Vesting contracts were introduced on 1 Jan 04. The key policy objective of the vesting contract regime is to curb market power in order to promote efficiency and competition in the electricity market for the benefit of consumers. The vesting contracts are bilateral electricity contracts between generation companies and SP Services. Under the vesting contracts, the generation companies are committed to sell a specified amount of electricity (viz. the vesting contract level) at a specified price (viz. the vesting contract price). This removes the incentives for generation companies to exercise their market power by withholding their generation capacity to push up spot prices in the wholesale electricity market.

EMA reviews both the vesting contract level and the parameters used to set the vesting price every two years. The vesting price is set based on the long run marginal cost (“LRMC”) of the most efficient generation technology that accounts for more than 25% of the total electricity demand and taking into consideration the key policy objective. The vesting contract level is set to effectively curb the exercise of market power based on projected electricity supply and demand.