Wholesale electricity price spikes unsettle independent retailers

Singapore

PRICE spikes in the wholesale electricity market just as competition heats up in the Open Electricity Market (OEM) have left independent retailers crying foul, but power generation companies attribute the increases to unusually high demand.

The situation brings into sharp focus the need for independent retailers - who have no power generation arm - to hedge their electricity price exposure in a traditionally volatile market.

"We've seen some abnormal movements in the pool price," a senior executive at an independent retailer told The Business Times, referring to the wholesale electricity price, also known as Uniform Singapore Energy Price (USEP).

He noted that the price, which averaged S$104.31 per megawatt-hour (MWh) in March, has moved above S$900 per MWh for a few trading periods since end-February, including during weekends when demand is usually weaker and the price lower. Price spikes result in higher costs of buying electricity from the wholesale market for independent retailers.

These price spikes have been especially "disturbing" over the past two weekends, said the senior executive. "I don't know whether certain generation companies (gencos) are withholding their generation capacity."

Concurring, Red Dot Power chief executive Vijay Sirse said he believes that it is not a coincidence the timing of this volatility is happening around the launch of the OEM.

As a result, prices offered to households by all retailers have increased by almost three or four cents per kilowatt-hour compared to the beginning of the year, he added.

While the firm hedges most of its electricity price exposure, such price spikes inadvertently put pressure on retailers to increase their selling prices, said Mr Sirse. "Ultimately, customers are paying for this induced price volatility by gencos."

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Market operator Energy Market Company (EMC) senior vice-president of markets and operations Henry Gan noted that there have been three half-hourly trading periods when USEP reached S$800 MWh or more since the start of the year - all on May 5, when supply was tight and demand was higher than usual.

But the USEP tapered off when demand fell in the subsequent trading periods that day, he said, observing that the average USEP for the day was S$253.21 per MWh.

"In general, wholesale electricity prices are volatile especially at the half-hourly trading period level. This is due to the nature of electricity. Electricity cannot be stored, which means that demand and supply need to be matched in real-time," he said. "Any changes in demand and/or supply conditions will cause the price to fluctuate, as to be expected in any well-functioning competitive market."

Market regulator Energy Market Authority (EMA) said it shared the same observation as EMC.

Another independent retailer, iSwitch, while conceding that it does share the same concerns on gencos possibly withholding generation capacity, said it also understands that EMA and EMC have provisions in place to monitor rebidding and compliance within the wholesale market.

"(We) have confidence that they will manage in the best interests of the market," said managing director David Maher.

Mr Maher said iSwitch was largely protected from the recent price increases due to its risk management and hedging strategies. The firm hedges through the electricity futures on the Singapore Exchange and also the oil market, as the price of electricity in Singapore is highly correlated to oil prices.

Gencos, for their part, also say the recent price spikes are due to fundamental supply and demand factors.

Said Senoko Energy president and chief executive Bernard Esselinckx: "The recent high prices occurred on a weekend where typically gencos will have fewer generating units operating as some plants may be scheduled for maintenance work on the weekend as electricity demand is lower."

The recent price spikes may also have been felt more acutely because the wholesale electricity price has been "abnormally low" for a number of years, he added.

"Although there were some periods of heightened price volatility observed since March 2018, the year-to-date average USEP is still much lower than the long run marginal cost of a combined cycle gas turbine unit. In fact, the spark spread (difference between the wholesale price of electricity or USEP, and the cost of fuel to generate that electricity) has been zero or even negative for over three years."

A YTL PowerSeraya spokesperson attributed the price spike on May 5 to "unexpectedly high demand", among other factors.

Still, the average USEP for the first and second quarters of this year - S$96.33 and S$112 per MWh respectively - has been "substantially lower" than the energy costs component of the SP Services tariff over the same period, she added.

Tuas Power general manager Michael Wong said the USEP prices are "just reflecting the market".

"Market prices are volatile by design," he said. "All along, we have been advising our customers not to take the risks in the pool prices."

Gentailers - or retailers with a generation arm such as Tuas Power - are naturally hedged because when the wholesale electricity price rises, the generation arm earns more though the retailing arm sees higher costs, he added.

"The key thing here is for the independent retailers who are operating in this market to work with their own risk management or hedging mechanism," said Mr Wong.