Singapore’s power squeeze is tighter than its housing crunch

SINGAPORE’S landlords have jacked up rents by more than half over the past two years. They may be able to squeeze out a few more quarters of increases before enough new supply gives tenants a semblance of bargaining power. But this isn’t the end of “greedflation” in the Asian financial centre. High energy costs may be here to stay even after the city’s dwelling crunch has eased. The clues are in the stock market. Investors’ love affair with landlords is waning after a bumper performance. Compared with a year earlier, serviced-residence operator CapitaLand Ascott Trust garnered 178 per cent higher revenue per available unit from one of its Singapore properties in the final quarter of 2022, thanks to the island state’s rapid post-pandemic reopening and a strong influx of expatriate bankers and other professionals. But the real-estate fervour is peaking: For the first time since early 2020, private housing prices declined by 0.4 per cent last quarter. The exuberance is showing up in another corner. This year, the two best-performing stocks on the benchmark Straits Times Index are Sembcorp Industries and Keppel. From their share-price charts, you would think they’re close cousins of the artificial intelligence (AI) hotshot Nvidia when in reality it’s their humble utility business that has got the market all excited. Between them, Sembcorp and Keppel account for roughly a fifth of the city’s 12 gigawatt power-generation capacity, of which 35 per cent is over two decades old. DBS Group Holdings expects a quarter of it to retire in the next five years, even as electricity demand grows by more than 4 per cent annually. As a result, “Singapore’s power market will likely remain fairly tight until more capacity comes online from 2026,” DBS analyst Pei Hwa Ho, who has a buy rating on the two stocks, wrote in a Jun 20 note. Starting from Jul 1, the island’s Energy Market Authority has imposed temporary caps on wholesale power prices to tamp down exceptional volatility. It will bring some relief to a market where 3,000-plus intraday spikes have become common since 2021. So destabilising were these that even before Russia’s invasion of Ukraine many of the city’s newly formed electricity retailers – iSwitch, Ohm Energy, Best Electricity and SilverCloud Energy – had thrown in the towel. They couldn’t honour their price plans for consumers and yet turn a profit. With that capitulation, the 2018 liberalisation of Singapore’s retail electricity market lost some of its sheen. This is what happened: The 2021 reopening of the economy unleashed pent-up power demand and eroded Singapore’s electricity reserve margin, the cushion that provides for planned and unplanned outages of generating units. The start of the war in Ukraine last February shocked prices of imported natural gas, the fuel source for Singapore’s power plants. Meanwhile, demand continued to grow. That created the perfect entry point for “sellers’ inflation”, a concept that has taken centre stage in the current debate on stubbornly high global price pressures. The University of Massachusetts Amherst economist Isabella Weber, one of the pioneers of the theory, explains sellers’ inflation – also known as greedflation or excuseflation – “as an implicit agreement which can be coordinated by sector-wide cost shocks and supply bottlenecks”. Since the increase in fuel costs wasn’t unique to individual power producers but experienced by all competitors, they could safely lift prices; the mutual expectation was that all players would do the same. The primary goal of all the rival firms may have been to protect profitability. Sembcorp Industries’ Ebitda margin, which crashed from nearly 21 per cent in 2020 to 15 per cent in 2021, came back up to 17 per cent last year. Even now, when global natural gas costs are stabilising after last year’s crisis, wholesale electricity prices are still stubbornly high. Everybody is operating in the same tight market, and benefiting from it. While Sembcorp and Keppel are still investing, their foreign-owned rivals don’t have much interest in building new capacity. The city’s reserve cushion will be around 26 per cent in 2025, compared with 64 per cent in 2015, according to Morgan Stanley. SP Group has raised retail prices by an average of 1.2 per cent for this quarter. The way Sembcorp’s share price shrugged off last month’s price-cap announcement has a message for authorities. Weber’s research points to “overlapping uncertainties” – of climate change, geopolitical tensions and future pandemics – and warns that shocks to the inflation dynamic may reoccur. Given Singapore’s fundamental deficiency in energy resources, perhaps a fully liberalised power market with several private-sector generators and many resellers doesn’t exactly meet its need for resilience. Singapore was forced to nationalise its subway system seven years ago after frequent breakdowns became an embarrassment for a city that prides itself on its all-around efficiency. The privately owned operator was forced to hand over its trains, signalling systems and related assets to the national transport regulator. The power market may not be quite there, but it could do with a lot more public investment. Which is why the regulator is rolling up its sleeves and entering the fray. As there is no commercial interest from the private sector to set up open-cycle gas turbines, the Energy Market Authority has said that it will commission two 340-megawatt plants on its own by June 2025, one-year ahead of the more expensive but more efficient, hydrogen-ready, combined-cycle units that Keppel and Sembcorp are building. That still leaves electricity sellers with a two-year window. The price cap allows them plenty of headroom around fuel costs. In elevating utilities to AI superstar status, investors seem to be betting that they will take up all or most of it. Just like Singapore’s authorities intervene in the housing market when prices get too far out of whack, cooling down the power industry is also up to them. BLOOMBERG Andy Mukherjee is a Bloomberg Opinion columnist covering industrial companies and financial services in Asia. Previously, he worked for Reuters, the Straits Times and Bloomberg News.