Electricity Tariff Q3 - Did SP Take A Bullet For Ruling Party?

Singapore Power's drastic reduction of 15% in Q3 electricity tariff is predicated on a fall in oil prices by at least 25%. This does not seem to be supported by market expectation. It therefore begs the question why. The obvious answer is Election July 10.

The tariff for Q3 is down by a hefty 15% from $0.2302/kWh to $0.1960/kWh before GST. A drop of $0.0342/kWh. Why is no one out in the internet praising the government. Then again, if the reason is exogenous, is acknowledgement even deserving.

Singapore Power gave the standard reason for the 15% decrease in tariff as due to cheaper energy cost. In a world chokeful of falsehoods, all information need to be filtered critically. If something seems unlikely, it is most probably not true. It is better to trust one's intuition. Should the matter be a concern, do a fact check. If it is of no import, let it pass, don't waste precious time. In this light, Q3 tariff needs to be scrutinised.

The tariff comprises of a fixed component and a variable component. The fixed part is for transmission and some administration cost and it is $0.0590/ kWh. The variable part is the energy cost at $0.1370. Compare this to the energy cost component of Q2 of $0.1712, the decrease in energy cost is much higher at 19.98%.

The energy cost of $0.1370/kWh for Q3 is a forecast by SP based on a regulated set of parameters. This can be drilled down to capital cost (depreciation), production overheads, fuel (gas), etc. Of all the cost of production, fuel is the most volatile and is the cause for the changes in the quarterly tariff. Data for breakdown of cost is not available.

The 15% decrease in tariff is due to a 19.98% drop in the energy component. It can be drilled down to a very much higher % drop in the fuel cost component. Without cost data, it is impossible to state, but a wild guess of 25% is fairly conservative given that fuel forms the bulk of production cost. So what the tariff is basically saying, is that fuel cost in the next quarter is forecasted to decrease by 25%.

SP computes fuel cost on the basis of Brent crude oil prices. So SP is taking the view of a drop in oil price of 25% in the next quarter. Is this position supported by reality in the real world?

The outlook for oil whether in the short term or long term, is so murky to us who don't understand the industry. Even for those who are in the oil industry, there is great diversity of opinions. On the demand side, world trade has slowed, and post Covid-19 pandemic will probably see a retreat of globalisation. But in the short term, economies are beginning to open up again, although very slowly. On the supply side, OPEC+ countries are beginning to adhere to agreed production cuts. More importantly, rig counts are down significantly way below 2016 levels, meaning less production capacity ahead, especially US and Canada. The rush for the exit by financial traders who cleared their positions to avoid taking physical deliveries that caused spot oil prices to go negative in March/April, is now over. Inventory level has come down a bit, but there is still substantial quantity in the market to dampen price breakthroughs in 2020/21. Hundreds of millions of barrels are still sitting in tankers in Singapore waters at the moment.

UBS : “We therefore expect the oil market to be balanced in third quarter and undersupplied in fourth quarter, and Brent to recover to $43 per barrel by end-2020 and to $55 per barrel by mid-2021.”

The EIA (Energy Information Agency) : In May, EIA (Energy Information Administration of US) forecasted Brent prices rising to average US$37 per barrel during Q3/Q4 and further to US$48/b in 2021. In June, the EIA lifted its forecast for Brent crude price further to US$38/b for 2020.

It is in the trading market that will help us make sense of SP's position. And here, the consensus is trading is volatile within a tight band into the next few weeks. It's sea-saw volatility with no directional momentum.

No market player is talking of a 25% dip in oil prices! Does SP know something the world does not know?

A lower electricity bill sure is a good thing. But maybe consumers should look at the gift horse in the mouth. It has the smell of an election ploy. So be prepared for claw backs in the next quarter.

If it indeed is an election ploy, then sadly, the government has weaponised an open market mechanism for political objectives. What does it say for the integrity of the Singapore electricity system.


4 July 2020