Using 3-month average will reflect prevalent oil prices, smooth out volatility
Ronnie Lim, Business Times 10 Feb 09;
EFFECTIVE from this third quarter, the Energy Market Authority intends to use a revised formula - which will be more reflective of the prevailing market prices of fuel - to set electricity tariffs here.
The market regulator is also considering an interim measure to enable smaller consumers and households to benefit from market competition ahead of full opening of the electricity market, S Iswaran, Senior Minister of State (Trade & Industry) disclosed in Parliament yesterday.
This is because while consumers who account for about three-quarters of the market - especially the big ones such as refineries and petrochemical plants - have been able to choose which retailer they want to buy electricity from and at what price, the rest, including some 1.2 million small consumers, have so far been unable to do so.
The first move to revise the electricity formula follows public anger over a 22 per cent spike in electricity tariffs in Q4 last year - the highest quarterly increase in eight years here - even as oil prices were sliding.
This arose because the existing pricing formula uses fuel oil prices in the first month of the previous quarter - that is July 2008 - to set Q4's tariffs. Unfortunately, July last year was the month when oil spiked to its all-time record of over US$147, with this consequently causing the record electricity rates here as well.
EMA now intends to revise the electricity tariff formula by using the average of fuel oil prices in the preceding three months to determine the tariff for the current quarter.
For example, the new formula would have used the average fuel oil price from October to December, rather than just October alone, to set the tariff for Q1 2009.
The new approach has two advantages, Mr Iswaran explained.
Firstly, it will help reduce volatility of electricity tariffs by averaging fuel oil prices over a longer time period. Secondly, with a three-month average, more recent fuel oil price data will be used to determine the tariff, making the latter more reflective of prevailing fuel oil prices.
After consulting key stakeholders and industry players - as the move involves adjustments to their hedging operations and processes - EMA will use the revised formula to set the electricity tariff from Q3 onwards, he said.
Mr Iswaran said that overall, competition in the power sector has helped exert downward pressure on energy prices. 'While fuel oil prices have risen by 143 per cent since 2001, tariffs have risen by only 15 per cent.'
In Q1, household electricity tariffs fell by 25 per cent, and 'we can expect a further reduction in April for the second quarter, in tandem with global fuel oil prices,' he added.
While EMA is now carrying out pilot trials of the Electricity Vending System (EVS), or smart meters, to allow households to purchase electricity directly from competing providers, it is also considering other interim steps to bring more benefits of competition to small consumers, Mr Iswaran said.
This is because full retail market contestability - once the EVS trials end this September, and if the system is proven - is expected to take another three years to implement, BT understands.
In the interim, one idea is for the power generating companies - with three of the biggest sold to foreign buyers recently - to bid for the portion of the domestic electricity load on a competitive basis, he disclosed.
The overall price of electricity for domestic consumers will then be determined as a weighted average of the tender price and the price from the tariff formula. EMA expects to complete a detailed study of this proposal by the end of this year and implement the idea next year.
Bumps get minimised
Less volatility with new tariff formula; lower prices expected for next quarter
Neo Chai Chin, Today Online 10 Feb 09;
HAD a different formula been used in calculating electricity tariffs then, the shocking 21 per cent increase would have been a less painful 12 per cent.
Change is on the cards, prompted by public outcry after last October’s spike in electricity prices.
To moderate such wild swings and better reflect prevailing oil prices, power tariffs will, from the third quarter of this year, take into account the average forward fuel oil prices over three months, instead of just one month.
But don’t expect to pay less on the whole for power — because the moderation swings both ways. Had the new formula applied then, during the last tariff reduction in April to June 2007, households would have enjoyed roughly a 2 per cent cut, instead of about 6 per cent shrinkage in their bills.
Said the Energy Market Authority (EMA): “Based on fuel oil prices over the last four years, the average level of tariffs under the revised formula would be about the same as that under the current formula.”
Nor does the EMA plan to revise tariffs more frequently — some have suggested, perhaps as often as every month — because this would mean “more changes and greater uncertainty for consumers”.
Experts told Today the new formula would be fairer than the existing one. “It seems to be an improvement of the old regime,” said Mr Dave Ernsberger, Asia editorial director of energy news provider Platts.
The existing formula is “very hit-or-miss”, and if consumers are unlucky, tariffs would be based on the month where forward fuel oil prices spiked, he said. Therevised formula would be “neutral” in capturing prices on an upward or downward trend.
The old formula — in place since 2001 — had served Singapore well in an “era of less volatile oil prices”, said Senior Minister of State for Trade and Industry S Iswaran in Parliament yesterday.
But the sharp ups and downs of global energy prices in recent times made it clear that tweaks were needed.
Looking ahead this year, the Energy Studies Institute’s economist Benjamin Tang expects oil prices tobe less volatile, barring any further shocks to the economy. With crude oil prices tumbling from highs of US$147 per barrel last year to about US$40 now, power tariffs were slashed25 per cent for this quarter.
The good news? Expect even lower electricity prices from April to June due to lower fuel oil prices, saidMr Iswaran.
NEW FORMULA: GOOD, BUT CAN BE IMPROVED
Even as he praised the tariff formula revision as a step in the right direction, Mr Ernsberger said it could better capture prevailing conditions in oil markets.
He suggested the new formula use “next month contracts” — prices of fuel oil for delivery a month later — instead of three-month forward prices, which are not “the most frequently or actively traded”.
Consumers such as IT professional Koh Choong Yong said the new formula was more equitable and would help smoothen price fluctuations. “The objective of the tariff revision is to better capture an average price, so from this point ofview, it is an improvement,” he said.
But Mr Koh — who spends $100 to $120 monthly on power bills for his five-room flat — would still like to see a tiered pricing system, where those who exceed a certain level of consumption pay proportionately more.
This would benefit low- and middle-income households, which presumably use less, he said.
2nd-quarter power tariffs set to fall
Price drop likely in line with lower oil prices; new tariff formula proposed
Fiona Chan, Straits Times 10 Feb 09;
HOUSEHOLDS' electricity bills are likely to fall again in the second quarter of this year, in line with the decrease in global fuel oil prices, said Mr S. Iswaran, Senior Minister of State for Trade and Industry.
Tariffs have already dropped 25 per cent in the first quarter, after peaking in the fourth quarter last year, he told Parliament yesterday.
And from July, the Energy Market Authority (EMA) will adopt a new formula to calculate electricity tariffs that will smoothen out the spikes caused by volatile oil prices.
Electricity rates shot up 21 per cent in the fourth quarter of last year, posting their biggest jump in eight years. This caused an outcry as oil prices were just starting to plunge in that period.
The timing discrepancy was due to the formula that EMA uses. To set tariffs for each quarter, EMA takes the oil prices at the beginning of the previous quarter.
This could give rise to larger fluctuations if oil prices are volatile, and means that tariffs are not very reflective of prevailing market conditions.
So a new formula is being proposed. Instead of just referring to the prices at the beginning of the previous quarter, EMA will take the average of the oil prices over all three months of the previous quarter.
This means that to calculate the rate for January to March this year, it would take the average of all the oil prices between October and December last year.
According to EMA, if the new formula had been in place last year, the tariff would have risen only 12 per cent in the fourth quarter rather than 21 per cent.
To keep energy costs competitive, the agency is also looking at ways to further open up the electricity retail market.
One idea is for power generation companies to submit bids to provide a portion of domestic electricity consumption. EMA plans to complete a detailed study of this proposal by the end of the year and implement the tender next year.
Another scheme to increase competition in the market is the Electricity Vending System, which allows households to buy electricity directly from individual competing providers. This has been introduced in Marine Parade and West Coast, and will be widened if it proves feasible.
'Competition in our power sector has been a bulwark against rising energy prices,' Mr Iswaran said. Singapore is particularly vulnerable to volatility in global energy prices as it imports almost all its energy supplies.
Since the Government began to liberalise the electricity market in 2001, domestic electricity tariffs have risen much less than worldwide oil prices. Global fuel oil prices have shot up by 143 per cent between April 2001 and last month, but local tariffs have gone up by only 19.9 per cent in the period, Mr Iswaran said.
New formula for calculating electricity tariffs to reduce volatility
Imelda Saad, Channel NewsAsia 9 Feb 09;
SINGAPORE: The cost of electricity in Singapore is expected to be less volatile and more reflective of current oil prices with a revision in the tariff formula.
The revision was announced by the Senior Minister of State for Trade and Industry, S Iswaran, in Parliament on Monday.
Instead of using the fuel oil price in the first month of the previous quarter to set tariffs for the current quarter - that is, using October oil prices to set rates for the January-March quarter - the Energy Market Authority (EMA) will use the average of fuel oil prices in the preceding three months to determine the tariff for the current quarter. That means using the average October to December oil price to set tariffs for the January-March quarter.
Mr Iswaran said: "The new approach has two advantages. First, it'll help reduce the volatility of the electricity tariff by averaging fuel oil prices over a longer time.
"Second, with a 3-month average, more recent fuel price data will be used to determine tariff. This will allow the tariff to be more reflective of the prevailing market prices of fuel."
If the new formula were to be applied to the fourth quarter of last year, the EMA said, tariff rates would have gone up by only 12 per cent instead of 21 per cent.
The EMA will apply the revised formula starting the third quarter of this year. Other measures to keep electricity rates low is to introduce more competition into the domestic energy sector.
One idea the EMA is exploring is for power generation companies to bid for a portion of the domestic electricity load on a competitive basis. The EMA expects to complete a detailed study of this proposal by the end of this year.
Mr Iswaran said Singapore is vulnerable to volatility in global energy prices as the country imports virtually all its energy supplies.
He added consumers can expect a further reduction of tariffs in April for the second quarter in tandem with global fuel prices.
- CNA/ir
