Q2 Tariff In A Perfect Storm

Sans any quantitative data, and solely on intuition alone, I'm going to predict a perfect storm is brewing to jack up the electricity tariff for Q2. Watch out, you have been warned.

The first part of the tariff computation is a forecast of what power generation cost will be for the 3 months April, May and June. This is based on the LRMC (long run marginal cost) of a hypothetical efficient CCGT plant. Parameters that are factored in include an ROI rate, plant recovery (over 30 years), fuel cost, and other non-fuel costs. For a CCGT plant, fuel is the biggest cost component. In the LRMC computation for each quarter, fuel cost is variable as it is affected by oil price and US$ exchange rate projections. The short term view is oil prices will increase due to problems in Venezuela, renewed sanction of Iranian oil, Saudi Arabia cut-back on production, US shale production appearing to be over-optimistic, and a surprising recent increase in global demand. Market expectation is oil hitting US$70/barrel anytime this year. All these make for a higher LRMC for Q2.

Next, the difference of the vesting contracts of the previous Q1 is computed. (To be exact, it relates to the period 15 Dec 2018 to 15 Mar 2019). Vesting contracts are contracts for difference that SP Services take up with gencos. The strike price of the vesting contracts is based on the LRMC of Q1. If the strike price is higher than the gencos' nodal prices, SP Services pays the gencos the difference. The USEP (Uniform Singapore Energy Price) is the weighted average of nodal prices. Since 2013, the USEP has been lower than the LRMC, which means SP services has been paying out to gencos on those vesting contracts. The quantity of load vested in these contracts is currently 25% of aggregate demand load, which is immense. As mentioned in previous blog, since 2013, more than S$3B in the contract of difference has been paid out by SP. Who is paying for all these -- the non-contestable consumers. They don't see it because this adjustment in respect of one quarter is added into the tariff of the next quarter.

The Q2 tariff will be based on the LRMC computed for Q2 plus the adjustment for vesting contracts of  Q1. Because oil prices dropped significantly sometime mid Dec 2018 and through Jan 2019, it depressed USEP further. Thus I'm suspecting the adjustment that will be added into Q2 tariff will tend to be higher. Non-contestable consumers who were 'too busy' to switch in Dec last year lost an opportunity to lock in at very low rates in the region of $0.15/kWh and continue to pay for the vesting contract differences..

The third punch is the long expected carbon tax which comes into effect 1st April. The government is imposing a carbon tax of  S$5./m tonne of CO2 emission. The Singapore carbon tax is a tax on consumers. The tax is applied on the big emitters, gencos being one of them. However, gencos will pass on this as a cost, so it's consumers who ultimately pay the bill. The add on cost to domestic consumers is expected to be just a few $ more, but industrial and commercial consumers may feel the pinch.

For those who bitch at each increase in the tariff - stop it. It's not the government's fault. It is what it is.