Power grab in Singapore's electricity market could spur consolidation

Singapore

AS Singapore Power's monopoly in the electricity retail market for households winds down completely in May, consolidation among the 13 retailers may be inevitable as they jostle for the 1.4 million accounts up for grabs.

Meanwhile, consumers spoilt for choice emerge - as intended - the biggest winner so far of the frenzied competition under Singapore's Open Electricity Market (OEM). They are being lured by options to cut power bills by up to 30 per cent and showered with freebies such as iPads, insurance policies and credit card rebates. Or, if it's their thing, they can opt for "green energy" and even free Sundays and sundaes, for the homebody and those with a sweet tooth.

But for retail players in Singapore's freed up energy market, the cut-throat competition could bite even as the OEM cast its net wider last Friday over the third zone (mostly in the city state's east), with only one geographical pocket left to go since the soft launch in Jurong last April and actual rollout in November.

Consolidation could beckon as hefty spend on marketing and advertising, coupled with the price war, hurts margins.

"For a comparatively small market like Singapore which is now served by 13 retailers, some consolidation might not be unexpected," said Sembcorp Power vice-president of retail Lim Han Kwang, adding that this has happened in liberalised markets elsewhere that had a higher number of retailers relative to market size.

There are just two months left before Singapore completes the final phase to deregulate the energy industry and so far, Sembcorp has won over 30,000 residential accounts.

A spokesman for the Energy Market Authority (EMA), the industry's regulator, told The Business Times: "The eventual number of retailers in the OEM will depend on the level of market competition."

The competition could be at its highest point right now, as iSwitch chief commercial officer Andrew Koscharsky sees it. "Competition is very strong and we expect it to remain so for the next few months. We believe we are seeing the peak currently," he said, adding that iSwitch "shot through" 1,500 sign-ups on the OEM's first day in Zone 3.

Singapore has a total of 30 licensed electricity retailers, of which 13 that had cleared additional regulatory hoops to ensure viability to safeguard consumers' interests are authorised to sell electricity to households and small businesses under the OEM.

In January, retailer Red Dot Power, which was part of the OEM's soft launch in Jurong, dropped out as a retail electricity services provider, citing "financial challenges".

Experts rule out further exits among current players but say that the power grab could force consolidation particularly among independent or standalone retailers that are not backed by their own "genco" (power generation company that generates and sells electricity in the wholesale electricity market).

"Given the competitive and complex nature of this evolving market, we expect to see further consolidation of the electricity retailers, particularly amongst retailers without adequate coverage from power generation," said a spokesman for Keppel Electric. So far, 50,000 household customers have switched over to Keppel Electric.

Of the 13 OEM players, six are "gentailers" with a slice of action in both generating and selling electricity in the retail market. They are sector stalwarts Keppel Electric, Geneco (under YTL PowerSeraya), PacificLight Energy, Sembcorp Power, Senoko Energy and Tuas Power.

The remaining seven are independent retailers that do not generate electricity.

Not everyone agrees that independent retailers are necessarily more disadvantaged.

Said iSwitch's Mr Koscharsky: "Owning a power gen business can be an advantage or disadvantage depending on the performance of the assets and existing market conditions. I think Hyflux is a good example of how difficult the operating environment can be for a Singapore genco and the ongoing struggle associated with having physical assets."

iSwitch uses financial contracts such as Singapore Exchange-listed electricity futures contracts to hedge risks. "This ensures that we only buy what we need to buy and are not left holding excess capacity. Under current market conditions, it is certainly more economical to not own a physical generating asset," he explained.

Several factors determine the rates that retailers are able to charge customers. These include market conditions, shorter-term costs of producing electricity and competition levels, said Low Boon Tong, executive vice-president (retail) of YTL PowerSeraya, whose retail arm is Geneco.

The ability to hedge against fluctuations in global crude oil prices is another factor.

"However, it's inevitable that price volatility will intensify, and the market will see more product variations as suppliers seek new ways to differentiate themselves," said Mr Low.

One outcome is fairly certain - the market share of incumbent utility and state-owned SP Group will shrink even more. The pendulum has swung since Singapore progressively freed up its electricity market in 2001 and first allowed other players (apart from SP) to sell electricity to energy-guzzling big businesses that consume over 70 per cent of the city state's power supply.

In 2017, for the first time, SP's market share for electricity retail dipped below 30 per cent to 28 per cent, according to a report by Energy Market Company, Singapore's wholesale market operator.

Based on a survey, EMA said one out of two consumers is open to switching away from SP, the traditional electricity provider which remains operator of the national power grid and will continue to provide market support services such as billing and meter reading.

Singapore's switch rates so far as at end-January 2019 are between 18 and 40 per cent - higher than other countries such as Australia and Japan.

Could this be as good as it gets for consumers and will the cherry-picking season in Singapore's electricity market cool off soon? Maybe - or maybe, not.

Mr Koscharsky said some companies have slowed down their marketing spend and are struggling to keep up with the rebates and perks offered by rivals. iSwitch, with nearly 40,000 residential customers signed up so far, is not hunkering down; it is holding 15 roadshows daily in March. "It's a record for us," he said.

YTL PowerSeraya's Mr Low added: "Ultimately, while customers may be comparing the best prices, what makes customers stay with a particular brand is satisfactory customer service as well as innovative and sustainable product offerings."