10 March 2011, TODAY

Do the signs truly point to contained power tariffs?

Parliament was told last Friday that the current volatility in the global markets for oil would not fully translate into higher electricity tariffs for households. This is due to several factors.

First, we are told, the Singapore dollar is strong.

To cushion the impact of higher prices, the Singapore dollar has not only to be strong but also to keep strengthening against the US dollar. However, the Singapore dollar probably cannot continue appreciating without affecting export competitiveness.

Second, it is said, natural gas is the primary fuel for electricity generation.

We have been told that the industry practice in Asia is to peg the price of the natural gas used for generating electricity to the price of fuel oil. Indeed, in the past two years, the fuel cost component (in cents per kWh) of the low tension tariff has closely correlated to the price of fuel oil (in S$ per barrel). In light of the peg, it is puzzling why it is presumed that the fuel cost component of the tariff would not fully reflect the price of fuel oil.

Third, we are told, CCGT (combined cycle gas turbine) plants are very efficient.

Higher prices of fuel will be mirrored in the fuel cost component of the tariff unless the efficiency of the existing CCGT plants improves. But the efficiency of Singapore's power generation plants appears to have had little impact on tariffs in recent years. For example, comparing the tariffs for Q1 2011 and Q3 2007, we find that the fuel cost component of the tariff has risen by almost the same percentage as the price of the fuel oil peg.

Fourth, it is pointed out, the electricity market is competitive.

Almost four-fifths of the tariff is currently paid to the generating companies, comprising fuel cost and non-fuel power generation cost - the latter covers the generating companies' depreciation, rental, manpower costs and profit, among others.

The non-fuel power generation cost has increased steadily and significantly, rising 46 per cent from 4.51 cents per kWh in Q3 2009 to 6.59 cents per kWh in Q1 2011. This is an annualised rate of increase of 29 per cent, a surprisingly high figure in a regulated market.

If we assume that all consumers - not just non-contestable households and small businesses - pay some form of non-fuel generation cost, the generating companies would have collected S$445 million in non-fuel generation cost in Q3 2009 and will collect S$693 million in Q1 2011 (based on Q4 2010 demand).

Mr David Boey

Reply From EMA

Factors do help cushion tariffs against oil price hikes

We refer to Mr David Boey's letter "Do the signs truly point to contained power tariffs?" (March 10) in which he queried the effectiveness of factors listed by Mr S Iswaran, Senior Minister of State for Trade and Industry, in Parliament to help mitigate the impact of rising oil prices on electricity tariffs.

Mr Boey is correct that an appreciating Singapore dollar cushions the impact of rising oil prices.

And this is not a trivial effect.

Since the start of last year, the Singapore dollar has appreciated by around 6 per cent against the US dollar. Without this, the electricity tariff in 1Q this year would have been 4 per cent higher.

Mr Boey has opined that the efficiency of Singapore's power generation plants has little impact on tariffs.

On the contrary, competition introduced in the electricity market since 2001 has motivated generation companies to switch from oil-fired steam plants to more cost efficient ways of generating electricity, such as gas-fired combined cycle gas turbines (CCGT).

If we had continued to use steam plants, the electricity tariff today would be about 15 per cent higher.

Mr Boey has questioned whether competition in the electricity market has yielded benefits, on the basis that there had been a 46-per-cent increase in the non-fuel generation cost component of the tariff from Q3 2009 to Q1 this year.

This component of the tariff includes quarterly adjustments to account for any variation between forecasted and actual consumption of electricity.

Any over-recovery or under-recovery of tariffs in one quarter is adjusted in subsequent quarters.

It is therefore necessary to look at increases in non-fuel cost components over a longer time frame.

Since the Energy Market Authority (EMA) reviews and updates the non-fuel cost every two years to ensure that cost adjustments are in line with international benchmarks, it would be more instructive to compare the non-fuel component between Q1 2009 and Q1 this year, to align with the biennial review.

The increase in the non-fuel generation component between Q1 2009 and Q1 this year was only 9.5 per cent.

These factors have helped to cushion against the effects of oil price increases on electricity tariffs.

But they cannot be expected to fully offset these effects.

The Government recognises that some households face difficulties coping with volatile energy prices.

This year, S$200 million in utilities rebates will be disbursed to help Singaporeans cope with higher energy prices.

A three-room household will receive about 5 months' worth of electricity bills in rebates.

Since 2007, the Government has provided close to S$800 million of such rebates, benefitting about 800,000 households.

Cindy Keng
Director (Corporate Communications)
Ministry of Trade and Industry

Juliana Chow
Deputy Director (Corporate Communications)
Energy Market Authority

More EMA's replies to letters in the media:

We provide information in a meaningful, timely manner
28 November 2011, TODAY

Liberalisation has its benefits
27 September 2011, TODAY

Changes in electricity tariff primarily driven by fuel cost movements
25 July 2011, TODAY

Factors do help cushion tariffs against oil price hikes
10 March 2011, TODAY

Put the brakes on electricity price hikes
31 December 2009, My Paper

Tariff increase might lead to repercussions
9 October 2009

Choice of electricity retailers
1 October 2009

Tariff-calculation formula online
29 December 2008, My Paper

Power tariff formula reviewed every 2 years
17 December 2008, TODAY

Doing the power math
10 December 2008, TODAY

Gencos don't make 'extraordinary profits'
9 December 2008, The Straits Times

Energy bill formula still being tweaked
13 November 2008, TODAY

Why HK pays a different price
30 October 2008, TODAY

Fairer comparisons - Japan and Ireland
27 October 2008, The Straits Times

Tariff Revision no benefit to power generation companies
20 October 2008, TODAY

Lower distribution cost moderated tariff increase
16 October 2008, Lianhe Zaobao

Why electricity price hike was needed
10 October 2008, The Straits Times

Lower Electricity Tariff if Price of Oil Continues to Fall
7 October 2008, My Paper

Price electricity properly and give focused help
7 October 2008, My Paper

Towards a more liberal electric mart
7 October 2008, My Paper

Quarterly tariff update accounts for time lag
2 October 2008, My Paper

Higher electricity prices will not adversely affect lower-income families
1 October 2008, Lianhe Zaobao

EMA explains spike
1 October 2008, The Straits Times