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13 November 2008, TODAY
THE Energy Market Authority (EMA) uses the three-month forward price of fuel oil to dampen the effects of volatility on the electricity tariff. A forward price is strongly correlated to the spot price on the fixing day. So, when determining the average forward price, as many fixing days as practical should be used to smoothen out price volatility. Why then does the EMA fix the forward price of fuel oil for, say, January to March next year based on the average forward prices in October only? Forward prices in October may not necessarily be representative of forward prices in November or December. Perhaps the EMA should base the forward price for January to March next year on the average forward prices from October to mid-December. Or better still, use rolling three-month periods such as mid-September to mid-December or September to November, so that over four consecutive calendar quarters, every market day in a year is used for fixing. We may not necessarily get lower tariffs by doing so, but we will avoid being hit by exceptionally high prices if these should occur in January, April, July or October. David Boey Reply From EMA WE THANK Mr David Boey for his suggestion to fine-tune the tariff-setting formula to prevent spikes in the electricity price "A suggestion to prevent spikes in energy bills ... " (Nov 13). The oil market today has become much more volatile, and this will have a direct impact on the cost of electricity in Singapore. The Energy Market Authority is therefore studying how the tariff formula can be improved so that consumers will not be faced with large price adjustments too often. At the same time, we are mindful of the need to keep any changes to the formula simple and practical, so as to minimise administrative and implementation costs. We will take Mr Boey's suggestion into consideration in our review. |
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