Why is the government taking conflicting actions dishing out Covid assistance cash on one hand and hiking several service fees drastically on the other? In the case of electricity, why can't the 9.3% tariff increase be deferred or absorbed by the government since Singapore Power makes humongous S$1b annual profits?
A simple querry by non-constituency MP Leong Mun Wai from the opposition in parliament. State media described it a criticism. Two ruling party MPs took to the floor to provide non-sequitur responses and a rebuke that Leong ought to get his facts right.
Those with analytical capability will realise that the exchanges in parliament was nothing but a skirting of Leong's querries. No answers were provided. Instead there was a dumbdown of side-issues which were error-ridden.
2nd Minister for Trade and Industry Dr Tan See Leng:
“I would like to clarify that SP buys electricity at the full cost of producing it and delivering it to all consumers ... whatever is procured is passed on to the gencos (generation companies) and then the genco charges consumers at the same price."
Where Tan is right: SP has vested contracts with gencos. The quantity or load (kwh) covered by these contracts cover the aggregate non-contestable load (customers of SP). SP pays the gencos at the strike prices of these vested contracts and sells to their customers at the same price (this is the energy component in the tariff). Both the vested contract and the tariff are fixed quarterly. To this extent, Tan is right in that SP makes no profits in the sale of electricity. SP is fully hedged.
Where Tan is wrong: These hedging contracts are priced in 2 ways for the next quarter. First is at the allocated vesting price. This price is computed by SP on the long run marginal cost basis. Some gencos are allocated certain vesting quantity at this price. Second, a certain vesting quantity is auctioned. The auction price is often lower than the allocated price. Basically, SP is buying at prices computed by themselves, not at gencos full cost of production. The reason is simple. SP buys at vesting prices fixed for the quarter. Gencos production cost changes every 30 minutes.
Where Tan does not explain: Gencos supply to the grid at USEP (uniform Singapore electricity price) which changes every 30 minutes. Retailers and direct participants buy at the Wholesale Electricity Market at the same wholesale prices (which is the USEP + a small system admin fee). The wholesale price changes every 30 mins. Due to huge over-capacity, gencos bid at the wholesale market at very competitive prices. This puts a very strong downward pressure on USEP. For many years, the USEP has been below the vesting prices. In other words, SP has been paying for their electricity purchases at vesting prices which are way much higher than what retailers pay. How much excess payment due to vesting has been paid out over the years? An industry expert suggested it could be $3-$4b. Non-contestable customers paid for these. But they should not complain because it's their choice not to switch to retailers.
"...the increase in electricity tariffs in the fourth quarter of this year was “primarily due” to the increase in fuel costs, Dr Tan noted that the price of crude oil went up by a “whopping” 47 per cent between July and September this year." CNA
However, opposition MP Leong is right in that the SP group is making fantastic profits of a billion $ a year. Substantial profits from foreign operations is to be applauded. But the huge profits from SPS and SPA is obscene for state monopolies delivering essential services. It does suggest the regulatory parameters for computation of rates have been overly generous to the licensees. Let's cut out the obfuscation by the 2 ruling party MPs about returning costs to gencos and the business model. The vesting contracts do impose some complications, but this can be circumvented by leaving the energy cost alone and looking at cost reduction in the fixed component of the tariff.
Leong's appeal for deferment or government absorption of some electricity cost is beyond rational, it's a moral call. Dr Tan and Chee dumbdown on Leong and support status quo, to the extent of misinformation. Equity calls for some social redistribution of the profit. Status quo means the profits go a long way towards excessive executive rewards in a deeply layered organisation -- the operating units, the holding company, and the ultimate holding company Temasek. Everbody takes a cut. Is it wrong to ask whose interest is being served?
A simple querry by non-constituency MP Leong Mun Wai from the opposition in parliament. State media described it a criticism. Two ruling party MPs took to the floor to provide non-sequitur responses and a rebuke that Leong ought to get his facts right.
Those with analytical capability will realise that the exchanges in parliament was nothing but a skirting of Leong's querries. No answers were provided. Instead there was a dumbdown of side-issues which were error-ridden.
2nd Minister for Trade and Industry Dr Tan See Leng:
“I would like to clarify that SP buys electricity at the full cost of producing it and delivering it to all consumers ... whatever is procured is passed on to the gencos (generation companies) and then the genco charges consumers at the same price."
Where Tan is right: SP has vested contracts with gencos. The quantity or load (kwh) covered by these contracts cover the aggregate non-contestable load (customers of SP). SP pays the gencos at the strike prices of these vested contracts and sells to their customers at the same price (this is the energy component in the tariff). Both the vested contract and the tariff are fixed quarterly. To this extent, Tan is right in that SP makes no profits in the sale of electricity. SP is fully hedged.
Where Tan is wrong: These hedging contracts are priced in 2 ways for the next quarter. First is at the allocated vesting price. This price is computed by SP on the long run marginal cost basis. Some gencos are allocated certain vesting quantity at this price. Second, a certain vesting quantity is auctioned. The auction price is often lower than the allocated price. Basically, SP is buying at prices computed by themselves, not at gencos full cost of production. The reason is simple. SP buys at vesting prices fixed for the quarter. Gencos production cost changes every 30 minutes.
Where Tan does not explain: Gencos supply to the grid at USEP (uniform Singapore electricity price) which changes every 30 minutes. Retailers and direct participants buy at the Wholesale Electricity Market at the same wholesale prices (which is the USEP + a small system admin fee). The wholesale price changes every 30 mins. Due to huge over-capacity, gencos bid at the wholesale market at very competitive prices. This puts a very strong downward pressure on USEP. For many years, the USEP has been below the vesting prices. In other words, SP has been paying for their electricity purchases at vesting prices which are way much higher than what retailers pay. How much excess payment due to vesting has been paid out over the years? An industry expert suggested it could be $3-$4b. Non-contestable customers paid for these. But they should not complain because it's their choice not to switch to retailers.
"...the increase in electricity tariffs in the fourth quarter of this year was “primarily due” to the increase in fuel costs, Dr Tan noted that the price of crude oil went up by a “whopping” 47 per cent between July and September this year." CNA
Where Tan is wrong: Tan's comment that oil price went up by a whopping 47% between July to September is firstly, totally wrong. The price was in fact very stable around mid US$40s. Secondly, even if the price had gone up as he said, it has no relevance for Q4. The next Q's tariff is based on forecast, not historical prices.
What Tan does not explain: By June, the futures contracts that caused spot prices to hit negative levels in April had played itself out. EIA (US Energy Information Agency) outlook for Q3 oil spot prices to average US$43. SP held a contrarian view and made a whopping decrease in their oil price forecast to US$27.13, down from their Q2 projection of US$56.25. This was the reason for the 15% decrease in Q3 tariff. Why did SP make a projection of such a low price against market expectation? It was because of the election. The deregulated electricity system was weaponised for political ends.
What Tan dares not to explain: The huge oil inventory built up in the past due to global economic slowdown and production over capacity dampened prices for quite a while. Market data showed the drawdown from inventory has eased off. The market is now seeing net inventory drawdowns but high production capacity puts a downward pressure on prices. In September, EIA forecast for Q4 spot oil prices directionless and ending the year average US$44. The market is expected to balance out in 2021 with prices to average US$49 next year.
Once again, SP held a contrarian view for oil prices. Their forecast for Q4 was US$61.76, up 127% against their Q3 forecast of US$27.13. Clearly, when SP and Tan talk about oil prices going up, thus forcing tariff increase of 9.3% in Q4, they were not referring to the actual market, but their own computational figures. Market spot oil prices for Q3 and Q4 actually remain unchanged. What was explained in parliament was utter rubbish that can be attributed to ignorance or with intent to mislead.
The reality is oil price was under-priced for political purposes in Q3. The tariff was based on oil price way below the market in Q3. So it had to be increased in Q4 to bring it up to actual market expectation. Even if Tan really understands the situation, he would not have the integrity nor courage to explain thus in parliament.
What Tan dares not speculate: Since Q3 forecasted oil price was intentionally priced way too low, it meant the long run marginal cost was unrealistic. This in turn means SP forced gencos to take on allocated vesting contracts at unrealistically low prices. Perhaps for equity, either unilaterally, or with prior agreement, SP will make up for this by jacking up following quarters oil price forecast. That can explain the Q4 forecast for oil price of US$61.76, way over market expectation of US$44.
If there is indeed this 'make-up' policy, the question then is whether Q4 price increase has even out the Q3 under-pricing. I'm speculating the answer is no. In order to get the long run marginal cost back on even keel to compensate for the low vesting prices in Q3, the tariff for 2021 Q1 needs to be jacked up a bit more.
Ex-senior minister in various ministries - Chee Hong Tat :
"SP group is the entity that transmits the electrons, so they earn a return for the grid infrastructure that they have put in place........... I think it is important for us to be clear what is the business model of the various entities before we make comments like ‘Why are they making so much money and they’re not passing on?"
Chee was speaking French through his nose if the model he described of the SP group is simply that of transmitting electrons. Actually to be more specific, it's negative electrons. The SP Group has various functions under different subsidiary entities.
What Tan does not explain: By June, the futures contracts that caused spot prices to hit negative levels in April had played itself out. EIA (US Energy Information Agency) outlook for Q3 oil spot prices to average US$43. SP held a contrarian view and made a whopping decrease in their oil price forecast to US$27.13, down from their Q2 projection of US$56.25. This was the reason for the 15% decrease in Q3 tariff. Why did SP make a projection of such a low price against market expectation? It was because of the election. The deregulated electricity system was weaponised for political ends.
What Tan dares not to explain: The huge oil inventory built up in the past due to global economic slowdown and production over capacity dampened prices for quite a while. Market data showed the drawdown from inventory has eased off. The market is now seeing net inventory drawdowns but high production capacity puts a downward pressure on prices. In September, EIA forecast for Q4 spot oil prices directionless and ending the year average US$44. The market is expected to balance out in 2021 with prices to average US$49 next year.
Once again, SP held a contrarian view for oil prices. Their forecast for Q4 was US$61.76, up 127% against their Q3 forecast of US$27.13. Clearly, when SP and Tan talk about oil prices going up, thus forcing tariff increase of 9.3% in Q4, they were not referring to the actual market, but their own computational figures. Market spot oil prices for Q3 and Q4 actually remain unchanged. What was explained in parliament was utter rubbish that can be attributed to ignorance or with intent to mislead.
The reality is oil price was under-priced for political purposes in Q3. The tariff was based on oil price way below the market in Q3. So it had to be increased in Q4 to bring it up to actual market expectation. Even if Tan really understands the situation, he would not have the integrity nor courage to explain thus in parliament.
What Tan dares not speculate: Since Q3 forecasted oil price was intentionally priced way too low, it meant the long run marginal cost was unrealistic. This in turn means SP forced gencos to take on allocated vesting contracts at unrealistically low prices. Perhaps for equity, either unilaterally, or with prior agreement, SP will make up for this by jacking up following quarters oil price forecast. That can explain the Q4 forecast for oil price of US$61.76, way over market expectation of US$44.
If there is indeed this 'make-up' policy, the question then is whether Q4 price increase has even out the Q3 under-pricing. I'm speculating the answer is no. In order to get the long run marginal cost back on even keel to compensate for the low vesting prices in Q3, the tariff for 2021 Q1 needs to be jacked up a bit more.
Ex-senior minister in various ministries - Chee Hong Tat :
"SP group is the entity that transmits the electrons, so they earn a return for the grid infrastructure that they have put in place........... I think it is important for us to be clear what is the business model of the various entities before we make comments like ‘Why are they making so much money and they’re not passing on?"
Chee was speaking French through his nose if the model he described of the SP group is simply that of transmitting electrons. Actually to be more specific, it's negative electrons. The SP Group has various functions under different subsidiary entities.
In 2019 10% of group profits came from SPS which is the MSSL licensee. It has several functions, which include sales of electricity to non-contestable consumers. In 2018 it led the market with a share of 25%. But Dr Tan is right. SPS mades no profit from sales because it is fully hedged. Profits come mainly from metering. Nevertheless, it remains a major electricity vendor.
The bulk of profits come from transmission and distribution. SPA is the Transmission Licensee. The electricity industry is open market, but transmission remains regulated. It is heavy infrastructure business and the regulated returns is computed on the basis of allowing a fair ROI on capital. Mr Chee is right in this respect.
The bulk of profits come from transmission and distribution. SPA is the Transmission Licensee. The electricity industry is open market, but transmission remains regulated. It is heavy infrastructure business and the regulated returns is computed on the basis of allowing a fair ROI on capital. Mr Chee is right in this respect.
However, opposition MP Leong is right in that the SP group is making fantastic profits of a billion $ a year. Substantial profits from foreign operations is to be applauded. But the huge profits from SPS and SPA is obscene for state monopolies delivering essential services. It does suggest the regulatory parameters for computation of rates have been overly generous to the licensees. Let's cut out the obfuscation by the 2 ruling party MPs about returning costs to gencos and the business model. The vesting contracts do impose some complications, but this can be circumvented by leaving the energy cost alone and looking at cost reduction in the fixed component of the tariff.
Leong's appeal for deferment or government absorption of some electricity cost is beyond rational, it's a moral call. Dr Tan and Chee dumbdown on Leong and support status quo, to the extent of misinformation. Equity calls for some social redistribution of the profit. Status quo means the profits go a long way towards excessive executive rewards in a deeply layered organisation -- the operating units, the holding company, and the ultimate holding company Temasek. Everbody takes a cut. Is it wrong to ask whose interest is being served?
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