A Portfolio-Based Approach to Power Generation Planning for Singapore: A Projection to 2030

Zhang Xiaoying

Abstract

The volatility of oil and gas prices over the past few years and the increasing world temperature have raised the concerns over energy security and greenhouse emission. As a small country without its own energy resources reservation, Singapore depends entirely on imports of oil and gas to fulfill its energy consumption. Hence, a key challenge Singapore is facing now is to ensure its energy security.

Although Energy security is more about diversity, energy diversification will help to protect Singapore against supply disruptions, price volatility and other threats to the reliability of supply. However, Singapore is also facing practical challenges to fuel diversification due to its geographical conditions. Other than conventional fossil fuels, alternative energy resources like hydro, wind and geothermal are not applicable for Singapore. While nuclear, solar, and coal have some potential, but face cost, technological barriers, and environmental concerns correspondingly.

Another challenge faced by Singapore is the environmental impact of fuel combustion. Singapore is vulnerable to the effects of climate change, especially, global warming caused by increasing greenhouse gas emission. Taking various constraints and the need of a stable energy supply system into consideration, this thesis applies Mean-Variance Portfolio (MVP) theory to provide the policy makers a broad view of Singapore’s power generation portfolio in terms of both risks and costs. On top the MVP model, shadow price analysis is performed to infer the marginal cost of carbon emission credits from electricity generation’s perspective.

Results of the MVP model suggest that in the next two decades, natural gas remains the best option under the base case scenarios. Potential renewable resources, including solar and nuclear, are not economically feasible to participate in power generation. With the current carbon emission target, the resulting generation mix is not constrained by its carbon emission. Thus, it is not necessary to buy carbon emission credits from other countries.

A sensitivity analysis is also performed which shows the effect of a change in the policy maker’s risk attitude. As the policy maker tends to behave in a more risk-averse way, coal is more favorable over other fuel options.