Today - Factors do help cushion tariffs against oil price hikes

19 Mar 2011

We refer to Mr David Boey’s letter “Do the signs truly point to contained power tariffs?” (TODAY, 10 March 2011) 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 2010, the Singapore dollar has appreciated by around 6 per cent against the US dollar. Without this, the electricity tariff in 1Q 2011 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 2011. 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 2011, to align with the biennial review. The increase in the non-fuel generation component between Q1 2009 and Q1 2011 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, $200 million in utilities rebates will be disbursed to help Singaporeans cope with higher energy prices. A 3-room household will receive about 5 months’ worth of electricity bills in rebates. Since 2007, the Government has provided close to $800 million of such rebates, benefitting about 800,000 households. 


Mrs Cindy Keng
Director, Corporate Communications
Ministry of Trade and Industry

Ms Juliana Chow
Deputy Director, Corporate Communications
Energy Market Authority

Today - Do the signs truly point to contained power tariffs?

10 Mar 2011

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).


David Boey