Turbulent Times in Electricity Industry — What you should know as consumer
Disclaimer: All information / data presented here are publicity available data and of my opinion to the best of my understanding. This does not represent the comment of any companies I have worked for, or with.
Recent international political events seemed to have affected the price of commodity market, including the fuel oil prices. As ~95% of electricity in Singapore is generated using natural gas, the instability of oil prices will naturally affect the future cost of electricity.
Locally, the sudden fluctuations of electricity consumption also have destabilized the wholesale electricity prices as highlighted by business times (https://www.businesstimes.com.sg/energy-commodities/wholesale-electricity-price-spikes-unsettle-independent-retailers). This point will be further illustrated in later part of this article.
It seems to be a trend that the consumer’s energy cost will gradually be affected. The real question is — what is the extent of the impact to the consumers?
Before we look into details, let’s first look into the data sources and and key assumptions.
Data Sources
(1) Wholesale electricity prices
Wholesale electricity prices are obtained from www.emcsg.com. Here we can find the average daily electricity prices since 1 Jan 2018 to end of 27 May 2018. The average cost is S$ 100.926 / MWh
The following chart shows the half-hourly settlement prices since 1 Jan 2018
As the data points were off the chart, the USEP prices of May 2018 is reproduced below. More insights will be provided on this surge in prices.
(2) Load Profiles
Open data sources are used to estimate the load profiles. The source of the data points is referenced from here. The key attributes I’m using are the weekday and weekend load curves. These are the normalized [consumption/peak] load profiles:
(i) Apartment (normalized value x 2.060 kWh)
(ii) Office (normalized value x 40.796 kWh)
(iii) Shopping Mall (normalized value x 590.619 kWh)
(iv) Warehouse (normalized value x 792.767 kWh)
(v) Hospital (normalized value x 2124.575 kWh)
I’m using different load profiles as the impact of electricity prices could have different impacts on customer type. For example, if the price surges occurs in weekdays noon, the residential users would not be severely impacted. If the price surges occurs in weekends noon, the office users would not be severely impacted. These load profiles help to model the impacts on different customer type relative to each other.
I have made some assumptions on these load shapes. If you’re interested to know what I have modified, please drop me an email.
Why the price spikes?
May 5 marks the highest price spike in 2018. The spike in USEP prices in May is supposedly due to the sudden increase in energy demand on Saturday.
To understand further, we filter the times where the cost of energy is greater than S$ 120 / MWh and count its frequencies. Note that there is none in January.
Of course, we would be interested to know which day the impact goes since 1 Jan.
Filtering the values from 1st April to 27 May.
It seems like the price volatility does not follow a fixed pattern throughout the week. But weekends tend to have a higher probability of encountering surge prices.
We first look at the energy demand on Saturday on weekly basis since 1st Jan. There seem to have a gradual upward trend in energy consumption on Saturday. The lowest energy consumption occurs on 17 Feb, which essentially is Chinese New Year. We can presume that it is attributed to the 500k Malaysians working in Singapore whom have left Singapore, and the Singaporean travelling overseas.
The highest USEP price (~S$ 900/MWh) in 2018 occurs on 5 May. However, it is not the highest demand ever encountered in 2018. The highest demand occurs on 12 May. The second highest demand occurs on 26 May.
My analysis of the events go like this: on the 14th April, the energy consumption peaked but insufficient to trigger an alarm on the energy cost. No significant action has been taken. The next peak occurred on 5th May with the sudden increase of ~100 MW in demand. This has escalated the energy price to beyond S$ 900 / MWh. Understanding the impact, actions are taken to ensure that the energy prices are within reasonable control. on 12th May, energy demand rose up to historical high (since 2018). As measures have been taken place, the energy price only peaked to ~S$ 400/MWh. In the next two Saturdays, additional planning has maintained the peak at S$400/MWh but lower overall.
We should be impressed by how fast the market corrected itself after a mere 100 MW demand difference on 5 May.
Consumer Impacts
To understand the impacts of wholesale electricity volatility to consumers, we first need to understand how they are impacted by the wholesale electricity market.
Electricity is “distributed” through electricity retailers. Consumers purchase electricity price plans from electricity retailers, which carries differences in financial risks. Generally, there are 4 kinds of electricity price plans in Singapore:
(1) Fixed Plan
If you have signed a fixed plan by now, congratulations. The above mentioned volatility will not impact your cost of energy. The only exception being your choice of electricity retailer cease business operation, where you will be required to revert your electricity retailer to Singapore Power, or choose a new electricity retailer within a short period of time.
(2) Discount Off Tariff (DOT)
The risks is marginally affected but not completely covered. DOT is revised on quarterly basis depending on Singapore Power’s tariff. It is a government regulated tariff. The impact of oil prices seems have a delayed effect on wholesale electricity prices. It will be affected by wholesale electricity prices as Singapore Power purchases electricity from the wholesale electricity market.
(3) Fuel-Indexed Plan
Consumers on this plan are exposed to HSFO volatility. The translation of HSFO prices to the electricity contract is highly subjected to the energy contract between consumer and electricity retailer.
The consumers on this plans are not exposed to the volatility risks of the wholesale electricity market. Their energy consumption would be hedged against oil prices at the confirmation of the contract.
(4) Pool Prices
This is where the fun begins. When a consumer purchases electricity directly from the wholesale electricity market (we call it “purchase from the pool”), they are exposing themselves to the pool prices. In the event of sudden spikes in pool prices, the financial risks will be borne by consumers.
The following table summarizes the risk attributes.
We will try to understand the financial impact of different customer segment when exposed to pool prices.
The Math
(a) Final Energy Bill
Using their half hourly energy data, we calculate the cost of energy by the following formula:
We are using the consumer’s half hourly energy consumption and half hourly electricity price to calculate the amount payable by the consumer. Therefore, in the event of price spikes during the half-hour period, the consumer will have to pay more for the same amount of energy consumed.
(b) Modelling wholesale electricity prices using actual data
The wholesale electricity prices are modeled with two scenarios. The first scenario is the ideal scenario where there is no sudden spikes in spot prices. To model this, the actual wholesale electricity price is modified to minimize spikes in electricity prices. To understand better on the impact of volatility from last year, please read my previous analysis.
The second scenario is the true electricity prices customer are paying due to the recent spikes using unchanged wholesale electricity price. The chart below shows the USEP values used for both scenarios. Adjusted price is the prices for Scenario 1, actual USEP data is scenario 2.
The adjusted USEP values are calculated as below:
For any data point with 20% change in USEP prices in one period, the actual price used is the 3-day average USEP price.
Impact on Electricity Bill
First, we establish a “baseline” for estimating the case where businesses are not impacted the volatility of USEP prices. The adjusted USEP values are used. Each data point in the chart below shows daily energy cost.
Using the actual USEP price, the half-hourly energy cost demonstrated an immediate impact onto the daily energy cost.
For better visualization, each locations are compared individually.
In this simulation exercise, the daily energy consumption for each consumer category remains identical, i.e. the energy consumption on 1 Jan and 1 May are identical.
It is noticeable that the net energy bill is gradually increasing. Therefore, the consumers on pool prices should expect the energy bill to be gradually higher and increased volatility.
To understand the net financial impacts to the consumer. The table below summarizes the financial impacts as a result of USEP volatility.
Impact on Retailer
On the flip side of the table, the consumer would be in better position to ride through the volatility if he has signed up for a fixed rate contract. Therefore, we would also look at the financial impacts to the retailer in this scenario.
On a hypothetical scenario, let’s say that the retailer has contracted with the hospital as a customer to supply electricity since last year at S$ 90 / MWh. The retailer would be making a healthy profit of ~S$ 10 / MWh from the energy cost when the pool price is S$ 80 /MWh. Due to the increase of USEP price and the pool volatility, the cost of purchasing electricity from the pool is higher.
I’m assuming that 100% of electricity is purchased from pool. The financial impacts can be significant.
In this scenario, one hospital customer could represent S$ 141k of cumulative loss to the retailer (1 Jan to 27 May).
End Note
The volatility in the electricity market should have everyone to rethink about the hedging strategies and pricing strategies. This is just a simple analysis to understand the financial impacts of the volatility in wholesale electricity market.
There are more complex mechanisms that can directly or indirectly contribute to the price of electricity in wholesale electricity market. From what I can see, actions are taken to minimize price surges even if the same event is to occur again.
If you have any comment / questions, you can reach out to me at hanwen.low@gmail.com. If you want to be notified of the next update, you may drop me an email as well.
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