for devices in mobile Web and WoT environments

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.

Problem

• price volatility
• liquidity squeeze
• tail-risk
• market stability
• wholesale electricity price

Innovation

• dual-defense mechanism
• vesting contracts
• temporary price cap
• price volatility
• liquidity squeeze