1 November 2021 Updated 2nd December 2021
Abstract:
There is a price hike in LNG recently due to a global supply and demand issue. This has caused the oil price to rise slightly. According to EMA, the Electricity price in Singapore should always track the oil price but this was not the case recently since 4 October 2021. Singapore's wholesale electricity price has gone up by about 5 times whereas oil price hardly has any increase. This article will try to find out why. It also discusses how best we can "invest" in this turbulent electricity market.
"Invest" in Electricity Market?
Some will ask, "I am on electricity fixed rates, what electricity market are you talking about?". The answer is, irrespective of whether we are on fixed-rate, monthly-rate, or otherwise, we are always inside the electricity markets so long as the country has de-regularised the electricity business and we are having an open electricity market. Electricity supply on fixed-rate, monthly-rate is just the type of electricity packages in the electricity market. We must always know how the oil price or natural gas price is affecting us.
Oil Price?
Again, some will say, "We are using mainly natural gas, will oil price matter?"
In some countries like the US, oil prices and gas prices are separately fixed by different markets. They might have different prices. Even in Asia, we also have different pricing for LNG. However, in many other countries, like Singapore, gas price is often pegged to oil price for some reasons The gas prices used for generating power in the latter will fluctuate with the oil price. Therefore, the open market electricity price in these countries will fluctuate as much as the oil price depending on the supply and demand.
What Supply and Demand?
In an open electricity market, the electricity price is always determined by a market called "The electricity market". This market, regulated by the local Electricity Authority will have the generating companies supplying and selling the electricity and the big consumers like the Municipal Electricity Board and the big electricity consumers, bidding and buying the electricity. Because the market is so small with a few players, the market, unlike the usual stock market, will have special rules to encourage pricing competition (see Appendix2). One thing is for sure, the price will fluctuate wildly at times especially when demand outstrips the supply.
What we will have to do?
Whether or not we are on fixed-rate or wholesale rates quoted by electricity retailers or Municipal Electricity Board, the price would be affected by the electricity market unless we are buying electricity at the usual regulated price. We must always assess the oil or gas price before we buy electricity. This is because energy price is always the biggest component in any electricity pricing.
How?
Oil or gas Futures prices either at the US's Chicago Mercantile Exchange (CME) or local stock market will always determine and affect the energy price. Some Asian countries might have energy prices indexed with the Asian LNG market depending on the energy policy. One must know how the energy price will move. This is essential if one really wants to judge whether to enter the electricity market on a fixed price or wholesale price or just stick with the regulated electricity price. There are also other things to watch out for.
It will be riskier to jump to a conclusion just because one electricity supplier can supply the cheapest price for some reason. If that is the case, it would be better for one to stick to the usual regulated electricity price. The electricity market is not for us.
Why?
The Electricity Market, in one way or another, works like a stock market except it is heavily regulated. Unless one is familiar with a stock movement, their business background, etc, one would not buy the stock of that company just because it has the cheapest price in the market. Similarly, an electricity retailer can go burst, applying the unfavorable terms in the contracts and selling us electricity at an unreasonable price without the blessing of the regulating bodies. It is then left to ourselves versus the electricity retailer to settle the problem. The regulator might be acting just as the Arbitrator if the retailer did not break any rules.
Then How?
The following can be used as reference:
1) Shortlist the electricity suppliers in terms of their business background to assess if they are trustworthy and can remain in business within the contract period;
2) Find out which among the shortlisted can supply you the electricity at the cheapest and cost-effective rate. Some will have special offers that are better than others;
3) As to whether to take up long term or short-term contract or just a % discount from the usual regulated price, one will have to assess what energy price will be likely within the contract period. If one expects the energy price to go up and up, then it will be good to sign a long-term contract; otherwise, just sign a short-term one or even take up the % discount or just the usual regulated price; then, wait for the energy price to drop to the bottom before signing up for a long-term contract.
What is the Energy Price Now in Singapore?
a) The Brief
The electricity price in Singapore is always fixed by the EMA's Electricity Market. Gencos, the generating companies, will offer every half-hour to sell the electricity into the spot market. Rightly speaking, large electricity consumers, electricity retailers will bid or buy the electricity. Presently, there is no consumer bidding per se in the market. The Power System Operator (PSO), governed by EMA, will provide the demand load for each period based on the collected information. The power generating companies (Gencos) will then offer their selling price based on these demand load and their operating cost of which, energy price will be the main component.
90% of Singapore's power generation is using natural gas. In the past, Singapore's natural gas for power generation are imported through piped gas from Indonesia. That gas price is pegged to oil price according to the supply agreement until 2023 (see reference 4). LNG began to supply in 2013. Because of this, there was this speculation about the Gencos in Singapore are using LNG prices when they offer their selling prices in the EMA's Electricity Market.
Singapore used to have an LNG Futures Market in SGX Exchange Board that supposes to fix the price of LNG but now it has been replaced by the Electricity Future's Market. The LNG price in Asia is now fixed by the LNG Japan/Korea Marker PLATTS Future - (JKM).
Anyway, EMA believes that the natural gas price that is used for power generation is still pegged or indexed to the oil price. EMA claimed that "This is the market practice in Asia for natural gas contracts". Therefore, this article will be using only oil price and SGX electricity future price as guides to assess the future energy prices in Singapore.
If the price is not pegged to the oil price, the trend would be a lot different in the energy pricing today because there is a global demand and supply issue presently lingering around the natural gas pricing. More countries are converting their coal or oil-fired to natural gas-fired power plants & also, there is a natural gas supply shortage globally.
b) SGX Electricity Future (Chart to be updated regularly)
From the December 2021 Contracts and the Contracts beyond, it would appear that the electricity price has gone over the peak of 522 on October 14. It is around 356 on Nov 25 and is slowing dropping towards 185 for the December 2022 contracts. It is likely the trend of the electricity price is falling going forward. Note that this chart will be updated regularly.
c) Oil Price Future (chart updated on 2 Dec 2020)
If EMA is correct that the natural gas is pegged to the oil price, then it would be better for us to view the energy price using the oil price chart.
The Situation on 2 December 2021
The Technical Analysis of the oil price chart indicates that the price has dropped about 19% since Friday, November 26 when the market was spooked by the fear of a new Covid variant, called Omicron, emerging from South Africa.
The oil price now rests on the upper trendline of a falling wedge that has been trapping the oil price since 2008. The oil price will make attempt to recover from this point. If it is not successful, we shall see a bearish oil price pattern falling toward USD50/= which is around the breakeven price of a new oil project today in the US.
Note: Please note that the scale of the chart is in months, the analysis assumes that it will take weeks or months for any price movement.
The WSJ Market
The Crude Oil Contracts (CL1 @ NYMEX) in the WSJ Market is showing a declining trend for the various future contracts. The price trend is shown attached. The chart predicted that oil price is likely to fall in the future months.
Why is Singapore Wholesale Price still rising?
The recent readings of the electricity price in Singapore have no sign of falling despite an 18% fall in oil prices. The following chart is showing that the Electricity price in Singapore is not tracking the oil price; instead, it is trying to follow the LNG price trend.
The chart shows that LNG spiked by 4.5 times and the Electricity price went up by about 3.5 times since March 15, 2021. Before August 2021, the Electricity price was tracking oil price nicely. This is not what EMA has been saying about the natural gas used for power generation being indexed or pegged to the oil price.
Conclusion
The sudden rate jump in those taken up wholesale electricity prices is reflecting the open electricity market prices. It will go up and down according to the energy price because energy is the biggest component in power generation. One should always get out of the wholesale market, either taking up the regulated electricity price or other electricity price plans at the moment. Which plan to take next will depend much on the Future pricing and trending of the energy price.
Should natural gas used for power generation be indexed to the oil price as what EMA has indicated, the Electricity Future Price should have tracked the oil price and started to fall. It would appear there is some confusion in the Electricity market that will require the attention of EMA. They should investigate why the electricity price in Singapore was not tracking the oil price.
back to top Update: 18 December 2021
1) SGX Electricity Futures
The electricity futures hasn't yet responded to the hike in Asian LNG prices on 16 December. The next few days will see if the hike in LNG price will make any difference. The price has risen slightly from $356 per unit @ 27 November to the present price of $465 per unit
b) Nymex Crude Oil Price
The Nymex crude oil price has slid again to hit USD70/=. But it has reflected from the trendline as shown in the attached. Until the price drop below the trendline, it would be hard to tell its exact direction.
The Asian LNG price has broken the rising wedge that has trapped the LNG price since early 2021. The trend is very bullish bearing unforeseen circumstances.
back to top Update: 25 December 2021
LNG Crisis in EU and Asian Region eased.
The Asian LNG took a plunge on 23 December when the price tumbled over 16% to fall from a height of $24/= on 21 December. The combined effect of Russian increasing natural gas output, China buying gas from the US, and US merchants diverting gas to Europe could have caused this drastic drop in price.
Technically speaking, the gas price is falling back into the bearish rising wedge. Barring unforeseen circumstances, one could say the natural gas crisis in the EU and Asian regions has been eased. It is back on track to where it was before; hopefully, the breaking down of the bearish rising wedge will cause the gas price to ease further.
New Tariff for Next Quarter likely to be much higher.
The electricity futures has stubbornly stayed above 460 and would not want to come down especially after the LNG price spiked over 20% earlier in the week. The futures price for December 22 went up more than 25% from 180 a week ago to 226 today. We expect the regulated tariff for the next quarter in 2022 to be adjusted upwards. This announcement is likely to be made within this week. This higher regulated tariff might prompt the other electricity retailers to adjust their price plans to follow suit.
