Electricity price hike in Singapore explained

EMA explains spike
EMA response to the Straits Times Forum 4 Oct 08;

I REFER to Wednesday's letters ('Tariff hike goes against common sense' and 'Power Points') on the revision in the electricity tariff, and would like to clarify how the Energy Market Authority regulates the tariff proposed by SP Services. Singapore imports all the fuel we need for power generation and the electricity tariff must reflect this cost. Indeed, the cost of fuel accounts for about 60 per cent of the electricity tariff.

While 80 per cent of our electricity is generated using natural gas, the price of this gas is tied by long-term contracts to the fuel oil price. This is the market practice in Asia where fuel oil is the substitute fuel source to gas, and sets a natural benchmark for gas pricing.

The electricity tariff in Singapore is therefore pegged to the fuel oil price. If the fuel oil price goes up, the electricity tariff will be increased. Likewise, if there is a reduction in the fuel oil price, the electricity tariff will be reduced accordingly, as happened in two consecutive quarters last year.

To provide certainty in pricing, the electricity tariff is set in advance for a three-month period based on the three-month forward fuel oil price. For example, the forward fuel oil price quoted last July for delivery between this month and December will determine the tariff for this period.

As the fuel oil price increased sharply in July this year, there was a corresponding spike in the July forward fuel oil price for this month until December. This is why we are experiencing a sharp increase in the electricity tariff now. Recently, the fuel oil price has started to come down. If the downward trend continues this month, we can expect a reduction in the electricity tariff for the first quarter of next year.

The increase in the electricity tariff has nothing to do with the recent Formula One event. The F1 organisers brought in their own generators and equipment for the race. The electricity tariff was not used to pay for the costs of lighting the F1 circuit.

The increase in tariff is also not linked to the privatisation of the electricity industry. On the contrary, the privatisation process has helped to promote greater competition and drive efficiency gains in the power generation companies. This has brought real benefits to all consumers. Despite the substantial rise in fuel oil price over the years, the increase in electricity tariff has been much smaller in comparison. Our electricity price would have been much higher had it not been for competition.

Jenny Teo (Ms)
Director, Corporate Communications
Energy Market Authority (EMA)

Queries on your power bill answered
Straits Times 4 Oct 08;

Readers have flooded The Straits Times Forum mailbox with letters about the recent 21 per cent hike in electricity charges. LIAW WY-CIN put some of their questions to the Energy Market Authority and got the following responses.

# Crude oil prices are coming down and petrol stations are slashing pump prices. So why are electricity prices still going up?

Crude oil and fuel oil are two different products with two different prices.

Crude oil, the raw material pumped up from deep underground, is not used to produce electricity.

Instead, companies use fuel oil, which is made from refining crude oil. Electricity prices are therefore pegged to fuel oil prices.

The oil prices usually mentioned in the news refer to crude oil prices. The pump prices at petrol stations are pegged to crude oil, which is why the recent fall in crude oil prices led to cuts in petrol and diesel prices.

# But 80 per cent of our electricity is powered by natural gas, so why are electricity prices pegged to oil prices rather than gas prices?

Asia does not have a benchmark for gas prices. Until its gas trading industry comes up with a gas index, electricity prices will be pegged to oil prices.

# Fuel oil prices are also coming down, so why are electricity prices still going up?

Since 2004, electricity tariffs here have been pegged to forward fuel prices instead of spot fuel prices.

Spot fuel oil prices are those that apply to oil for immediate delivery to customers.

The forward fuel price is the price for a contract to deliver fuel oil during a future period. These contracts are traded in the commodities market.

Forward fuel oil prices are set in advance to lock in the price of fuel oil so power generation firms have some certainty in pricing electricity. Uncertainty tends to lead to higher prices and volatility in the commodities market.

Changes in the spot fuel oil price will influence the forward fuel oil price. But because our electricity tariff is based on the forward price quoted three months earlier, there is a lag time of about three months before we experience the impact of the change.

For example, between October 2006 and June last year, electricity tariffs fell by 13 per cent, from 21.64 cents per kilowatt-hour (kwh) to 18.88 cents per kwh, after fuel oil prices fell.

Spot fuel oil prices are falling now, so this should translate into lower forward fuel prices three months later, if the decline continues.

# Did the recently concluded Formula One race contribute to the electricity price hikes?

No, the F1 organisers brought in their own generators and equipment for the race. The electricity tariff has not been raised to cover the costs of lighting up the F1 circuit.

# Why can't electricity be more heavily subsidised?

The Singapore Government has a policy of subjecting essentials like electricity, water and oil to market forces as it believes blanket government subsidies are generally unsustainable.

The Malaysian and Indonesian governments, for example, recently found it hard to revoke their heavy fuel subsidies when oil prices rose. Demonstrations and riots broke out.

Here, the prices of essentials are allowed to rise and fall according to market forces. Subsidies are made available to those in financial need.

# In about three years, the Government is planning to further liberalise the electricity sector, opening up household power services to other providers. How will that benefit residents?

The liberalising of the market for electricity for industrial use has resulted in a 3 per cent to 8 per cent drop in electricity prices.

Electricity for household use is now provided only by Singapore Power. Opening up the household electricity sector in about three years could bring in more competing energy providers, driving electricity prices down. The effect could be the same as that of the liberalisation of the mobile phone industry, which lowered the cost of using a mobile phone.

Power generation companies might even throw in freebies to entice consumers to sign up with them.

Let it fly
Lediati Tan, The New Paper 4 Oct 08;

THE latest power rate hike has Miss Chua Kim Choo scratching her head.

On the one hand, the bank administrator read in the newspapers that electricity bills are up by 21 per cent from Wednesday. On the other hand, there are news reports saying that oil prices have fallen.

Miss Chua, who is in her 50s, pointed out that My Paper carried an report that quoted the Energy Market Authority (EMA) as saying that the projected fuel-oil price for the next three months will jump by 38 per cent, justifying the 21 per cent increase.

She said that in the same day's paper, there was another report saying that Taiwan Airlines will cut fuel surcharges on international routes to reflect oil prices.

The latest round of power hikes - the fourth this year - has left MissChua fuming.

'The 21 per cent increase is ridiculous. It's too high.

'How can it be justified when there are reports saying fuel prices have fallen?' she asked.

It is the highest one-time increase in about seven years, EMA said.

EMA chief executive Khoo Chin Hean explained that petrol and diesel pump prices, which have fallen in recent weeks, are not indicative of how much power generation companies have to pay.

Since 2004, electricity tariffs have been pegged to the price of fuel oil delivered to power generation firms for the next three months, otherwise known as 'forward fuel oil' prices.

Mr Khoo was hopeful that if oil prices continued to drop, electricity tariffs could fall in the next quarterly revision, due in January.

When this reporter asked Miss Chua if she understands what forward fuel oil prices means, she replied: 'I don't know what it means. I don't think the majority of us do.'

This only adds to her confusion.

Miss Chua lives in a five-room HDB flat with her younger sister and her 20-year-old niece.

They pay power bills of more than $300 a month. With the latest increase, they can expect to pay another $63.

Miss Chua said: 'I've grown tired of analysing it, so I just pay.'

She said she and her family have tried out ways to cut down on their power usage. They no longer leave their electrical appliances on standby and they have used energy-saving lightbulbs for the last three years.

But, she lamented, 'no matter how much we save on usage, the electricity bills are always high'.

Despite the Government's rebates, she feels that the lower-income will be the worst-hit, although she thinks middle-income earners are also increasingly being squeezed.