Hyflux's problems due to its own commercial decisions: EMA

Singapore

THE Energy Market Authority (EMA) of Singapore said on Tuesday that Hyflux's present financial situation was the "result of its own commercial decisions".

The gas industry regulator was responding to a reader's letter "Time for a close look into why Hyflux tanked. This was no typical business failure", published in The Business Times on March 26.

In the letter, reader Leong Mun Wai suggested that vesting contracts and policy changes led to lower electricity prices which in turn was a key contributory factor to Hyflux's current situation.

In its letter to BT - signed by Dorcas Tan, director of Market Development and Surveillance Department - EMA said Mr Leong "had drawn the wrong conclusions".

It said: "Hyflux's present financial situation is a result of its own commercial decisions, with full knowledge of the gas supply situation and electricity generation market."

On the vesting contracts, EMA said that in 2009, it offered the liquefied natural gas (LNG) vesting scheme to generation companies (gencos) as a voluntary option to encourage the uptake of LNG. It said the gencos opted into the scheme "based on their own commercial considerations".

While EMA offered only up to 1.2 million tonnes per annum of LNG under vesting contracts, the gencos had bought more than twice as much LNG. They then made their commercial decisions to build additional generation capacity to consume the LNG that they had bought.

At that time, wholesale electricity prices were high but the subsequent increase in generation capacity led to a decline in wholesale electricity prices in recent years.

The agency added that Hyflux does not have any LNG vesting contracts and had decided to build its power plant after the LNG vesting contracts were awarded to other gencos. Thus, when Hyflux made its decision, it would also have been aware of other gencos' plans to increase their generation capacity as this was publicly available information published by EMA, it said.

EMA also said it was incorrect for Mr Leong to claim that Hyflux's financial problems were caused by "an unexpected domestic policy change".

It added there is also no justification for EMA to "render relief" to Hyflux using public resources, as Mr Leong had suggested.

The spokesman added: "EMA will continue to promote economic efficiency and competition, and ensure a level playing field for stakeholders in the electricity market."

In his letter, Mr Leong had suggested that Hyflux's management was perhaps "blinded by the potential huge profits if electricity prices had stayed at around S$200 per MWh, the price level in 2012 when the decision was made".

The company committed to a high-priced gas supply contract with no corresponding mechanism to protect the company against the decline of the electricity price, he added.

Mr Leong also said the collapse in electricity price was the "direct result of the vesting contracts given to the other gencos in return for their support to sign long-term take-or-pay gas supply contracts from the LNG terminal, itself another national project".

He said as a result of the vesting contracts, existing gencos expanded their capacity rapidly.

This resulted in a reserved margin of 80 per cent instead of the normal 30 per cent, precipitating the price collapse.

The letter added that EMA "did not render relief to Hyflux at an early stage" to buffer it from the unintended results of the vesting contracts.

On Monday, Minister for the Environment and Water Resources Masagos Zulkifli said the government cannot use taxpayer money to help retail investors recoup losses from the beleaguered water treatment firm.

Hyflux faces the prospect of selling its biggest asset, its Tuaspring desalination plant, to PUB for zero dollars if it fails to rectify defaults at the plant by April 30.

PUB will take over only the desalination plant, and not the power plant which sits on the same site.

The Hyflux make-or-break scheme meetings when the firm's restructuring plan will be put to a vote are set for April 5.

READ MORE: Letter from Energy Market Authority