Government to price gas on cost-plus basis amid concerns over less competitive pricing with centralised procurement
Gasco will align its gas portfolio to national needs, accounting for electricity demand growth and decarbonisation plans
THE upcoming government-owned gas company will be charging power generation companies for gas on a cost-plus basis, on top of a regulated fee to cover its operating costs, said Second Minister for Trade and Industry Tan See Leng on Monday (Sep 9).
Tan, who was addressing concerns by Members of Parliament about how a centralised gas procurement framework would affect its price competitiveness, added that the primary objective of this centralised gas entity “is to procure and supply gas to meet Singapore’s power generation needs, not to maximise profits”.
“(It) will be staffed by professionals who will take a long-term, systems view to guide the gas procurement. It will also align its gas portfolio to national needs, accounting for our electricity demand growth and decarbonisation plans,” said Tan, who was speaking in Parliament during a debate on several proposed legislative changes relating to the energy market.
In addition to providing the Energy Market Authority (EMA) the ability to direct power generation companies to purchase natural gas from the soon-to-be-formed entity currently known as Gasco, the draft laws – which were passed on Monday – gave EMA powers to impose a power ration in an emergency, direct owners of critical energy infrastructure to allow licensees to access critical energy infrastructure, as well as recover costs from energy security, market development and decarbonisation initiatives.
The amendments also established the Future Energy Fund, which is intended to catalyse infrastructure investments that would support Singapore’s energy transition to a low-carbon economy. The government announced that it had set up this fund with an initial capital injection of S$5 billion during the Budget earlier this year.
Centralised gas procurement
While the government had previously said that the switch to a centralised gas procurement framework would lead to more stable prices and supply – as opposed to the current model where individual power generation companies seek out their own contracts – several MPs still raised concerns about how this might affect the competitiveness of gas prices.
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MP for Bishan-Toa Payoh Group Representation Constituency (GRC) Saktiandi Supaat said that respondents in a previously-held consultation exercise gave feedback that the establishment of Gasco might lead to a loss of flexibility in purchasing gas from other suppliers.
MP for Choa Chu Kang GRC Don Wee suggested that the government set limits on how much gas it can buy to ensure diversification.
Reiterating points the government had made previously, Tan said that the decision to switch to a centralised gas procurement framework was a long-term solution to the spike in Singapore’s spot electricity prices during the global energy crisis in 2021 and 2022.
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Currently, around 75 per cent of Singapore’s gas consumption is by the power sector and will be procured by Gasco in the steady state.
Under this new framework, EMA will impose a standardised minimum gas contracting level for power generation companies. This is to ensure they continue to contract sufficient fuel from Gasco, which the government expects to be up and running by the end of this financial year.
Tan added that Gasco will also aim to broaden its sources of supply and enter into long-term contracts.
Power generation companies typically import most of the gas Singapore uses from neighbouring countries such as Indonesia, Malaysia and Australia. They were also not incentivised to enter into long-term contracts as the volatile gas prices might cause them to be undercut by competitors when prices fall.
“Centralisation and scale therefore give Gasco room to negotiate for more favourable gas contracting terms, as well as to explore co-procurement with other major gas procurement entities, such as JERA of Japan and Korea Gas Corporation,” said Tan.
Power rationing
Several questions were also fielded by MPs on what constitutes an emergency for the government to impose power rationing and whether businesses could have some legal cover from potential liabilities.
Tan reiterated that power rationing measures would only be implemented as a last resort. Singapore has existing measures to mitigate the impact of gas supply disruptions. For example, the liquefied natural gas terminal can support energy needs if piped natural gas is disrupted. In addition, there is a standby facility for liquefied natural gas.
There is also sufficient generation capacity, including a 27 per cent reserve margin which provides for planned and unplanned outages.
“These measures, combined with voluntary power conservation, can meet all our demand in most potential disruption scenarios. However, we cannot afford to be complacent. Singapore must prepare for worst-case scenarios,” said Tan.
He added that an emergency is a situation where an electricity shortage has occurred, or where EMA assesses that a shortage is likely, or that the secure operation of Singapore’s power transmission system will be threatened if no measures are taken.
Tan said that EMA will try to notify affected parties before implementing power rationing. However, the priority during an emergency would be to implement power rationing as quickly as possible to ensure system stability.
Priority will be given to services critical to Singapore’s security, economic and social needs, such as medical and telecommunications services.
MTI and EMA are working out a prioritisation framework, which they have started preliminary consultations on, that aims to outline clear guidelines for the latter’s intended order of load reductions.
Future Energy Fund
Responding to several MPs’ questions on the investment criteria and types of project that will come under the S$5 billion Future Energy Fund, Tan said that the government will ringfence the use of funds to infrastructure development needed to decarbonise the power sector.
These projects, which will likely be awarded through tenders and price discovery mechanisms, will have to undergo the same evaluation processes as other government infrastructure projects, he added. These include a careful evaluation of technological and commercial risks, and the eventual cost of electricity generated through low-carbon energy sources.
There will also be milestones established to ensure that project timelines remain on track, and to have the flexibility to reduce abortive costs if circumstances change.
Potential projects the government has identified that could be financed include undersea cables to import low-carbon electricity, as well as hydrogen terminals and pipelines.
It is too early to say if nuclear projects would be supported by the fund as Singapore has not made a decision on whether to deploy nuclear energy yet, said Tan in response to a question from MP for Bukit Panjang Single Member Constituency Liang Eng Hwa.
Workers’ Party MP He Ting Ru, who represents Sengkang GRC, also asked if the fund could support a new-build fossil fuel project in the name of energy security.
Tan said: “Even as we decarbonise, we have to ensure that Singapore’s energy security is not compromised. Therefore, we should be prepared to consider all options to support a secure and sustainable energy transition. And this is also how we mitigate various risks from renewable electricity imports.”
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