Look what the election brought - Electricity tariff down by 15% for Qtr 3

"Timeo Danaos et dona ferentes", Latin for "Beware of Greeks bearing gifts". The chief priest of Troy, Laocoon, warned the Trojans not to accept the wooden horse as a gift from the Greeks as he was wary of trickery. Well, we know that 3,200 years ago, it didn't go down well with the Trojans who took the gift and lost the war.

Consumers are gifted by the government with a 15% decrease in electricity tariff. Q2 tariff was S$0.2302 per kwh and is now down to S$0.1960 per kwh before GST. That is a very significant and generous reduction, certainly to be welcomed. Singapore Power said the reduction is due to lower energy cost compared to the previous quarter. One wonders if the election just round the corner has anything to do with this.

Terminology is a bit tricky here, so we need to understand what SP meant. The 'energy cost' element in the tariff is the wholesale price of electricity. This however, has nothing to do with the tariff computation. SP computation is based on a forecast of the short run marginal cost of an efficient gas-fired power plant for the next 3 months. In this forecast, SP takes into account many variables, the most important of which is the projected cost of gas. In the case of Singapore, gas price is derived from the price of Brent crude oil. So what SP meant is the price of Brent crude is projected to be lower than the previous quarter.

SP's projection of oil prices seems to be at odds with market perception. 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. This is in view of declining global inventories and OPEC+ countries are adhering to announced production cuts. In June, the EIA lifted its forecast for Brent crude price further to US$38/b for 2020.

Another way you can have a feel for the authenticity of the reason for the 15% drop in tariff is looking at the market rate movements. Let's take a look at the 12 month price plans of 4 electricity retailers.

Info in the table is taken off their websites at time of press. I believe they have not yet updated their websites in response to the new tariff rates announced on June 29. The current discounts result in rates that are below their fixed rates. These discounts apply to the Q2 tariff of S$0.2302. where they would compute higher than the fixed rate, which is normally the case. By next week, retail rates will be refixed. There being no big decrease in oil prices to bring down the wholesale electricity prices, retailers' 1 year fixed rate will vary very little. On the other hand, the discounts will be lowered significantly in response to the 15% decrease in tariff.

Does it mean SP will loose money for Q3? This depends on how the whole thing is played out. Ordinarily, SP's sales to their customers are 100% hedged. Thus it makes no profit from its electricity sales, and it carries no risks to wholesale price volatility. Due to huge power generation capacity excess, market competition forced wholesale prices low. This led to a situation where SP's energy cost element in the tariff tends to be higher than wholesale prices. That means SP has been a payer in all its hedging contracts. SP recoups the cost of hedging for quarter by incorporating it in the following quarter's tariff. My guess is that the hedging cost of Q2 has not been added into Q3 tariff. That accounts for the 15% drop in rates. So the question of whether SP losses money depends on whether it will recoup Q2 hedging cost in Q4. In all likelihood, it will.

So be prepared for a sharp increase in Q4 as the tariff incorporates the hedging cost of Q2 + Q3 and Brent crude oil prices continues its gradual climb.. Like the Trojans that took the gift, be prepared for what is likely to come after election.

3 Jul 2020

Read related article on how electricity is computed here