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Authors: Kowsalya Ganesan & Ryan James Tan Wei Ren
Editor & Region Head: Gingee Babu Sasthaa (Uday)
The prospect of surging energy prices in the upcoming years owing to the global energy crisis and a severely diminished ability to effectively hedge against such volatile conditions, have spurred the departure of two retailers from Singapore's open electricity market (OEM) within a span of a week (Ong, 2021). Singapore's fourth-largest retailer iSwitch, as well as Ohm Energy, announced their departures from the market just days apart. In addition, Diamond Electric has stopped accepting new customers.
Background on Singapore’s Electricity Market
The nationwide Open Electricity Market (OEM) was launched in November 2018 to provide consumers with innovative offers, increased choice and flexibility, such as electricity generated from solar power, as well as value-added packages through bundled products and services, when buying electricity as well as to increase market competition in the industry and, thus, lower the electricity price. (Open Electricity Market, n.d.) With this move, Singapore joined a host of other nations such as the US, UK and most recently Italy and Japan, in providing energy retail choice to residents and business owners (Qing, 2021) . Instead of getting power solely from SP Group at the quarterly-reviewed regulated tariff, buying electricity has become similar to choosing mobile phone plans. Consumers can choose from a range of price plans, such as fixed price plans, discount-off-regulated tariff (DOT) plans, or wholesale electricity price plans (Qing, 2021). Since then, about half of household consumers in Singapore have switched to buying electricity from OEM retailers. The remaining half of household consumers continue to purchase electricity from SP Group at the regulated tariff (Ong, 2021).
Figure 1: Flowchart on How Singapore’s Electricity Market Works (OpenElectricityMarket)
Electricity generated in power plants run by power generation companies (gencos) is delivered to consumers through the national power grid, operated by SP Group (via its member SP PowerGrid). Electricity retailers and SP Group (via its member SP Services) buy electricity in bulk from Singapore’s Wholesale Electricity Market (WEM) to supply to consumers. OEM retailers are either the retail arm of power generators or independent retailers which buy electricity in bulk from power generation companies in a wholesale market where prices change every 30 minutes depending on demand and supply.
Why are retailers able to offer rates that are different from the regulated tariff?
Retailers have the flexibility to vary their prices and business strategies, to adapt to current market conditions and the level of competition in the electricity market (Gene, 2021). They also have the flexibility to select the consumers they prefer to serve (e.g. large families, business consumers, etc.), to customise their price plans (e.g. by bundling other services/products) and to impose terms such as contract lock-in periods or early termination charges. On the other hand, SP Group is required by the Government to supply electricity to all consumers in Singapore, including those who are not supplied by retailers for any reason. SP Group has no flexibility to pick and choose its customers, or to freely change its electricity prices, which are regulated by EMA to recover the long-term costs of producing and delivering electricity to consumers (Ting, 2021). SP Group also has to bear the risks from having an uncertain customer base, as it does not tie its customers down to any contract period or charge any early termination fees (Gene, 2021).
The regulated tariff, charged by SP Group and approved by the Energy Market Authority, reflects the long-term costs of producing and delivering electricity in Singapore, such as the costs of building and operating the power plants and maintaining the power grid. On the other hand, the electricity rates offered by retailers typically reflect the current market conditions, level of competition and short-term costs of producing electricity. Under current market conditions where electricity production capacity exceeds demand for electricity, we can expect market prices to be lower than the regulated tariff (Ting, 2021). These retailers can then go into the wholesale market and buy electricity in bulk from power generation companies. However, this may change over time based on market demand and supply. Consumers should be aware that while the price plans offered by retailers are fixed for the duration of each contract, retailers, like all businesses, may adjust their prices and discounts over time.
Price spikes and price volatility amid global energy crisis
Earlier this month, Trade and Industry Minister Gan Kim Yong cautioned in a written parliamentary response that fuel prices have more than doubled over the past 18 months, impacting countries worldwide including China, Japan, Britain and countries in the European Union and that global movements would affect Singapore – which imports nearly 100% of its energy needs and advised households in Singapore to conserve electricity in light of this. Today, about 95% of Singapore’s electricity is produced from natural gas. Natural gas is used as fuel to produce electricity in power plants run by generation companies. It has served us well given its stability in both price and supply. The energy cost, or cost of imported natural gas, is tied to oil prices by commercial contracts, which change depending on global market conditions. It is based on the average price of oil and the average SGD/USD exchange rate in the previous quarter.
The recent spike in electricity prices in Singapore is worrying.
Higher energy prices work like an indirect tax on the economy - they lead to higher production costs for businesses and a higher cost of living for households.
However, the price of natural gas has surged, owing partly to growing demand as countries start to reopen. Another reason for the spike in electricity prices is that Singapore's piped natural gas supply from Indonesia's gas fields in Natuna has been disrupted since July.
It has been reported that Indonesia has decided to stop exporting natural gas to Singapore in 2023. Instead, the supply will be used for its local consumption. There is also a curtailment of piped natural gas from West Natuna and low landing pressure of gas supplied from South Sumatra.
Over the past months, spot liquified natural gas prices rose sharply due to increased demand from China and elsewhere while gas and coal production dropped. Meanwhile, gas supplies via pipeline to Singapore have been affected by upstream production issues in an Indonesian gas field, the EMA said, with reduced output expected to last until the end of the year.
In the past two weeks, the WEM has experienced higher price volatility for sustained periods. These can be attributed to several factors. Globally, prices for spot Liquefied Natural Gas have risen significantly. This is driven by increased global demand for natural gas and a drop in natural gas and coal production, due to the world’s recovery from COVID-19 and extreme winters in the Northern Hemisphere. Domestically, Singapore has seen higher than usual electricity demand, with a new system peak demand of 7,667MW recorded on 12 October 2021.
How did this prompt the electricity providers to leave?
Singapore's electricity futures are generally trading at a higher price today than at any point in their history, with a curve suggesting that high energy prices will be locked in until December 2023. OEM retailers thus have to choose between future unknown but increasingly volatile spot, or real-time, market outcomes and locking in high costs on the basis of currently tradable futures.
Due to this rise in price, the ability to hedge effectively has been lost (Ong & Tan, 2021). Hedging is the process of locking in prices for the longer term to guard against increases. Hedging is a financial instrument protecting against price volatility, by locking in profits on market movements. Singaporean retailers who have yet to hedge their electricity futures will find it hard to sell electricity to consumers at a competitive price as they have to hedge electricity futures at a much higher price (Jaganathan & Lin, 2021). In turn, these retailers would have to sell their electricity at a higher price, leading to a fall in demand for their electricity as consumers would switch to other retailers that offer cheaper prices. This will lead to losses and retailers, especially the smaller ones with less capital, will not be able to sustain business operations (Ong & Tan, 2021). Furthermore, the Open Electricity Market in Singapore is extremely saturated, with retailers having to compete for just 1.4 million households. Hence, some retailers have no choice but to cease operations.
However, electricity retailers who have under-hedged their positions may be exposed to the price volatility in the wholesale electricity market. Some may find it challenging to sustain their operations and may choose to exit the market. This is a consequence of their business decisions and can be expected in open and liberalised electricity markets, where participants may enter and exit the market, and market consolidation may occur.
Given the exceptional circumstances, the Energy Market Authority (EMA) is working closely with retailers which are facing challenges. For retailers which intend to continue operations, EMA is facilitating their efforts to hedge against future price volatility. EMA is also open to allowing retailers to suspend their operations by transferring their customers to SP Group while they strengthen their businesses and ease their customers’ transition with ex-gratia payments.
What does this mean for Singaporean energy consumers?
On the consumer end, household electricity expenditure is expected to rise as prices will increase by 3.1% to 25.8 cents per kwh from October as a result of the global energy crisis. In Singapore, electricity prices are reviewed each quarter and prices are expected to continue rising over the next few quarters. As Singapore imports close to 100% of its electricity, consumer prices are largely affected by the movements in the global market (Ang, 2021). Therefore, the rise in the price of electricity can be attributed to the high natural gas price. In addition, with Singaporeans working from home and schools switching to home based learning due to the COVID-19 pandemic, electricity consumption has risen as people are spending more time at home.
Most consumers have been cushioned from the volatility in SWEM prices as they are either on fixed price plans, DOT, or the regulated tariff. OEM consumers may see an increase in electricity prices at the point of contract renewal, which reflects the increased costs of electricity production.
Singapore’s transition to green energy
Southeast Asian (SEA) countries have been growing rapidly and this has led to increased energy consumption. This comes in the form of burning fossil fuels, namely coal, which releases the most amount of carbon dioxide into the atmosphere (Teh, 2021). To make growth sustainable, ASEAN has set a target of 23% renewable energy by 2025 and this has spurred SEA countries to place more emphasis on their transition to green energy.
In Singapore, the government has set itself a long term target of net zero carbon emissions. The energy sector has been the main focus of change, since it takes up 40% of emissions in the country (Mohan, 2021). Singapore has a plan to use “4 switches” to help facilitate this transition. The first switch is natural gas, which is the cleanest form of fossil fuel. Currently, 95% of Singapore’s electricity is generated from natural gas and it will continue to be the dominant fuel in the coming years. Solar energy is the next switch and the government is trying to achieve a output of 2 gigawatt-peak by 2030, which is a 350% increase compared to their current output (Mohan, 2021). Next, Singapore intends to use regional power grids as their third switch. Power grids are the backbone of the energy system for renewable sources and it is used to transport energy from power plants to the users (Teh, 2021). They are trying to make it cheaper to use power grids to access energy and this could be done through bilateral cooperation with countries around SEA. The last switch is to low-carbon alternatives to help lower emissions in Singapore, such as carbon capture or storage technologies.
To supplement this, Singapore has come up with the Green Plan 2030, which is spearheaded by 5 government ministries - Ministry of Education, Ministry of National Development, Ministry of Sustainability and the Environment, Ministry of Trade and Industry, and Ministry of Transport. This plan gives Singapore feasible targets to lower emissions over the next 10 years and it includes projects such as planting 1 million more trees, quadrupling solar energy deployment, and encouraging the usage of electric vehicles.
DBS and OCBC have stopped funding new coal power plants as well. The 2 banks have retreated from coal as coal burning is the biggest contributor to man-made greenhouse gas emissions (Hicks, 2019). DBS’ last commitment to coal power plants ends this year.
The OEM hiccups — when taken together with what analysts have cited as larger uncertainties surrounding the country’s focus on large-scale solar systems despite the lack of physical space and the long-term impact of the looming carbon tax scheme — serve to illustrate Singapore’s growing pains in its drive to become a renewables leader in Southeast Asia.
“With the OEM to be implemented across Singapore by the end of this year, solar power developers will be able to tap the residential consumer market to offer green electricity.
The OEM is one of the key projects meant to propel solar power development in Singapore and enable the country to meet its target of 350 MW installed capacity,
Conclusion – What lies ahead for our future energy consumption?
As there is no end in sight for the global energy crisis, we could see more electricity retailers having to exit the market. This would lead to fewer choices and potential price rises for electricity. In light of this, Minister Gan Kim Yong urged households to use electricity more conservatively (Tang, 2021). In the long run, we should anticipate a more progressive transition from fossil fuels to green energy. However, more work may have to be done to convince consumers to make the switch to green energy, as it is much more expensive due to the high cost of solar and wind installations.
Singapore has taken steps to safeguard its energy needs through diversifying its gas sources, committing to producing 2 gigawatt-peak of solar energy by 2030, tapping regional power grids and exploring low-carbon alternatives.
Nevertheless, securing a diverse energy supply will take some time. Energy prices are likely to stay elevated given the supply disruptions. Unlike many countries, Singapore has no natural resources and has to rely on external sources for its energy needs. Renewable energy options are also limited. Singaporeans have to be more creative in optimising our energy consumption. For the longest time, Singaporeans have taken for granted the relatively cheap prices of both energy and water in Singapore. It is time for us to wake up to reality and work together as a nation to secure a sustainable path for a better future.
References
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