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Power unshackled: Singapore's open electricity market

With cheaper electricity bills and a glut of choices, consumers are reaping the rewards of Singapore’s open electricity market. Yet most have not switched, and with too many players now in the game, consolidation is surely in the pipeline.

POWER UNSHACKLED: Too many players, too much choice? A look at Singapore's open electricity market.


IN the early years of Germany's liberalisation of the electricity market that empowered consumers not only to pick a provider but also the energy source - wind or gas versus the conventional coal and gas and so forth - Hollywood star Arnold Schwarzenegger appeared in a German company's commercial touting a mixed energy product. The ad starring the former governor of California and renowned environmentalist, called "Mix it", drew great attention back in 2001 amid the country's campaign to unbundle its power sector as part of a larger liberalisation agenda by the European Union.

Singapore's steady and measured campaign to open up its electricity market since 2001 - it was, in fact, one of the first in the world to deregulate the energy market but fell behind due to its cautious approach - just came full circle in May for the final batch of household consumers.

The city-state may not have a famous brawny, bodybuilding icon as ambassador but in its place, it has one unrivalled crowd-puller - a chance to save money on power bills (up to 30 per cent if you pick your retailer well).

That's a big magnet for the average Singapore consumer. Or, as Martin Lim, co-founder and chief executive of Singapore-based energy start-up Electrify, puts it: "This is a market where there are people lining up for free Hello Kitty dolls."


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It's baffling then that many households appear somewhat insouciant, opting to stay put with the default provider and incumbent SP Services and its regulated tariffs rather than to jump ship to one of the 13 retailers under the Open Electricity Market (OEM) since it was soft launched in Jurong just over a year ago and rolled out in phases across the nation. Blame that on complacency and "analysis paralysis".

"Electricity is something we have long taken for granted and suddenly, we have to think about it and read through stacks of documents and we don't want to have to do it. It requires a massive education effort," says Mr Lim.

Lingam, 57, a middle-class Singaporean and a private-condo dweller, considers himself rather thrifty - he takes the bus rather than his car to save on petrol and shops at Giant or NTUC rather than Cold Storage.

He also often "tapau-s" dinner at the workplace canteen, which sells food at subsidised prices, to have it home later with family.

Yet, he is not jumping for joy - not yet, at least - at the prospects offered up by a freer market - lower power bills and a glut of choices.

"I will give it a couple of months more and see. I'm sticking to SP for now because I'm too lazy to switch," he shares, and without pausing, quickly adds: "I don't want to switch to a company that goes bust soon after."

That's not an irrational fear. In January this year, one of the pioneers in Singapore's energy market, Red Dot Power - an independent retailer - bowed out amid fierce competition in the retail electricity sector, citing "financial challenges".

At the time of its much-publicised exit, Red Dot Power which had also participated in the Jurong soft launch, had amassed "many thousands" of accounts among businesses as well as households, according to Vijay Sirse, chairman and chief executive of vTrium Energy, parent company of Red Dot Power.

Consumers worry that other retailers may suffer the same fate and their lights could go out. "That's very pessimistic," says Mr Vijay, adding that the processes are "clearly established" to avoid supply disruption. "It's just a matter of paper work," he says, referring to the switch from the existing retailer back to SP.

Seeing red

Red Dot Power considers itself one of the first independent retailers or IRs to secure a retail licence from industry regulator Energy Market Authority (EMA) in 2015. (IRs are retailers that do not generate their own electricity versus "gentailers" that generate as well as sell power. Under the OEM, there are seven IRs.)

The firm began by retailing electricity to big businesses, offering to lop off 22 per cent from their energy bills. "I can say with reasonable happiness that we were the ones to start disruption in the market which today has become a norm... retailers are offering good discounts, not just for the C&I (commercial and industrial) consumers but also residentials," says Mr Vijay.

For a while, the strategy bore fruit - Red Dot led the pack of IRs and snagged nearly 1.6 per cent of market share. Last year, it raked in S$100 million in sales. But, none of that was a guarantee for success.

Its move not to go all guns blazing until its software solutions were fully revamped caused it to lose time and momentum as rivals jockeyed for market share. "We wanted to test every part of the architecture and so, we didn't go too aggressively on pricing," he adds.

Also, "significant volatility" in the wholesale electricity market where retailers buy their power and limited risk management avenues - there is only the Singapore Exchange's electricity futures for retailers to hedge contracts - prompted a rethink on the firm's business model.

The company eventually decided to drop off the grid as a retailer and bank instead on the business of technology solutions - battery storage for grid applications, electric vehicle charging stations and fuel cells.

"I have no regrets. The Singapore market is too small for too many players with some having entrenched market power. We were one of the first to get a licence and helped the entire process. That's our contribution... nobody can take that away from us," notes Mr Vijay.

Electrifying competition

"Now, it's over-crowded," he says.

That may be stating the obvious, notwithstanding the merits of opening up the market and igniting competition.

In the big business space that consumes 2,000 kWh monthly and up, Singapore has 22 electricity retailers. This category also makes up a bulk or 80 per cent of the energy consumption in the city-state. Under the OEM that covers all households as well as small businesses consuming less than 2,000 kwh monthly, there are 13 retailers - all 13 also sell to the big businesses.

In 2017 alone, based on data provided by the Energy Market Company (EMC), six new retailers joined the National Electricity Market of Singapore (NEMS), ostensibly to ready up for retail action under the OEM which covers consumers that accounted for some 20 per cent of Singapore's energy consumption last year.

"That's insane. So many new guys entered the market in the past one to two years and thought they can take part in OEM and make a lot of money. They are fighting over just 15 (or so) per cent of the market. That doesn't make good business sense," says Electrify's Mr Lim.

Some of them have discovered that the hard way. In the business space, five retailers have exited in the past year. None of them are part of the 13 under the OEM which had to jump additional regulatory hoops to participate in the residential consumer segment.

"It's not rocket science. For retailers to thrive, there must be an ability to create a margin between purchasing energy and re-selling it. Period," says Jochen Krauss, partner at consulting firm Simon Kucher & Partners.

"Cost is a critical make-or-break factor. That some have left is a sign that they were unable to cope with that," Mr Krauss adds.

One way to keep a lid on costs is to digitise highly repetitive processes and to create digital workflows without a manual interface. This, he says, can save costs by up to 5 to 10 per cent.

Another is to crank up omnichannel sales approach to enable a retailer to shift customers towards new low-cost channels.

According to Mr Krauss, there are now more than 1,000 energy providers in Germany and the average household can choose among 98 providers, many of whom are online-only players.

So, what's the magic number for a market the size of Singapore?

"This market is not really for more than 10 players," Mr Vijay reckons.

Andrew Koscharsky, chief commercial officer of green energy retailer iSwitch, concurs: "No room for more than 10 retailers doesn't necessarily mean financial ruin. Just consolidation. (It) will be orderly".

There appears to be consensus that consolidation beckons.

"There will be mergers... if a retailer has twice as many customers through a merger, then it will be better able to generate margins. Ultimately, the market will end up with a limited number of players with unique characteristics... price may not be the only determinant but also those who are super customer-friendly or offer sustainable energy or a good app and so forth (will survive)," points out Mr Krauss.

Just this week, iSwitch inked a pact to take over another retailer ES Power's contracts worth S$15 million involving business and residential customers. With that, there are now 12 retailers under OEM.

Flipping the switch

According to EMA, in a February update, the switch rates in the first and second geographical zones in the nationwide launch stood at 25 per cent and 18 per cent respectively as at end-January. It has yet to provide updates on the progress in the other two zones.

The switch rates thus far are higher than the single-digit first-year switch rates seen in other countries such as Japan, the United Kingdom, Australia and New Zealand.

Not everyone is impressed.

"In such a dense, aggressive environment where retailers are offering up to a 30 per cent discount, only 40 per cent have been converted. That to me is a 60 per cent failure. The reasons to switch are compelling but why are the rates so low?" one market watcher remarks, referring to the 40 per cent switch rates that the soft launch in Jurong had attracted as at end-January.

"While we are tempted to say it's a huge success, I'm trying to ask why aren't we doing better. Could we be doing more?" he adds.

Others deem the switch rates as encouraging. "The conversion rates are reasonably good. It will take some time... for generations, electricity was sold by only one entity. OEM is low volume, high consumer base. So, if the conversion rates are between 18-20 per cent, that's quite significant," says Mr Vijay.

Lights dim on SP

Singapore's liberalisation effort has seen SP's market share slip below 30 per cent for the first time in 2017. Its role, however, has far from diminished - SP operates the national grid to ensure supply and is the only one licensed to provide market support services such as facilitating customer transfers between retailers and meter reading.

Also, it still holds the biggest market share. "An incumbent in any industry has a massive advantage - of history, experience and brand. One will never be able to replicate this as it's a function of time and the security that consumers place on it," explains Mr Krauss.

Possibly for similar reasons, some big and familiar names in the sector have an upper hand.

Jeff, a Singaporean executive, played it safe and picked Keppel Electric as a retailer. Evidently, that's a wider trend among consumers.

In EMC's 2018 report, SP aside, Keppel is in top spot, having snagged a nearly 14 per cent market share with Tuas Power Supply following closely behind.

"I also didn't want to go to a roadshow just for grocery vouchers, man," Jeff adds.

According to Keppel Electric's general manager Janice Bong, the retailer has won over 100,000 customers under the OEM as of April. "We observe that branding and reliability are major factors when households choose their electricity retailer. Another factor influencing households to switch is promotional tie-ups with partners," she says.

Fixed price plans are also trending.

Alexis Tan, managing director of Simply Hamper Singapore, picked YTL's Geneco's 24-month fixed price plan under OEM so he could focus on his business and not worry about surges in electricity bills.

Smaller players have also steadily gained ground. iSwitch's Mr Koscharsky said the company, "one of the nimble players taking on the larger incumbents", has pulled in 70,000 sign-ups so far. That's out of the 1.3 million household accounts and 67,000 small business accounts that came up for grabs with the open market - or roughly 5 per cent market share.

He also points out that while "face-to-face" is still the dominant method of winning over accounts, digital marketing has risen as consumers increasingly expect both offline and online approaches.

Retailer fatigue may be setting in.

Mr Koscharsky points out that of late, a clear gap has emerged between the top four retailers and the rest of the pack: "We have seen a reduction in the number of serious competitors. The heavy online and offline (marketing) presence from OEM retailers has waned significantly since March. If a retailer has not reached over 60,000 sign-ups by now, it will be very hard to reach the scale required to justify the investment in retailing."

As for consumers, can low electricity tariffs continue to sizzle over the long term?

Mr Krauss cites Germany, one of the leaders in energy deregulation since the sector was fully liberalised in 1998, where there is presently a 23 per cent gap between the most expensive and cheapest electricity provider.

He adds: "Any provider can create a business case with lower prices if they are able to contain their cost. So yes, it is possible (that rates can stay low)."

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