The upward adjustment of electricity tariff in Singapore has sparked a slight debate within the community in Singapore. During the challenging COVID-19 times, it is understandable price hike is a sensitive topic. Here I try to use my knowledge, to the best of my ability to explain the facts using data.
We see debates arguing that the price hike is entirely caused by power generators, and that Singapore Power does not profit directly from the price hike. How much of it is true? We’ll look into it using facts and data.
I do not have all the facts. If you have any questions or want to correct me for any mistakes I made in this article, please feel free to reach out to me at firstname.lastname@example.org.
Components of Electricity Tariffs
The first thing to consider is the components that make up of electricity tariff. Singapore Power’s website provided a simple breakdown of the electricity prices.
Market Admin & PSO Fee — this is the administrative fee paid to support the services for getting you the best deal (quite literally). They are responsible for purchasing the electricity from the wholesale electricity market at lowest price possible. (Fun fact, if I recall correctly, they have 50,000 equations to determine the lowest cost of energy)
MSS Fee — This is the fee paid to Singapore Power Services for meter reading. The meter data will be sent to your electricity retailer for billing purposes.
Network Costs — This is the fee paid to Singapore PowerGrid to maintain the electrical network in Singapore.
Energy Costs — This is the costs of electricity and is subjected to change due to changing oil prices (to be precise, HSFO180). Why oil but not natural gas, since Singapore is generated 95% of energy from natural gas? Because the natural gas prices has direct correlation with HSFO180.
Note that SP PowerGrid, SP Services are same but not the same. They are of SP Group but they operating independently.
What is the market condition?
As of the time of writing this article (25 October 2020), the price of USEP hovers around S$ 60–90 /MWh, or 6–9 cent/kWh. USEP is the price you pay to the power generators, this is the primary source of revenue for the power generators.
FACT 1 — Electricity prices correlates with oil prices
If you have read my previous article (Evaluating Singapore Electricity Market Risks), you would have noticed the following chart
Over a one year period, the price of oil correlates with price of wholesale electricity with a 3 month lag. Note that this is the price of wholesale electricity (USEP), not retail electricity. The correlation between these two are strong.
How to convert the price from wholesale to retail? Simple, think of it as hedging strategy. The retailers would want to protect itself from sudden fluctuation that kills their business (it had happened before in Singapore), so they add a margin of error. In short, they just add a margin to cover the risk of fluctuation.
How it works is this, the generators buys in natural gas, and generate electricity. They sell this electricity through Market Administrator (Energy Market Company), to the retailers (which can be internal) or Singapore Power.
It’s also good to note that Singapore Power nor EMA have almost zero control over this pricing? Why almost zero but not zero? That’s because of vesting contract, but that’s a conversation for another day. EMA sets the rules and framework for the power generators to bid into the system. The price is driven by supply and demand.
It’s also good to know that the power generators may sign long term natural gas contracts with natural gas suppliers. There is also a take-or-pay contact in place, that essential binds the power generators from under-consuming natural gas. Therefore, the price rightfully should not fluctuate that much. But remember the conversation about why the petrol price went up faster than it drops? Maybe the same mechanism is in place, I don’t have an answer to this.
FACT 2 — Electricity prices is not going up all the time
This is a human psychological problem. When the price goes down, no one bats an eye. When the price goes up, everyone loses their mind. Here is a summary of historical electricity prices over the past 7 years.
Let’s compare it against the oil prices for the past 7 years.
From reading the charts, it’s clear that the electricity price went down slower than it goes back up, but then that’s business. If you run a power generator business, you would have done the same thing, wouldn’t you?
Again, this has nothing to do with Singapore Power, because Singapore Power does not really own power generation assets. Why does not really? Because they have small scale solar panels installed (unless my understanding is wrong, feel free to correct me).
FACT 3 — Electricity retailer always offer a better deal
As of 25 Oct 2020, the price of retail electricity tariff (not regulated electricity tariff) is around high 16c/kWh. Not advertising for these companies though. (We’re open to write articles for a fee, feel free to reach out to me).
You can say that this is the “true” cost of electricity because these are businesses where they have to remain profitable, non-government related, while remaining competitive. Competitive = cheaper price. Monopoly = premium price.
The extra cost on the regulated tariff is caused by other factors, like vesting contract. I’m not too sure if vesting contract is the major contributing factor, or sole contributing factor.
FACT 4 — Power generators are making more revenue, but so is their long term costs
No sane power generator will purchase natural gas when the price of oil is low, just to use it to generate electricity immediately. When the price of oil is low, they purchase more natural gas, but bear in mind, that they might have to consider the possibility of lower future demand. The inventory risk is high on them.
To put things into perspective of masks. Just because the price of masks are high in the market while you get your masks supply cheap, it doesn’t mean that you should not sell it low? Just because the mask supplier can provide you with cheaper masks, doesn’t mean you have to buy lifetime’s supply of masks right? Same logic applies to power generators. This is what we call exercising market power. EMA created vesting contract scheme to prevent this from happening.
Remember, it’s just business.
FACT 5 — Carbon tax has been implemented
The carbon tax is capped at S$5/tonne CO2, which translates to 0.20425 cent/kWh (Singapore’s Grid Emission Factor is 0.4085 kgCO2/kWh, it’s really low). This is a tax on generation, so we can expect the cost to be priced into USEP. The plan for Singapore is to double/triple the tax by 2030 according to NEA.
As far as I know, there have been many suggestions on how the tax should be used. There isn’t seem to be an organization oversight to manage the carbon tax fund. Rightfully, the tax should be utilized to reduce carbon emission in Singapore. NEA has been doing a great job on that, I’m not too sure if this fund is paid directly to them or to another government organization.
On 27 October 2020, EMA has announced that S$ 23 million in grants has been awarded to three power generation companies for energy efficiency projects. Is this a fair amount? Let’s calculate.
Carbon Tax started in 2019 at S$5/tonne CO2. Singapore’s power consumption is approximately 51 TWh in 2019, with 95% energy coming from natural gas. Total carbon tax collected is
I’m sure government is thinking about reinvesting the tax into renewable startup like my company, right? right????
Now, shall we get to the juicy part?
UNKNOWN 1 — What constitutes the cost of energy?
The cost of energy for Q4 2020 is 15.53
If you compare the last 7 days of wholesale electricity price, which is the price where retailer buys electricity from, the price has been ranging around 6–9c/kWh. Factor in ‘just in case of bad things happen and the price went surging up’ prices, we can assume an internal SP Group of 11c/kWh pricing when priced to consumer.
15.53c/kWh (Q4 2020 tariff) minus 11c/kWh (safety USEP price) is 4.53c/kWh. We know that some of this profit goes back to the power generators as part of vesting contract scheme, this is a scheme by EMA to curb the market power of power generators, which is the result of low electricity cost today.
Now the question is, who set the price? Notice that SP used the term “regulated tariff”? The short answer is that it follows a certain calculation according to market condition. This is why the regulated tariff follows closely with market condition determined by global forces.
I’m pretty sure there is a document on EMA website that describes the formula used to calculate the cost of energy. These are public information. I just don’t have the answer to this question.
UNKNOWN 2 — Does SP Benefit from Tariff increase directly?
We don’t know. I doubt SP benefits from tariff directly. Tariff is not set by Singapore Power, electricity is never generated from Singapore Power.
According to Singapore Energy Statics 2020, SP’s market share in retail electricity is 20.4%. While it is good to note that not all are transacting on regulated tariff (some might be transacting on wholesale electricity prices), a good proportion of residents are still purchasing electricity at regulated tariff.
The calculation for electricity tariff should remain the same. Let’s say part of the 4.53c/kWh is the profit by SP, their profit should remain the same regardless of electricity changes. To illustrate this:
I believe that SP tariff should work out something like this, as a fixed hedging costs, so basically regardless of energy price fluctuation, they would still be protected. I don’t have knowledge on this, I might be wrong.
UNKNOWN 3 — Are the power generators making more money?
Hard to say, it really depends on their hedging strategy. The price of electricity is largely driven by oil prices. Oil prices and market demand determine the wholesale electricity prices. On a bad day, you can have this.
You’re seeing it right, zero energy costs. Literally, the power generators are selling electricity for free. this happens on last week of June 2020. I don’t recall anyone talking about it, nor the media reporting about it.
Imagine this, you are a power generator and you sign on a 6 month natural gas supply since February while the prices of gas was high, and you’re supplying electricity at S$ 0 /MWh, how bad are you bleeding?
A short Google search will give you enough results to determine whether the power generators are profit making or loss making.
UNKNOWN 4 — How strongly is the price of electricity correlating with average USEP price?
I have the historical data for USEP in the past 4 years, but its’ quite a hassle for me to pull the data from my server. Drop me a message on LinkedIn or email if you think this is interesting. I’ll probably publish another article if there are enough interests on this.
In short, the correlation is strong. What I do not know, is the strength of the correlation.
How about inflation, does that impact SP?
This is where it gets interesting. You must first understand what constitutes “Network Costs”. To understand what is network costs, you will need to first understand the bills paid by commercial customers. Below is a bill simulation tool that shows you what rates will you be paying as high tension customer. The rates should be outdated by now (it was last updated around Q1 2019, I think), but the values shouldn’t deviate too far from this. Transmission charges are SP PowerGrid related charges.
From the past 7 years historical prices, I have filtered out all the SP PowerGrid related costs (contracted capacity charge, uncontracted capacity charge, reactive power charges, summarize into the follow chart.
Putting the price into perspective, you’re talking about inflation of 2–2.5% annually for the network costs. As long as your increment hit that amount, it should be alright. Personally, I think this number is alright, although this is still significantly higher than the Singapore’s national inflation rate.
To put things into perspective, this amount to approximately S$1.50 monthly addition for a S$200 dollar monthly electricity bill. That’s cheaper than my teh-si-kosong peng. But accounting for inflation over the past 7 years, that’s probably more than a cup of bbt…
I do not have the historical low voltage transmission charges. Can’t comment on that.
For all we know, SP Group has a pretty guaranteed YoY 2–2.25 revenue growth. This revenue growth should also tie in with the growth of electricity consumption. From what I know, this is not the their only source of revenue. Take for example, if you want to install a high voltage transmission line to your data center, you will need to apply for high voltage electrical connection. The fee schedule can be found on SP’s website.
Are you logging in into your trading account yet? If not, I have better news for you.
What has been the impacts on SP Group?
Let’s put the numbers down in perspectives.
According to Singapore Energy Statistics 2020, SP Services lost 9.7% of retail electricity market share over 3 years. Singapore’s energy consumption in 2019 is 51.7 TWh.
To put the finances into perspectives, I have extracted SP Group financial report in the past 3 years.
Too confusing? Let me summarize for you. The follow chart puts all the values about “Sale of electricity” into perspective.
It might be worth noting that despite declining market share in SP Services, the revenue for “Sale of electricity” remains high. I have included the average cost of electricity for reference (adjusted according to SP Group’s financial year, average across the 4 quarters). Note that the revenue grew despite of reduction of market share. It seems like the price of regulated electricity helped sustain the revenue growth.
Meanwhile, the revenue for network costs has grown drastically. Rightfully, the revenue of network costs is priced at cost per kWh. Therefore, the growth rate of network costs should be parallel to growth rate in electricity consumption. From the data, the growth rate of revenue definitely outweigh the growth rate of electricity consumption. SP Group might have other revenue within the network costs segment that drives the growth.
The net profit after tax is mouth-watering.
Here is my analysis
Let’s recap what happened in 2018 to 2020.
In 2018, SP Services lost 3.1% retail market share, but the electricity tariff went up in 2018. This might have resulted in an increase of YoY revenue by 1.89%.
In 2019, SP Services lost further 4.2% retail market share, but the electricity tariff went up in 2019. This might have resulted in an increase of YoY revenue by 5.68%.
Do be mindful that correlation is not causation. The question is, how can SP Group has a YoY revenue growth from “Sale of electricity” with declining market share?
Meanwhile, the revenue for “Use of System Charges and Transportation of Gas” has increased from S$ 1034 million in 2017 to S$ 1493.5 million in 2020, an increase of 44% by annual revenue in just 4 years. According to the report, revenue from “Use of System Charges” is 1234.1 million while “Transportation of Gas” is 259.4 million in 2020. It can be argued that the increased in revenue is caused by increase in energy demand, but I’m pretty sure the electricity demand of Singapore does not grow 44% in 4 years.
In 2020, SP Services suffered a YoY revenue reduction of 17.43%. Also it’s interesting to note that the financial year ended on 31 March 2020, the moment before the price of oil prices plunged, and also the year with the largest drop in electricity retail market share. Therefore, we can assume that the reduction in revenue is primarily contributed by the loss of market share (4.2%) with negligible impact from electricity tariff changes. If anyone justifies the reduction of revenue using covid-19 and the plunge of oil prices as the excuses, you know what to tell them.
Judging from the number, I believe that SP Services might potentially profit from increase in electricity tariff indirectly. Again, these are complicated calculations and I do not have the full facts to everything.
From what I have observed over the past years, the price of electricity very strongly correlates with the change of oil prices. While the impact of oil prices to electricity is strong, it is also worth noting that there are many other factors that impact the price of electricity.
As for whether SP Group directly benefits from the price of electricity increase, we do not know for sure. The number surely would speak for itself. But I do know for sure that SP Group is not responsible for the change in electricity tariff, and neither is the power generation company. A bulk of the profit goes to the power generation company, but that does not mean that the power generation company is in control of the price. There is some math to explain it.
It would be interesting to see the impact of USEP on regulated tariff, and see the relationship of the historical revenue by the power generation company, USEP, and regulated tariff. From there we can calculate the correlation strength between USEP and regulated tariff. I’ll probably analyze this data some other time in the future, but I’m a bit too busy at the moment.
Till next time!