Short circuit in electricity open market: Impact on consumers, retailers and the model itself

THE shakeout in Singapore's electricity market has come fast and furious. Some sector consolidation was expected from the get-go, with 13 electricity retailers jostling for 1.4 million households to begin. But few of these retailers foresaw the current exceptional circumstances. Perhaps they should have.

One early warning sign was the closure of Red Dot Power. The independent retailer (IR) was the first casualty of the fierce competition in the early days of the city state's sector liberalisation under the Open Electricity Market (OEM). It bowed out in January 2019 and later cited "significant volatility" in the wholesale electricity market, where retailers buy power, as well as limited risk management and hedging avenues.

Those same complaints are now echoing across the electricity market.

Unusual spikes in spot electricity prices have dried up hedging options on the local bourse's futures market, and curbed the ability to offset volatility-led losses. As a result, two electricity retailers announced exits from Singapore's residential segment last week and one more on Tuesday. The fallout appears just as deep among retailers in the business segment.

The chaos in the domestic electricity market began three months ago and stemmed from systemic gaps in the sector. These have been compounded by a global power crunch that has pushed gas prices up.

Singapore's electricity prices are now likely to stay elevated, as 95 per cent of the city state's power is generated from imported natural gas.

Unsettling signs

That the first one set to leave is iSwitch Energy should ring warning bells.

The all-green energy supplier is the city state's largest IR. It holds 90,000 household accounts and was ranked the fourth-largest OEM player.

The three largest are Keppel Electric, Geneco by Seraya Energy and Tuas Power - all big and entrenched players known as gentailers (generator-retailers).

Although iSwitch did not have their heft, it was not without some solid backing of its own. The company has been participating in Singapore's electricity market for six years. It is also part of the RCMA Group, a global commodities group that also has within its stable a former market-maker for Singapore's electricity futures market (EFM).

The exit of iSwitch, which had both economies of scale and know-how in electricity trading, is a big red flag for the sector.

Hurting all players

Meanwhile, it isn't clear how the gentailers are faring in the current climate. Gencos both provide capacity and sell electricity. And as they were previously weighed down by "depressed" wholesale prices, the current sharp price upticks should benefit them.

Gentailers also wield more market power and have more insights on potential outages or gas curtailments than their non-generation backed counterparts. In fact, the industry shakeup could benefit them as they win over more customers who have been left in limbo by exiting retailers.

Nevertheless, there are pain points on the generation side. Upstream disruptions have led to a drop in piped natural gas, so gencos have resorted more and more to spot-priced liquefied natural gas (LNG).

The latter is significantly more expensive given the global energy crunch, said the Energy Market Authority in a statement on Tuesday.

The cost burden

Electricity prices are set to rise for end-users. Market players estimate it could cost business and residential consumers about S$1.5 billion this year.

Over 100,000 households in Singapore may have to cough up more for their power bills, with three retailers having bowed out so far and one more no longer renewing contracts.

SP Group alluded to this in a recent update of frequently asked questions on its website: "We are unable to take over the current contract terms of the exiting retailers."

The price gap between retailers' fixed-price plans - a favourite option among households under the OEM - and SP's regulated tariff rate has narrowed significantly in recent months owing to the USEP (Uniform Singapore Energy Price) shooting through the roof.

SP, which reviews its tariffs quarterly, said last month that rates for the October-to-December quarter for households will be raised from 23.38 to 24.11 cents per kWh (kilowatt-hour); including GST, the rate is 25.80 cents per kWh.

A quick glimpse of a price comparison website indicates that the difference between the latest fixed-price plans offered by retailers over 12 or 24 months versus SP is marginal, at a meagre 3 per cent at best. On the other hand, the discount off regulated tariff plans offered by some retailers, which also includes cash rebates, may turn into a more favoured option.

The lynchpin of the OEM's success - potential savings of up to 30 per cent, which lured one out of two households to opt out of SP and go with an electricity retailer - seems now a thing of the past.

Back to square one?

Last year, for the first time in the sector's history, state-owned SP's market share slipped below that of an electricity retailer. This demonstrated the OEM's success, which was meant to reduce SP's role as provider in order to galvanise competition in the sector.

It is quite possible that SP - the "retailer of last resort" if an exiting retailer is unable to novate customer contracts to another player - could end up holding a majority of the accounts affected by exiting retailers. If one out of two consumers have been thus far sceptical about ditching SP for a retailer, chances are there are likely to be more doubters given recent events.

The big question is whether a continued surge in wholesale prices could render SP's regulated tariffs as the cheapest alternative for consumers.

That would be a major killjoy for the OEM, which began with a big bang.

READ MORE:

• EMA to set up standby fuel facilities for gencos
• One more retailer - Best Electricity - bites the dust in Singapore's hard-hit electricity market
• Why are electricity providers in Singapore exiting the scene?
• Lights dim for 3 more power retailers amid record wholesale prices
• Singapore's largest independent electricity retailer iSwitch powers down
• Electricity retailers in Singapore hike rates amid surge in spot prices
• EMA cites high demand, gas supply curbs for sharp spikes in Singapore's spot electricity prices