Why Singaporeans Cannot Get Cheaper Electricity from Singapore Power?

7 Apr 2019

# Singapore Power,  Open Electricity Market, Vesting Contracts,  Electricity Retailers, Gencos
http://tinyurl.com/y68n8rub

Unless one switches the electricity account from Singapore Power (SP) to other Electricity Retailers,  Singaporeans will not be able to get cheaper electricity rates.    This is because Singaporeans having SP's accounts are doing the Nation a service.   They are contributing about S$500 per household per annum for the past 4 years.

Why it is so?

Singapore has a small electricity market with just a few Power Generating Companies (Gencos).   To create an efficient and competitive electricity market in Singapore,  SP has been made to sign an agreement or contract with some six major Gencos in Singapore.  This contract is called “Vesting Contracts (VC)”.  It is for SP to buy electricity from the 6  Gencos at a fixed price called "Vesting Contract Price (VCP) to be worked out every quarterly according to a formula approved by the Electricity Market Authority of Singapore (EMA).   The  Vesting Contracts have no expiry date and can be terminated only by a 60-day notice according to the contracts agreement. 

It is understood in the effort to "privatise" further the supply of electricity,  SP will eventually relinquish its role as the supplier of electricity and retain the role only as infrastructure supporter. However,  it is also understood that there will always be a need for SP to be around to help existing consumers who would need SP's continued services.

What is this Vesting Contracts?

It is a contract signed between SP and the Gencos and facilitated by EMA.   This contract spelled out how SP must buy electricity from the Gencos at VCP for about 55% of Singapore’s electricity demand.   The method to work out this VCP will only be reviewed by EMA every 2 years.    SP will be based on the approved method to calculate the VCP  quarterly.  For readers who wanted to know more about how the VCP is set,  please refer to EMA’s website www.ema.gov.sg.

What’s the Purpose?

It was explained that one of the reasons for having the VC is to remove the “incentives” of the Gencos “fixing” the electricity market price by “short selling” the electricity supplies;   thereby pushing up the “pool price” in the Singapore Electricity Pool Market (SEPM) where electricity is sold at wholesale price..

How Vesting Contracts Work?

 

Before VP was introduced in 2004,  consumers will buy electricity from the electricity retailers at the pool prices or the Uniform Singapore Energy Price (USEP).   Say the consumers want to buy 3 MW,  they will approach Genco 1  who will supply only  2MW at pool price because that is all that he has had;  the consumers will have to buy the 3rd  MW from Genco 2 at a negotiated price.   There is no competition;  also, the pool price can be always"fixed" by the few players.    After VP was introduced,  the Gencos are bound by the VP to sell only 55% or 1 MW to the consumers.  The Gencos will have to compete to supply the 3rd MW at a competitive rate.  

Has it Worked?

It can be seen that this VCP method worked quite well before 2009 although it has benefited the  Gencos more with the pool price running below the VP.  Somehow the picture was a bit out of track after 2009 and it has gone awry after 2012.

The SP's consumers have been “subsidizing” the Gencos all these time after VC was introduced in 2004.  In the graph just shown above,   it can be seen that the orange patch is much larger than the green patch which denotes that the consumers were paying the Gencos more than the pool prices,

This article claimed that the VP in Singapore had made the Singapore consumers pay the extra $2.7 billion over the last 4 years. This worked out to be more than $ 500 per household per annum.  

Are there any other Better Methods?

1.  Breaking Up the Gencos into many smaller generating companies 

It was said this is not economical as the smaller generating companies do not have the economy of scale to provide cost-effective and cheaper electricity prices;

2.  Imposing a Price Cap in the Electricity Pool market  

When there are only a few market players,  imposing a price cap was viewed to hurt or delay the decision for the entrance of new Gencos;   the setting of the price cap can also be tricky and very often,  the prices are set higher than necessary. 

3. By breaking up the generation and forcing Gencos to lease out the capacity to several operators

EMA said this was not workable.

Any Other Improvements?

1.   Shortening the Vesting Contracts reviewing period of 2 years

The 2-year review is reasonable if we have a stable energy price over the 2 year period. This reviewing period should be shortened to 6 months or even less when the energy price is volatile especially when there is drastic change in the energy price.   SP should also be asked to shorten its time of working out the VCP.   The aim must be one that will ensure the VCP will always track closely to the market price.

2.  Allowing more parties to join the VP

The contract is presently signed only between the 6 major Gencos and SP.   It will make the system more transparent and the VCP more stable if there are more participants.  Don't forget that VCP can also be "fixed" by the few "interested parties".

3.   Not limiting the Generating Capacity 

EMA allowed Gencos to have excess generating capacities for reasons to get more users to participate in the LNG  Vesting Contracts (LNG VC). This LNG VC is another instrument used by EMA to ensure stable LNG supply.  However, there was a called for EMA to limit the generating capacities after the Hyflux's TuaSpring saga as it was viewed that the excess generating capacities is hurting the Gencos badly.     

It should be noted that the consumers will get better pricing with more competitions.   Furthermore,  Gencos are not small flies or companies;  there is no need to "spoon feed" them by over-regulation that will hurt the consumers pocket.  The free market should always rule. 

 What is the recourse for Consumers?

At present,   the VC only applies to SP's consumers who are non-contestable consumers.  It does not apply to contestable consumers who buy from Electricity Retailers. By 1 May 2019,  all electricity consumers in Singapore will have the option to switch their electricity retailer from SP to about 30 retailers in Singapore. 

If consumers think that they should not do the "National Service",  they can always switch to another retailer to become a contestable consumer.  

However,  those who have signed up to be contestable consumers should not be too happy because if SP cannot provide the 55% demand,  the contestable consumer might be called up to satisfy the 55% demand and pay electricity at the VCP level.