Industry players say EMA review of tougher rules for power retailers shouldn’t hinder open competition

WHILE potentially stricter licensing conditions for Singapore’s electricity retailers could hold them in better stead to weather wholesale market price shocks such as the one witnessed last year, industry participants caution against such new legislation turning into hindrances for new entrants into the market.

“We welcome any new legislation that improves the ability or requirements for electricity retailers to hedge their risks. At the same time, any new legislation should not further limit the opportunity to enter the market,” said Ernst Westendorp, chief commercial officer of Flo Energy Singapore.

Westendorp, who is also co-founder of Flo, a licensed electricity retailer in Singapore, added: “We find it important that the market remains open to new entrants to allow customers to select the retailers that meet their needs. An open market also drives innovation.”

He was responding to queries from The Business Times (BT) on an article published on Monday that the Energy Market Authority (EMA) was mulling tightening licensing conditions for electricity retailers after last year’s staggering spikes in spot electricity prices drove nearly half a dozen of them to bow out.

Some of the new measures being considered include requiring retailers to raise their physical hedging and capital positions and possibly even provide performance bonds, EMA’s director of market development and surveillance Jesse Chin told BT.

Chin stressed that the regulator would have to strike a balance between setting more stringent requirements to reduce the risk of retailers failing and the higher cost that these measures introduce, which will be passed on to consumers.

The review will involve a consultation process with the public and industry stakeholders and is expected to be completed by year-end.

One potential measure that will require retailers to fully hedge their contracted consumer volumes appears overdue. As it stands, EMA requires retailers to consistently hedge at least 50 per cent of their wholesale electricity price risk. Even so, there are several players who have walked the extra mile and hedged 100 per cent.

Flo Energy is one of those that is fully hedged. “This way, we do not have to worry about rising wholesale prices while trying to meet the electricity demand,” said Westendorp.

Simpson Spence Young’s global energy derivatives head James Whistler said that while strengthening the hedging requirements of independent retailers is key to rebuilding market confidence, he hopes the EMA would focus on “rebuilding” the futures market.

“Futures are a fundamental component of a well-functioning electricity market and the industry must not let all the hard work and public expense previously put into developing this go to waste,” he said.

Indeed, last year’s cripplingly high wholesale prices turned into an even bigger dilemma for retailers who were unable to adequately hedge against such volatility in the Singapore Exchange’s electricity futures market as liquidity had dried up.

As a result, 5 electricity retailers who were then supplying electricity to 140,000 households and 11,000 business accounts - about 9 per cent of all electricity consumers in Singapore - exited the industry.

However, regulation is no magic bullet for any industry.

To this end, Westendorp remarked: “The market and retailers have been hit by extreme external factors, which in my opinion largely lie beyond the control of regulators of an open electricity market.

“Regulatory reform may be required to ensure retailers supply the electricity throughout the contract for the fixed price agreed. But too much intervention in free markets leads to extra costs and subsequently higher prices. In any open market, you have entrants and exits of companies.”