Commentary: Why have energy retailers folded so quickly in Singapore?
Four energy companies have announced exits and two others are reviewing their business models – did liberalisation of the Singapore energy market lead to cracks previously unseen? Two energy experts explain.
SINGAPORE: In recent weeks, something unusual happened in Singapore’s energy market which raises important questions. iSwitch, Ohm Energy, Best Electricity and SilverCloud Energy exited the retail side of the electricity market.
Another two companies – Diamond Electric and Union Power – have stopped accepting new customers while they review and restructure their business models. These companies have attributed their actions to soaring wholesale electricity prices.
What’s behind this flurry of moves among local electricity retailers? First, we need to understand how the market works.
Electricity retailers buy much of the electricity they sell to consumers from the wholesale electricity market. The monthly average for the uniform Singapore energy price (USEP) has however more than doubled within the last year, from S$67 per megawatt hour (MWh) in October 2020 to S$156/MWh in September 2021.
Between Oct 1 to 14, the average USEP was closer to S$400/MWh. This represents only the cost of electricity and doesn’t consider operational costs.
However, regulated tariffs – the price of electricity the state power provider must offer to customers – imply retailers will be effectively capped at a selling price nearer S$250/MWh at least for the near future.
The regulated tariff establishes a boundary for electricity prices that retailers will face and plays a role to help ensure that customers don’t pay too high a price.
The recent high prices present more than a squeeze to revenue margins for retailers, they reflect unambiguous and large losses. While the electricity futures market offers a mechanism for retailers to shield themselves against wholesale market price volatility, some futures prices also spiked above S$850/MWh.
On Oct 19, the Energy Market Authority (EMA), responding to the sudden and extreme market fluctuations, introduced several safeguard measures for consumers and pre-emptive energy security measures for generators.
These measures include: The establishment of standby fuel facilities which will enable power generating companies (gencos) to draw natural gas from local reserves when international prices are high; the requirement that gencos with excess natural gas must offer the first right of refusal to sell to other gencos that have not contracted enough supply; and active intervention in the wholesale electricity market to ensure system stability where necessary.
DID OEM FAIL TO DELIVER ON ITS OBJECTIVES?
The Singapore energy market was liberalised in 2018 to give customers more options. The question now is whether the open electricity market (OEM) should or could have prevented recent market outcomes. Might recent events indicate the market has failed to deliver on its objectives?
We would argue that the OEM, by itself, has not failed as such, but has demonstrated a painful level of sensitivity to external forces, in this case, the international market for natural gas which is presenting abnormally high prices.
The recent lack of resilience warrants attention, and action is needed to ensure the OEM does not lose its ability to facilitate a commercially viable and competitive marketplace.
Market liberalisation permits and promotes competition. Within a competitive market, firms who can provide a good or service at a lower cost will attract customers away from more expensive suppliers.
A liberalised market is good for consumers who benefit from lower prices due to unavoidable price competition among retailers. However companies that lose price competitiveness or cannot bear low prices are inevitably excluded.
This ability for firms to exit is part of the suite of natural economic mechanics that make a liberalised market attractive in the first place.
Retailers in the OEM not only provide electricity pricing plans to customers, mostly in terms of low fixed price and discount off the regulated tariff contracts, but also offer additional benefits, such as credit card rebates, promotional and referral codes, and free gifts, to attract more customers.
For some companies like Ohm Energy, their pricing plans, lower than the regulated tariff approved by the EMA, had become unsustainable under the volatile electricity market.
Listen to how one energy retailer balances business with climate action and sustainability:
HIGH DEMAND AND SUPPLY CONSTRAINTS DRIVING PRICES UP
Unfortunately, what happens in the global energy market has a direct impact on ours. In these last few weeks, the market is not operating “within normal parameters”.
The price volatility in the domestic wholesale and futures markets prevents any viable business operations, and it’s anyone’s guess for how long.
These are not due to local market design or operations, but rather a symptom of global natural gas market dynamics. Singapore’s electricity is still generated almost entirely from imported natural gas despite the efforts to expand renewable energy in recent years.
The first price paid in electricity production is determined by the global market for natural gas, of which Singapore is a price-taker – which means it must accept whatever prevailing price is offered in the market.
According to the EMA, soaring global spot prices for liquified natural gas (LNG), rising domestic electricity demand, and a reduction in pipeline gas supply from Indonesia caused higher and more volatile wholesale electricity prices compared to the past.
Singapore has long-term contracts for pipeline gas – these are negotiated well beforehand so an increase in the gas price may not significantly impact market participants in the near term if all other conditions are stable.
However, Singapore’s heavy reliance - around 95 per cent - on natural gas for power generation makes this issue more challenging.
While higher domestic demand for electricity required more generation and more natural gas as fuels, the gas supply from Indonesia was smaller than usual due to the rising electricity demand in Indonesia and an incident at West Natuna gas field.
This meant we had to increase our purchases of costly LNG from the spot market, leading ultimately to an increase in the cost of power generation for Singapore. Although LNG terminals may buffer the negative impacts of high dependence on pipeline gas, around 70 per cent of Singapore’s gas supply still comes from Indonesia and Malaysia by pipelines.
As a result, the rising global gas price continued to increase wholesale electricity prices in Singapore and the cost to both power generating companies and retailers. In other words, it has simply become unsustainable for retailers without deep pockets, such as smaller players, to ride out the price hike.
One may question if businesses had failed to take into proper account the potential for market fluctuations and shored up some reserves in advance. But the current levels of volatility, and extent and duration of price hikes are unprecedented.
Businesses would have strategies to cope with normal levels of market uncertainty, but we are far beyond those typical parameters. It is simply not effective for firms to hold large cash or physical reserves for extreme events as those resources become stagnant. Leaving resources stagnant is not how businesses prosper.
TIGHTER REGULATION ON RETAILERS TO PROTECT CONSUMERS
What is happening in Singapore is playing out elsewhere too. Many countries are facing an energy crunch this year. China and the United States, specifically Texas, have suffered from power outages, while the United Kingdom had a severe petroleum shortage.
Other European countries are concerned about the fuel crisis during the winter. Singapore’s recent exit by some OEM retailers from the market may be a pre-emptive action to avoid large losses – but impacts to consumers and remaining retailers will persist.
Liberalisation of the retail electricity market aims to improve the quality of service and increase benefits to consumers by encouraging competition among the retailers in the private sector.
However, market consolidation in Singapore’s OEM will create short-term market disruptions and the market regulator may need to take further efforts to protect retailers and electricity consumers.
For consumers, the nature of “protection” warrants qualification: In Singapore, the grid is ultimately managed by Singapore Power (SP), so your lights will not go off even if your electricity company folds. We see proof of this with the market response to iSwitch, for example.
Listen to the Director-General of the International Renewable Energy Agency discuss why transiting away from fossil fuels is challenging:
Instead, consumer protection is more about ensuring households are offered fair electricity prices. It’s not so much a question of ensuring the lights will not be switched off, but rather a matter of ensuring it does not cost a lot more to keep them on.
In the UK, supplier failures and poor customer service occurred as the number of retailers increased in the market.
To address these problems, UK regulator Office of Gas and Electricity Markets (Ofgem) introduced new requirements for supplier licensing in 2020.
One of the new requirements is that suppliers should report to Ofgem when they meet 50,000 and 200,000 customers and get milestone assessments.
For retailers that exceeded these customer thresholds, Ofgem evaluates their financial sustainability and ability to serve their customers. The assessment contents include operational performance, customer service systems, pricing strategy, budget plan for changing costs associated with business scaling, investment attraction plan and customer supply continuity plans in case the retailers exit the market.
Ofgem also can request retailers undertake independent audit when there are concerns about the retailer’s financial health or customer service capabilities.
In Singapore, EMA has prudential and technical requirements for new electricity retailer licensing but does not have specific evaluation guidance about existing licensees.
Although there may be discomfort towards further government intervention in the market, occasional assessments like Ofgem’s would strengthen market resilience by ensuring retailers preparedness for the changing business environment.
ENHANCING THE RESILIENCE OF SINGAPORE’S ELECTRICITY MARKET
Beyond regulating retailers, we can enhance the resilience of the electricity market through the diversification of fuel sources. Natural gas has an extremely high share in Singapore’s generation mix, and this is unusual.
According to the International Energy Agency, only two Organisation for Economic Co-operation and Development (OECD) countries had more than 50 per cent gas in their power generation fuel mix – Mexico and Netherlands, as of December 2019.
In the longer term, diversifying fuel imports further, collaborating with other Southeast Asian countries to develop a robust regional power grid, and continuing the expansion of alternative, clean energy sources, such as imported renewables and hydrogen will help.
David C Broadstock is Senior Research Fellow, and Lead Energy Economist at the Energy Studies Institute and Kim Jeong Won is Research Fellow in the same institution.