In my previous blog, I suggested the decrease in the supply cushion motivates generators to up their offer prices at the auction. This is a natural free market price discovery function. Supply cushion is the access of offers at the auction. In turn, this is affected by the generation capacity. The Singapore power generation industry has been suppressed by massive over capacity for several years. Generators offered low prices at the auction in order to get despatch for their plants. This led to under-priced retail electricity for many years (something ordinary consumers are unwary and not grateful for). It was left to natural attrition to reduce the over capacity. Older plants that reached run-out date were not replaced. Thus in the past 3 quarters, we have seen a reduction in the supply cushion with resultant increased auction offer prices which of course meant higher wholesale prices.
I posit the high electricity prices is a result of a combination of higher fuel cost and reduced supply cushion. The days of massive over capacity of power generation is running out, with resultant higher electricity prices. In economic lingo, the 'short run marginal cost' is rising to the level of 'long run marginal cost' in the industry. The MTI recognises this and it's the reason why the government is legislating to provide the ministry the capability to build a reserve plant when necessary.
A price comparative with other countries is necessary to have an idea of where Singapore stands. Such a task is very difficult due to differences in types of power generation (coal, gas, renewables), tariff structures, type of market, state subsidies, and data availability. Nevertheless, it provides a general idea.
When oil prices exploded in Q3 of 2021, all consumers world-wide suffered huge increase in electricity bills. Let's see closer to home, what Asean governments are doing.
Malaysia:
Sep 2021 : Average rate was US$0.05 kWh (from Statistica)
Malaysian electricity is regulated, with private power generators and Tenga Nasional Bhd as the single purchasing entity. TNB has monopoly on transmission and distribution. They use stratified tariffs, cheaper for poorer segments. Rates are also split for domestic (residents) and non-domestic (industry/commerce) which are priced higher. They use a 'base rate' which are adjusted with a surcharge or debate every 6 months due to actual fuel impact on generation cost. The average base rate in Jul-Dec 2021 was MYR 0.394 (US$0.0893)/kWh with a rebate of MYR 0.02.
What did the govt do? They hold the base rate till 2024. For Jan-Jun 2022, the MYR 0.02 rebate remains for domestic consumers, but non-domestic will pay surcharge of MYR 0.037.
Indonesia:
Sep 2021 : Average rate was US$0.099 kWh (from Statistica)
Perusahaan Listrik Negara (PLN) is government utility agency. It holds monopoly for transmission and distribution, and owns about 73% generation capacity. Other generators are privately-owned. PLN is the single purchaser.
Indonesia's tariff is very stratified. Like Malaysia, Indonesia is holding the tariff unchanged. It will spend IDR134 trillion (US$9 m) on energy subsidies this year. Indonesia is a net oil-importer. Pertamina, the state oil company, will purchase cheaper gas from Rxxxxa. Indonesia is not on Rxxxxa's list of unfriendly countries.
Philippines:
Sep 2021 : Average rate was US$0.17 kWh (from Statistica)
Power generation is deregulated and Philippines has a wholesale market since 2001. Transmission asset is public under National Power Corp, operation is bidded out under 25 year franchise. Distribution is deregulated and run by many franchisees, of which Meralco is the largest operator.
Wholesale prices expected to increase in line with rising fuel cost. Transmission rate has been decreasing yearly when private enterprise franchisee took over operations in 2009. It is expected to drop further. Distribution rates are determined by regulatory body. For Meralco, there is a refund of PHP 18.7 trillion (US$357m) in respect of difference between actual weighted and interim distribution tariff for years 2015 to 2020. Meralco bills will carry a rebate from Dec 2020 till Mar 2023. This will significantly cushion electricity bills.
Thailand
Sep 2021 : Average rate was US$0.11 kWh (from Statistica)
There are some small power generators. The industry is regulated and basically, the government monopolises generation, transmission and distribution. Prices are expected to continue to rise. In March, the government announced a subsidy of 22 satang/kWh for consumers of less than 300kWh per month. The subsidy runs from May to August.
Vietnam
Sep 2021 : Average rate was US$0.08 kWh (from Statistica)
The government holds substantial generation capacity and it has monopoly on transmission and distribution. There are no mitigation programmes to meet the rising cost of electricity. However, Vietnam's electricity prices are still ridiculously cheaper in Asean due to substantial hydro-power.
Singapore
Sep 2021 : Average rate was US$0.18 kWh (from Statistica)
From S$23.38/kWh (before tax) in Sep 2021, the tariff has risen to S$27.94 in 2nd qtr of 2022. Faced with the exit of many retailers, the government's focus have been on the orderly exercise of supplier of last resort function by the Marker Support Services Licensee, ie Singapore Power. Next, the Energy Market Authority took all necessary steps to ensure sufficiency of gas for the generation plants for day-to-day needs.
Singapore government never believes in subsidies. There has never been any feed-in-tariffs and the early solar pv generators received no benefits. Singapore is the only country in Asean to impose carbon tax since 2019. Last year, carbon tax pulled in S$207m for the government's coffer. While the government has done nothing for household consumers to mitigate the high energy cost, it offers financial support to businesses who invest in solar pv installations with its 'Go Green Schemes'. In 2020, the government gave S$23m grants to 3 power generation companies YTL, Tuas and Senoko for 'energy efficiency projects'. The whole idea of carbon tax is to induce all consumers to reduce their carbon footprints and to take steps to aim for carbon neutrality. Why is the government funding such private efforts?
Regulated and De-regulated markets
In a fully regulated market, the government controls all 3 segments -- generation, transmission and distribution. It is thus in a position to determine the tariff. With deregulation, market forces determine the rates. None of the Asean countries are fully de-regulated. Only Singapore and Philippines have de-regulated power generation. Philippines have further privatised distribution services, and allowed private franchisee to operate the grid, but both transmission and distribution assets remain public. Most countries do not de-regulate transmission for national security reasons. Transmission and distribution remains regulated in Singapore.
Whether generation, transmission or distribution, there are basically 2 costs -- operating expenses (Opex) and capital expenditure (Capex).
With Opex, major cost is fuel in the case of fossil-based plants, whether coal, gas or oil. In the case of renewables (wind, solar, hyrdo, geothermal, nuclear), except for nuclear, there is zero fuel cost. It does not mean countries with fuel resources can easily subsidise their Opex cost because governments are contract bound in the price-sharing arrangements in resource extraction. Malaysia, Indonesia, Philippines and Vietnam are net-importers but they do produce some gas. Philippines' Malampaya gas fields supply their local needs, yet their wholesale electricity prices are just as costly. None of them are using their advantage of gas production to directly subsidise high electricity prices. Thus in terms of the tariff setting, Singapore is on a level playing field with them -- and we are the most expensive.
Subsiding fuel cost has huge political and security risks. Both Malaysia and Indonesia used to subsidise gas pump prices in days of yore when they had lots of petrol dollars. There comes a time when the revenue plunges as commodity prices do, or when gas fields dry up, and the subsidies burn a big hole in the national budget. When subsidies became unsustainable, withdrawing it at a time of high prices, will see riots in the streets. Both Malaysia and Indonesia deferred withdrawing gas pump subsidies until the time when oil prices took a dive.
In the case of Capex, all these are sunk cost. They have already been expended. In deregulated markets private enterprises price their products with a fixed cost depreciation charge to make sure they have a profit margin. In regulated markets, it is all about cost recovery. Government tariffs carry a cost in a formulated structure meant to recover investment in the infrastructure. It is in a recomputation of the formula that Philippines' Meralco has to refund Php18.7 trillion to consumers in respect of cost recovery of distribution infrastructure. (Just to clarify - Meralco is private enterprise, and this portion of the distribution tariff is a pass through cost for them. They simply collect and hand to the government which owns the assets. Thus it is in effect the government making the refund).
It is in Capex in a regulated market that governments can offer relief to hard pressed consumers. The cost recovery can simply be deferred, suspended, or put on a moratorium. In the case of Singapore, the transmission/distribution is regulated. The licensee is SP PowerAssets Limited (government-owned). SPPA earns for the SP Group S$1 billion each year, easily S$500m is from Singapore operations. In a regulated market, cost recovery is meant just that, to recover the infrastructure cost. That SPPA can make S$500m profit simply means the recovery formula has a high profit factor built-in. Of the current tariff of S$27.94/kWh, 22% or S$5.77 is transmission/distribution charge. It is here that the government can offer some relief -- by a deferment of cost recovery and a reduction in their margins.
Capex is a sunk cost. A deferment requires no cash outlay by the government and thus no demands on the budget. It does however, mean no profits, and has cashflow effects on SPPA, which cascades down to SP Group and Temasek. But overall, its impact on the Temasek's NIRC (net investment returns contribution) to the budget will be minimal. SPPA can live with a diminished cashflow by simply putting some of their projects on hold.
Conclusion
For years, the Singapore electricity market has operated with massive power generation over-capacity. This has seen the wholesale electricity prices consistently lower than regulated tariff. The upsurge in oil prices since Q3 of 2021 has brought about a paradigm shift. The short term marginal cost is now higher than the long term marginal cost. Wholesale prices will now tend to be higher than regulated tariff. The ministry has explained away the rising fuel cost and supply shortage as the problem. However, a contributing factor, in my opinion, is the lowered supply cushion that motivates higher offer rates at the wholesale market auction. Whilst the government has done nothing for consumers to mitigate the high electricity cost, here's hoping it will at least monitor for excessive profits by power generation companies.
