Electricity price hike in Singapore: more explanations

SP Services: Don’t shoot the messenger
Neo Chai Chin, Today Online 1 Nov 08;

THE uproar began over a month ago, when SP Services announced that electricity tariffs would increase 21.5 per cent in the last quarter of this year.

Consumers already burdened by record inflation saw red, pointing to profits of $1.086 billion that SP’s parent company, Singapore Power, made last year.

How would the poor cope, and why couldn’t Singapore Power use some of its profits to absorb the cost, many asked in newspaper and Internet forums.

But the company remained largely silent, and it was market regulator, the Energy Market Authority (EMA), which mostly responded to news coverage and readers’ letters.

On Friday, Singapore Power broke its silence and launched a spirited defence against public anger.

At a media briefing, group chief executive officer Quek Poh Huat said it was high time that the company clarified its business and role in electricity supply.

“We have nothing to hide,” said Mr Quek.

The key message was this: Blaming SP Services for high tariffs is akin to shooting the messenger.

“If I’m the lorry driver (delivering) goods to your house, and you ask me how come the (price for) a bag of rice has doubled, I can’t explain to you,” said chief financial officer Yap Chee Keong.

SP Services does not generate electricity; it transports power from the generation companies (gencos) to end-users, selling to households without any price mark-up.

The transmission charge, together with the fee for billing and reading of meters, makes up 17 per cent of the tariff. Over the last six years, Singapore Power has reduced transmission charges by 24 per cent through higher efficiency.

The remaining 83 per cent of the tariff – or 25.13 cents out of the current 30.45 cents per kilowatt hour - is paid to gencos.

The EMA sets the formula for tariffs, which Non-Constituency Member of Parliament Sylvia Lim asked to be revealed in Parliament last month.

Singapore Power’s profit from the regulated electricity market here was $423 million last year, representing a 6 per cent return on total assets (Rota) – a “reasonable” rate compared to other countries.In Australia’s Victoria state, for example, the Rota is 9.6 per cent.

The rest of its profit was from sale of investments and its Australian operations.

In the briefing, Singapore Power also tackled other thorny questions: How far in advance can consumers know of next quarter’s electricity prices? Why can’t investments in infrastructure be postponed? Why not ask the Government for funding?

Tariffs for January to March next year will be based on October’s average forward fuel prices, said SP Services deputy managing director Jeanne Cheng. The gencos will convert the average forward price to Singapore dollars and use it to set the tariff’s fuel component.

“By the end of November, we would submit to EMA for approval (of) the tariffs for (next) quarter,” she said.

SP Services had announced this current quarter’s tariffs two days before they kicked in, but notice of up to a month is possible, said Mr Quek.

When contacted, the EMA said: “We are working with SP Services to shorten the turnaround time, but ultimately, due process is needed to compute, check and confirm the figures.”

Singapore Power will invest $5.1 billion in infrastructure over the next five years, with funds coming from operational cashflows and external borrowings. It has borrowed $9 billion from the international markets this year for further investment, said Mr Yap.

It would be unfair to ask the Government for funding because that would mean taking from taxpayers, he said.

“We can take the easy way out, but $10 billion from the Budget would mean $10 billion less for the rest.”

Mr Yap added: “Energy has a direct correlation with gross national product. If you believe Singapore will grow, then you need to plan forward.”

Singapore’s major industries like the banking and pharmaceutical sectors also require high quality power grids with minimal voltage fluctuations. “Just to maintain the same standard, you have to invest,” said Singapore Power’s chief operating officer Ong Boon Hwee.

Where does the buck stop?
LOOK at Singapore Power like a lorry driver employed by a company to transport goods to the consumers.
Desmond Ng, The New Paper 2 Nov 08;

LOOK at Singapore Power like a lorry driver employed by a company to transport goods to the consumers.

When the company decides to charge more because of higher fuel prices, is it right for the consumers to ask the driver to absorb the levy?

Singapore Power - the target of brickbats recently over the rise in electricity tariffs by 21 per cent - used the 'driver' analogy to explain its situation.

It didn't help that this commercial company had made more than $1 billion in profit in the last financial year.

CEO Quek Poh Huat explained that their profit was from their local, international operations and sales of assets here and overseas.

The company does not keep any of the tariff increase that has been levied on users.

Simply put, they buy electricity from the gencos at cost and sell it at the same price to consumers. And that is without any sales mark-up.

All the 21 per cent increase goes to paying the gencos for their higher fuel costs, said the company.

The 5 cents per kilowatt hour (kwh) that the company receives through their subsidiary is to recover transport costs, and other services such as billing and metering.

While their profits are huge by any measure, the company explained they need to secure the financing to invest $5 billion in the Singapore electricity grid over the next five years.

This is on top of maintaining their current infrastructure.

And they've also borrowed over $9 billion internationally to finance their operations and expansions.

The company is not funded or subsidised by the Government.

Their future plans include building tunnels and more cables in the future.

And if there are plans to build another power station in the east side of Singapore by another commercial entity, this genco would also need the necessary infrastructure too.

Now, all the gencos are located in the west.

Increase in population

The company said it anticipates demand to support the increase in population and the growth in our economy. If we do attract more companies here, they will need to tap on our infrastructure.

Said CFO Yap Chee Keong: 'Infrastructure takes a long time to construct. We need to plan ahead, acquire the land, order the equipment, and invest upfront.

'It's like building an airport to anticipate demand - we can't wait for the planes to arrive, then we build the airport.'

But Mr Leong Sze Hian, president of the Society of Financial Service Professionals, said in an earlier report: 'In most countries, such infrastructure funding is rarely borne by the operators. (It) is part of national development and, rightly, should come from the state's coffers.'

Singapore Power said that as a company, they can raise their money using their retained earnings, issuing bonds and borrowing from financial institutions.

PLAYERS IN POWER SAGA

CONSUMER:

# Electricity and gas users pay more because of higher fuel prices

SINGAPORE POWER:

# One of the largest corporations in Singapore with assets of $29 billion at end-March 2008.

# Owns and operates electricity and gas transmission and distribution businesses and provides energy market support services in Singapore and Australia.

# Collects money from consumers but said they don't benefit from increase.

# Profits of $1.09 billion, including $423 million locally from electricity business came from international and local operations, asset sales and investments.They need to be set aside for future investments in infrastructure.

GENCOS:

# Power generating companies which generate and sell electricity.

# The three biggest gencos here are Senoko Power, Tuas Power and PowerSeraya who supply Singapore Power with electricity.

# Gets more money to cover costs and maintain profitability.

EMA:

# Statutory board under the Ministry of Trade and Industry that regulates the electricity and gas industry (among others).

# It approved price increase.

# But it does not fund future investments by Singapore Power.

COMMENTATOR:

# So, why not lower electricity and gas charges and fund power infrastructure investments using general taxes? - Mr Leong Sze Hian

Electricity prices: Why HK is cheaper
Straits Times 1 Nov 08;

IN HER letter on Thursday ('Consider tiered charge in electricity tariff'), Non-Constituency MP Sylvia Lim suggested adopting a tiered tariff system to make electricity more affordable, like Hong Kong.

Ms Lim acknowledged that electricity prices are lower in Hong Kong partly because it produces electricity from coal, whereas Singapore produces most of our electricity from natural gas. In fact, this is the main reason, rather than Hong Kong's tiered tariff system.

Singapore's approach is to charge everyone the full cost of electricity, and give targeted assistance, through U-Save rebates, to households that need it most. After taking U-Save into account, a three-room HDB household effectively pays an average of $50 a month for its electricity bill, comparable to what is payable in Hong Kong for the same amount of electricity consumed.

Charging below full cost in a tiered system would reduce the incentive for households to save electricity and lead to wasteful consumption. It is also not an efficient way to help the poor because well-off households would also enjoy the lower tariff rate in the first tier. If we need to do more to help the poor, it is better to increase the U-Save amount, as the Government has done.

Ms Lim pointed out that Singapore does have a tiered system of tariffs for water. However, water is a strategic resource for Singapore, and the water tariff is set so the first tier recovers the full cost of water production, and the next tier is set higher to encourage water conservation. Applying this principle to electricity tariffs would therefore raise prices for Singaporeans.

Ms Lim also asked for the details of the electricity tariff formula to be published. The Energy Market Authority has done so on its website.

Lim Bee Khim (Ms)
Director/Corporate Communications
For Permanent Secretary
Ministry of Trade and Industry

Fairer comparisons: Japan and Ireland
Straits Times Forum 1 Nov 08;

IN HIS letter on Monday, 'Electricity Prices: 82% higher here than in Hong Kong', Mr Paul Chan asks why Singapore has a higher electricity tariff than Hong Kong, when both places depend on imported fossil fuels and do not subsidise electricity.

Electricity is more expensive in Singapore because our fuel cost is much higher compared to Hong Kong. In particular, fuel charges account for 19 cents per kilowatt-hour of the overall tariff in Singapore, but just 5 cents per kilowatt-hour in Hong Kong.

Hong Kong enjoys this significant cost advantage in fuel largely because more than half of its electricity is generated from coal-fired power plants. Coal is cheaper than oil and natural gas, but it is also a dirtier fuel. Hence, the price of this heavy reliance on coal is felt in the impact on air pollution and quality of life. Another 10 per cent of Hong Kong's electricity comes from nuclear power plants in China which are unaffected by the high global oil price.

In contrast, Singapore's electricity is generated predominantly using imported natural gas, which is indexed to the fuel oil price by commercial contracts. We also do not have a ready source of low-cost energy supplies from our neighbours.

Any comparison of electricity prices across jurisdictions will have to take into account these variations in fuel mix and supply. In fact, our electricity tariff is lower than or comparable to that of countries such as Ireland and Japan, which, like Singapore, are highly dependent on imported oil and natural gas to meet their electricity needs.

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