Singapore to tighten rules on electricity retailers, raise safeguards around supply and price shocks
SINGAPORE’S energy regulator will introduce major guardrails to ensure secure and sufficient gas supply and power generation, and to better protect consumers.
The move comes after extraordinary spikes in spot electricity prices last year and a global energy crunch that rocked the electricity market.
Measures targeted at electricity retailers include stricter qualifying criteria such as higher capital and hedging requirements to ensure their resilience against market volatility. There will be additional protection for consumers if retailers prematurely terminate contracts, the Ministry of Trade and Industry (MTI) said on Tuesday (Oct 25).
The Energy Market Authority (EMA) also plans to tighten eligibility criteria for consumers on Wholesale Electricity Price (WEP) plans, so that only those who are equipped to deal with the risks of price fluctuations can purchase electricity at wholesale electricity prices.
Disruptions to Singapore’s piped natural gas and a global energy shock had led to extraordinary spikes in spot electricity prices here that resulted in at least five electricity retailers exiting the industry late last year. Collectively, they were supplying electricity to 140,000 households and 11,000 business accounts – about 9 per cent of all electricity consumers.
The shakeout, which also saw the exit of iSwitch– the fourth-largest electricity retailer and largest independent retailer in Singapore – was a blow to the city-state’s measured liberalisation of its electricity sector under the Open Electricity Market.
“While consumers have benefited from more competitive electricity prices and a wider range of retail price plans, some electricity retailers were not sufficiently equipped to deal with the extreme market volatilities observed in Q4 2021 and Q1 2022, and either exited the market or prematurely terminated contracts with some of their consumers,” noted MTI in a statement.
In an opening keynote address at Singapore International Energy Week on Tuesday, Minister for Trade and Industry Gan Kim Yong said Singapore’s energy market is facing “a perfect storm” this year.
On one hand, he noted that there are shortages in fossil fuel production, which are triggered by underinvestment in energy projects and exacerbated by the Russia-Ukraine conflict.
There have also been severe disruptions in renewable power in many parts of the world on the back of droughts and unexpected weather patterns.
Additionally, global oil prices have spiked and spot gas prices have been volatile. The confluence of these factors has caused electricity prices in many markets to rise by “multiple folds”, Gan said.
“Singapore imports almost all of our energy supply so our energy market will inevitably be affected by the global turbulence. As fuel prices surged, our electricity market was severely tested.
“The emergency measures that EMA implemented have stabilised the market for now. However, this is unlikely to be the last energy crunch we will face. The global clean energy transition will also not be a plain-sailing one, and we can expect continued volatility going forward,” he explained.
The potential new rules that cover the retail market are aimed at protecting consumers and ensuring that only industry participants with “sufficient financial strength and sustainable business propositions to withstand some degree of market volatility can enter the market” and are one of three guardrails that the EMA will introduce to address market risks and augment the competitive market structure in place today, said MTI.
To ensure the security and adequacy of gas supply, EMA will also “institutionalise the current crisis management measure requiring gencos (generation companies) to maintain sufficient fuel for power generation” and work with the industry to explore ways to improve gas procurement. The regulator will maintain the Standby LNG Facility to address risks of gas supply disruptions as it expects gas supply disruptions to be more prevalent in the future as supplies of piped natural gas are depleting, and given the energy transition.
MTI noted that gencos currently have significant flexibility to decide the amount of gas to contract and the duration of their contracts. However, this does not ensure sufficient contracted gas on aggregate to meet system demand.
“Indeed, when gas prices are high, gencos are less inclined to contract for gas for fear that they would be left stranded when gas prices moderate. Without the assurance of back-to-back electricity contracts, gencos are also reluctant to enter into longer-term gas contracts which typically offer greater guarantee of delivery and lower prices,” MTI said.
“Gencos also tend to exhibit herding behaviour in gas procurement, which can lead to either over – or under – contracting of gas, or gas contracts expiring at the same time. This magnifies the power sector’s exposure to global market conditions, which may be unfavourable,” it added.
The third guardrail is aimed at ensuring sufficient generation capacity to meet system demand. Currently, investments in new generation capacity are driven by each company’s commercial considerations. This can lead to prolonged periods of over and under supply as it takes some four to five years to establish a new generation unit and could lead to volatile electricity prices. These cyclical mismatches in supply and demand, said MTI, could worsen with the global climate imperative.
As such, the EMA will introduce a “structured process” to facilitate private investments in new generation. EMA will conduct a competitive tender, about five years in advance of the year in which the generation capacity is projected to be required. If there is insufficient private sector interest to build new generation capacity, EMA will do so as a last resort.
“While these guardrails will, to some extent, reduce choice for market participants (eg gencos and retailers) and consumers, they will help to improve the stability and security of our power sector in the longer term and ensure that Singapore is well-placed to navigate the energy transition,” said MTI.
EMA will be conducting industry and public consultations over the next few months, and will progressively implement these enhancements from 2023.
In his speech, Gan said he is mindful that the latest adjustments will “reduce the flexibility of some market participants”.
For instance, generation companies now cannot plant new capacity as they wish, and consumers may have fewer retailers to choose from.
“However, these measures will bring about a stronger and more secure power system collectively,” the minister said, adding that navigating the “dual challenges of energy transition and crisis will require a collective effort”.