Wholesale power buyers expected to face new financial, consumption rules to deal with price volatility

COMPANIES that want to be on Wholesale Electricity Price (WEP) plans could first have to show a strong financial track record and a minimum level of energy consumption, industry players and observers said in response to news that Singapore’s energy regulator intends to impose new guardrails for the sector.

The Energy Market Authority (EMA) said last week it intends to tighten the eligibility criteria for consumers on WEP plans, “so that only those who are equipped to deal with the risks of price fluctuations can purchase electricity at wholesale electricity prices”.

It did not give details of the proposed criteria, but said it will conduct industry and public consultations over the next few months.

Any requirements are likely to “set the bar higher” and exclude smaller players, said Yuit Ang, vice-president of the Association of Small & Medium Enterprises (Asme). “This reduces speculation… It limits this to only the larger SMEs who have the financial strength and capacity to track wholesale market prices for comparison with fixed rate contracts.”

Ang suggested the new criteria might include company turnover or paid-up capital. Companies could even be issued a performance bond for larger contracts – to show they can “stomach the fluctuation in prices”, he said.

Lennon Tan, president of the Singapore Manufacturing Federation (SMF), thinks companies might need to put forth “a detailed plan”, including steps taken to mitigate electricity price risks, and a commitment to be on the WEP for a fixed period.

Derrick Yap, chief executive officer of robotics and automation company PBA Robotics, expects that only those “with a track record of financial stability and diversified risks across markets, among other indicators” will be eligible.

The criteria could also favour industries with high electricity consumption – manufacturing and technology, where consumption can go above 50,000 kWh (kilowatt-hour) a month, is one possibility.

Under Singapore’s Open Electricity Market, there are three options for buying electricity: from SP Group at the regulated tariff; from an electricity retailer, with a price plan; or from the wholesale electricity market at half-hourly prices, through SP Group. The first option is available only to small businesses with an average monthly consumption of less than 4,000 kWh.

Industry players and observers told The Business Times (BT) that some companies had picked WEP plans due to favourable market conditions that rendered the package attractive on price.

But extraordinary spikes in spot prices last year, owing to gas curbs and an ensuing global energy crunch, led to bill shocks for many.

SMF’s Tan noted that before the sharp increase in energy prices, which began in mid-2021 and worsened towards the end of the year, the WEP plan was “likely cheaper” than other options.

But WEP plans also experience greater price volatility, and Tan said some companies may end up paying more and even exceeding their budgeting or operating expenditure calculations. “In one instance, businesses were paying three times the energy prices compared to the pre-Covid period,” he said.

BT had also reported in January that some companies saw a quadrupling in their electricity costs, after their electricity retailers shut down and they were forced to buy power under WEP plans.

The stricter requirements for WEP plans may not affect many companies. Only 1 per cent of accounts – comprising both households and small businesses – are currently under WEP plans.

Some of the SMEs polled by BT said they preferred the certainty of fixed-rate plans.

Lawrence Lim, general manager of engineering company EIOS 99, said: “It depends on your outlook. Some probably chose the wholesale option thinking that energy prices will continue to be affordable or moderate. But companies who think that they are saving money now may actually be subjecting themselves to a lot of risk exposure.”

His company uses less than 6,000 kWh a month and has been on a two-year fixed rate contract with PacificLight since July 2021, as this allows for budget projections and cashflow maintenance.

David Ng, managing director of Transicom Engineering, said: “For us, we want to concentrate on the business and not have to worry about how much we need to pay for electricity every month.” His company is on a two-year fixed rate contract with Keppel Electric.

Even bigger players such as PBA Robotics are playing it safe. With an average monthly consumption of 60,000 to 65,000 kWh, PBA previously bought from the wholesale market for a year. But it switched to a fixed-rate plan in July, in what Yap describes as a “prudent approach to mitigate risks of the volatile energy market”.

“At present, buying electricity at a fixed rate was a measured move. This has been proven in the current climate with increasing spot prices, where we have managed to benefit from significant cost savings,” he said.

Noting the uncertain economic climate, SMF’s Tan said that businesses – especially manufacturing companies with high energy consumption – will look to fixed price plans for “better predictability” and “to hedge against increasing energy prices”.

Added Tan: “This would give them the assurance that prices will not exceed the amount they have budgeted for during the duration of their contract with their retailers.”