The Success of Full Retail Competition – Revisited

On 15 October 2019, the Singaporean Energy Market Authority (EMA) reported on The Success of Full Retail Competition for electricity. About 40% of residential consumers have switched to a new electricity retailer as of the end of August 2019. Those who switched enjoyed savings of 20% to 30% compared to the regulated tariff. This is a good result as the early switching rate is substantial higher than seen in other deregulation processes in markets like the United Kingdom, New Zealand and Australia.

Switching implies that customers buy electricity from new retailers at new prices which depend on the wholesale price of electricity. The incumbent provider Singapore Power is only able to sell electricity at the regulated tariff. And, as this tariff is significantly higher than the wholesale price, customers who switch immediately enjoy the benefits of better prices. It is therefore no surprise that the introduction of the open electricity market and full retail competition has been an overwhelming success.

 

Figure: Regulated Tariff Energy Costs vs WEP from 2018

 

The Regulated Tariff

It is a delight to every residential consumer who switches to see their monthly bill decreased.  But, one should ask why the regulated tariff is so much higher that the wholesale price.  And, whether this has always been the situation.  The price differential is the result of the implementation of the LNG Vesting Scheme which is part of the Vesting Contracts.

The Vesting Contracts balance payments between generation companies (Gencos) and consumers depending on the profitability of power generation.  When Gencos make too much money, they pay consumers compensation. And visa versa, when the Gencos are loss-making, the consumers pay some extra.  These payments are included in the regulated tariff. And as Gencos have been struggling to make money since 2013, the regulated tariff has been significantly above the wholesale price of electricity.

The payments made as a result of the Vesting Contracts are not insignificant.  We reported previously that Vesting Contracts made Singapore Consumers pay 2.7 Billion SGD between 2013 and 2018.  These amounts are paid (almost entirely) through the regulated tariff.  In practise it means that residential customers carried most of this burden as they were left on this regulated tariff.

The introduction of the open electricity markets and full retail competition gives residential consumers the opportunity to switch away from the regulated tariff.  No longer do they have to pay so much extra to compensate Gencos for their inability to profitably generate electricity.

LNG Vesting Scheme

But, why are the Gencos not able to operate profitably? When the EMA introduced the LNG Vesting Scheme to underpin investments in a Singapore LNG terminal, it selectively supported new generation capacity fuelled by LNG only.  This resulted in additional 3,000 MW newly built production capacity.  And, as the LNG vesting Scheme protects the profitability of this newly build capacity, it is now unfairly competing with the capacity of the incumbent pipeline gas Gencos.

Consequently, the Power Generation Sector is now Crushed by Massive Overcapacity.  The wholesale prices of electricity are too low for Gencos to generate profitably.  Although this applies to both the incumbent capacity as well as the newly built LNG fuelled capacity, the latter is compensated through the LNG Vesting Scheme and the regulated tariff.

Low Prices here to Stay

We are often asked whether we believe that low prices are here to stay.  Although low prices are attractive to consumers, having a non-profitable power generation sector is not sustainable.  The insolvency of Hyflux/Tuaspring was a direct result of its underperforming power plant.  Resolving generation over-capacity and reducing the Singapore’s Power Supply Cushion is a difficult thing to do.  Therefore we believe that low prices are here to stay for some time to come.  

 

About the Author

Martin J. van der Lugt
Martin works as an independent consultant for the energy industry. He gained wide ranged experience in the gas and power markets in Northwest Europe working for European and American energy companies and as an independent consultant. He has a particular interest in the developments of the Southeast Asian markets and is open to discus opportunities.

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