SMS S Iswaran's oral answer on electricity tariffs (Question No 815/NP 252, Question No 817 & 826/NP 253, Question No 831 & 833/NP 255)

Question No. 815 in Notice paper No. 252 of 2008

Name and Constituency of Member of Parliament
Ms. Ellen Lee Geck Hoon, Member for Sembawang GRC

Question
To ask the Minister for Trade and Industry (a) if he will explain Energy Market Authority's (EMA) recently announced increase of about 21 per cent in the electricity tariffs when the forward oil prices for the fourth quarter in the open market has actually dropped and is available at a much cheaper price than the $155 per barrel stated by EMA; and (b) whether there is a professional group of analysts/traders helping EMA to seek out the best/lowest prices since its primary obligation is to protect the consumers in Singapore.

Question No. 817 in Notice Paper No. 253 of 2008

Name and Constituency of Member of Parliament
Ms. Er Lee Bee Wah, Member for Ang Mo Kio GRC

Question
To ask the Minister for Trade and Industry with electricity tariffs rising several times, (a) how does the Ministry regulate the market to ensure that (i) the revenue earned by Singapore Power (SP) can be translated into benefits for households in Singapore; (ii) the revenue of SP is ploughed back into making it more efficient in supplying electricity to all households and businesses; and (b) what is being done to ensure that pricing by energy companies are reasonable.

Question No. 826 in Notice Paper No. 253 of 2008

Name and Constituency of Member of Parliament
Ms. Sylvia Lim, Non-Constituency Member

Question
To ask the Minister for Trade and Industry (a) whether the 21% hike in electricity tariffs with effect from October 2008 indicates that the present formula for determining the electricity tariff is not sustainable in view of the volatile oil market; and (b) how will the Government protect the consumer against drastic surges or sudden spikes in electricity tariffs.

Question No. 831 in Notice Paper No.255 of 2008

Name and Constituency of Member of Parliament
Mr. Gautam Banerjee, Nominated Member

Question
To ask the Minister for Trade and Industry whether the sale of all our power companies to entities (possibly all foreign) whose objectives will be to maximize returns for their shareholders, be in the best interest of Singaporeans in the long term

Question No. 833 in Notice Paper No.255 of 2008

Name and Constituency of Member of Parliament
Madam Ho Geok Choo, Member for West Coast GRC

Question
To ask the Minister for Trade and Industry (a) what is the rationale for the increase in the electricity rates when oil prices have been on the decline, from a high of US$147 in July to a low of US$87 in recent weeks; and (b) whether he will clarify on the electricity rate pricing model.

Answer
1.Allow me to first explain the basis of the formula used to determine the electricity tariffs for households, and the rationale for the recent tariff increase.

2.SP Services Ltd, which is a subsidiary of Singapore Power, buys electricity from the generation companies and on-sells it to households. The components of the electricity tariff are:

a. Cost of fuel for power generation which accounts for 62% of the overall cost;

b. Non-fuel costs of generation (21%);

c. Cost of transmission and distribution (16%); and

d. Miscellaneous fees like meter reading and billing (1%).

3.About 80% of our electricity is generated using natural gas. In the US, there is a separate and distinct market for natural gas which determines its price. In Asia, however, there is no such distinct market and the price of natural gas is indexed to the price of fuel oil, which is the alternative fuel for power generation. Countries like Japan, Korea, Taiwan and Singapore buy natural gas through long term contracts at a price which is tied to the current price of fuel oil. Therefore, when the fuel oil price increases, so too will the natural gas price; with a consequential increase in our electricity tariff.

4.Therefore, SP Services adjusts the electricity tariff every quarter to reflect changes in the cost of fuel oil. Since 2004, SP Services has pegged the tariff to a 3-month forward fuel oil price. This forward fuel oil price is not a projection. It is the actual price in the commodities market for future delivery of fuel oil in 3 months’ time. This is in contrast to the spot price of fuel oil, which is the price paid for immediate delivery to customers.

5.Why use the 3-month forward fuel oil price and not the spot price to set the electricity tariff? The aim is to provide as much certainty as possible to consumers. A formula based on spot price, which is usually more variable, would mean households experiencing frequent and more volatile changes in their electricity tariffs.

6.It is clear from the Chart that the spot fuel oil price has greater variability compared to the 3-month forward fuel oil price used by SP Services. Members should also note that the 3-month forward fuel oil price used in the formula has been lower than the spot fuel oil price in all but 5 of the 16 quarters since 2004. [1Q 05, 3Q 06-1Q 07, 4Q 08].Although the tariff formula cannot insulate the price of electricity from the rising and volatile price of oil, it does help to moderate the impact.

7.With the current approach, there is a 3-month time lag between changes in the fuel oil price and the actual tariff revision. This time lag works both ways - that is electricity tariffs move up more slowly when fuel oil prices are rising, and move down more slowly when fuel oil prices are falling. For instance, in July 2008, the spot fuel oil price was S$153/bbl., which was higher than the corresponding 3-month forward fuel oil price of S$112/bbl. In July this year, if we had used the spot price to compute the electricity tariff, it would have been 21% higher than that computed using the 3-month forward price.

8.The converse is true in the current quarter, with the average spot fuel oil price in October[1] (about S$109/bbl.) being lower than the corresponding 3-month forward fuel oil price (S$155/bbl.). If the current lower fuel oil prices are sustained, the benefits will flow through with the same time lag to electricity tariffs in the next quarter.

9.On balance, under the current formula, the volatility of electricity tariffs has been relatively lower and households have generally paid less for their electricity than if we had used spot prices, as indicated by the green shaded areas of the Chart. The Energy Market Authority (EMA) is studying whether the formula can be further improved. To Ms. Sylvia Lim’s question, I would caution that we should refrain from making arbitrary changes just because the outcomes are inconvenient in a particular quarter or two. If we make such changes and if they are not well thought-out and they are seen to be arbitrary by the market, that would increase regulatory risks, adversely affect investor confidence and, ultimately, do more harm than good to consumers and businesses.

10.The Government has sought to mitigate the impact of the rise in electricity prices by providing focused and targeted assistance through U-save rebates for those who need help the most. We are also conducting programmes to raise awareness of electricity conservation and facilitate efforts by households and businesses to reduce their utility bills. We have opted not to subsidies electricity because this encourages over-consumption and is unsustainable in the long run, as the experience of other countries has shown.

11.Ms Lee Bee Wah has asked what has been done to ensure that the pricing by energy companies is reasonable. Since the liberalization of the electricity industry, the EMA has ensured that electricity tariffs are set efficiently through competition in the electricity generation market, and by regulating Singapore Power, on its tariff for the transmission and distribution of electricity, and also be regulating SP Services, which retails electricity to households. EMA has both in-house expertise and external consultants to advise on its regulation of the electricity industry.

12.The liberalization of the electricity industry has brought about greater competition and efficiency gains among the power generation companies and these have been passed on as real benefits to consumers. This is clear from the fact that although fuel oil prices have risen substantially by more than 300% since the onset of competition in 2001, electricity tariffs have risen by about 50%.

13.With the sale of the power generation companies by Temasek Holdings, we can expect market competition to continue to exert downward pressure on electricity prices without compromising the reliability and security of our energy supply. This is because our electricity market regime allows and encourages new generation plants to be built, which incentivizes generation companies to innovate and provide electricity at competitive rates. Senoko Power, for example, which was recently sold to a foreign consortium, has since decided to invest in repowering its oil-fired plants with the more efficient gas generators. The divestment of the power companies will benefit Singaporeans over the longer term as it will enhance competition, help raise our industry standards to international levels by attracting global energy players, and promote innovation in our energy industry.

14.Ms Lee Bee Wah has also asked how Singapore Power (SP) is regulated to ensure that its revenues are translated into benefits for households and businesses in Singapore. Singapore Power’s electricity transmission and distribution, and its retail business are regulated by the EMA to ensure that the electricity supply is reliable and affordable. In particular, the electricity grid is regulated such that Singapore Power is incentivized to enhance system efficiency, and the savings from such efficiency gains are passed on to consumers. In fact, Singapore Power has announced that from 1 October 2008, the charges for transporting electricity have been reduced by between 8% and 11%.

15.On Madam Ho Geok Choo’s suggestion for more clarity on the electricity pricing model, EMA will put out more information on its website to help Singaporeans understand how electricity is priced. EMA is also taking steps to further liberalize the electricity market for households. It has developed a prototype Electricity Vending System (EVS) which allows households to purchase electricity from competing providers with different price plans. Feedback from upcoming EVS trial runs will allow EMA to evaluate the system, establish its viability, and will eventually open the market for more retailers to compete to sell electricity directly to households.

[1] As of 17 Oct 08

Please click here for the chart

SMS S Iswaran's oral answer on electricity tariffs (Question No 815/NP 252, Question No 817 & 826/NP 253, Question No 831 & 833/NP 255)