SINGAPORE – A dramatic spike in global liquified natural gas (LNG) spot prices and other supply issues have sent shockwaves across Singapore’s electricity market, causing at least four power providers to exit the retail market and the city-state’s power regulator to announce pre-emptive measures to safeguard energy security.
So far there has been no disruption to local electricity supplies. But experts and analysts say the question is less about keeping the lights on and more about whether businesses and consumers will have to pay substantially more for power amid an ongoing global fuel crunch. Higher power costs would, in turn, diminish prospects for a robust post-pandemic economic recovery in the global business hub.
China, the United Kingdom and other bellwether global economies are likewise grappling with power shortages and supply disruptions linked to price volatility, which Singapore is highly exposed to as it generates 95% of its power from natural gas imported by pipeline or tankers. The city-state is also one of the few countries in Asia to fully liberalize its retail electricity market.
Gas prices have surged since the beginning of the year due to a confluence of factors ranging from rising consumption driven by recovering economic activity, increased heating needs from harsher-than-usual winter conditions and a series of unplanned global production outages. Industry watchers say it’s anyone’s guess how long current price volatility levels may last.
Those market dynamics have resulted in unprecedented wholesale electricity price rises in Singapore, causing millions of dollars in estimated losses for power generating companies and retailers that had offered cheap fixed-price contracts for households, which prevented them from passing on the higher input costs to customers.
“Their cost of procuring electricity from the market was in the thousand-dollar range, significantly higher than the selling price in the retail contracts with customers in the 170 to 200-dollar range. They were in the red for every unit of electricity sold,” said Joo Yeow Lee, associate director of power and renewables at IHS Markit.
Four energy providers – iSwitch, Ohm Energy, Best Electricity and SilverCloud Energy – pulled out of the retail electricity market due to wholesale price volatility since the beginning of October, with another two companies – Diamond Electric and Union Power – reportedly no longer accepting new customers as they undergo restructuring.
Wild fluctuations in the Uniform Singapore Energy Price (USEP), the price paid by retailers for their wholesale electricity purchases determined by supply and demand conditions every half-hour, were seen in the first half of October with average per megawatt-hour (MWh) prices trading between S$121 to S$1,821 (US$89 to $1,350).
A regulated tariff set quarterly by the state-owned utility provider Singapore Power Group sets a boundary for electricity prices to protect customers from extreme price swings. With the tariff rate for the October to December period effectively capping the selling price at around S$250 per MWh, business was no longer viable for some electricity retailers.
The market turbulence prompted the Energy Market Authority (EMA), Singapore’s energy regulator, to announce “extraordinary” measures to safeguard energy security on October 19, including plans to establish standby fuel facilities that power generation companies can draw on in the event gas supplies are affected.
Citing production issues with gas fields in Indonesia that have resulted in reduced output to Singapore, the regulator said it has become significantly more expensive for local power generation firms to procure standby fuel from the LNG spot market, with prices trading over 500% above the same period last year, to make up for reduced piped gas supplies.
Despite the efforts to expand renewable energy such as solar and waste-to-energy sources in recent years, the city-state is almost entirely reliant on imports to meet its energy needs. Around 70% of Singapore’s gas comes from Indonesia and Malaysia via pipelines, while the remainder is shipped in liquefied form from other gas exporters.
The EMA has insisted that Singapore’s overall gas supplies remain sufficient and that there will be no power disruptions for customers of the exiting retailers. The regulator also told power generation companies still in the market to contract sufficient fuel to meet the demands of retail customers and did not rule out further market interventions if necessary.
“Any power supply interruption would be unacceptable and these measures are proactive steps that will ensure that Singapore will not face any power curtailment or interruptions that have impacted manufacturing powerhouses in Asia,” said Subodh Mhaisalkar, executive director of the Energy Research Institute at Nanyang Technological University (NTU).
As Singapore shows signs of economic recovery from the Covid-19 pandemic, power supply and cost issues are now seen as a potential headwind given that businesses in the chemical and electronic manufacturing sectors, as well as data centers and shopping malls, consume large amounts of electricity and risk being impacted by sustained price increases.
“Commercial and industrial consumers will definitely be impacted,” said IHS’ Lee. “However, the magnitude of the impact will differ, depending on how exposed they are to the wholesale power market prices, as retailers do offer fixed-price contracts and consumers also have the option to hedge some of their consumption on the futures market.”
While price volatility in the local wholesale electricity market has eased recently, industry watchers say retail electricity customers in Singapore are bound to see higher utility prices, which could, in turn, weigh down consumption. The regulated tariff will be adjusted in the next quarter on the basis of the preceding quarter’s average natural gas prices.
Singapore’s regulated tariff is calculated each quarter using imported natural gas costs from the preceding quarter and non-fuel costs accrued by the building and operating of power plants as well as maintaining the power grid. To gain a competitive edge, some energy providers in the city-state had previously offered pricing plans lower than the regulated tariff.
Experts say that oil prices, rather than gas prices, actually have a bigger impact on electricity costs because commercial natural gas contracts in Asia are indexed to oil prices. As such, electricity prices could rise if already high global oil prices, now hovering around a three-year high of $82.76 per barrel of Brent crude, rise further due to a shortfall of gas supplies in the coming winter season amid higher heating needs.
“The question is not whether the market will remain volatile this winter but how volatile the market will be. It will very much depend on how cold the weather is in Europe and Asia,” said Marc Roussot, a Singapore-based spot LNG reporter at Energy Intelligence, who pointed to a gas price spike in January spurred by a colder than expected winter.
“Meteorologists are widely expecting a La Niña phenomenon this year, which typically brings cooler and wetter weather. If this materializes, another price spike cannot be ruled out, especially over the months of January and February when temperatures tend to be the lowest and heating requirements typically peak,” he added.
Singapore’s Minister for Trade and Industry Gan Kim Yong on October 25 announced plans for fuel source diversification amid the price surge, with the city-state aiming to import up to four gigawatts (GW) of electricity from low-carbon sources by 2035, which will make up about 30% of Singapore’s electricity supply in that year.
Gan said Singapore will issue the first of two requests for low-carbon electricity import proposals next month, with plans to import up to 1.2GW of electricity by 2027. The second proposal is expected to be issued in the second quarter of next year and will be for the remaining quantities of electricity imports by 2035.
While Singapore has moved to reduce its carbon footprint by enhancing energy efficiency and harnessing solar power, the trade minister said “meaningful abatement can only come through tapping on low-carbon energy beyond our shores, and by developing the use of low-carbon alternatives, such as hydrogen, in the longer term.”
In a speech at the Singapore International Energy Week event, Gan said the transition to renewable energy may not result in cheaper electricity. “While the cost of generation may be lower, the costs of transmission and backup, as well as necessary grid enhancements, will add to overall costs. This is an inevitable but necessary trade-off in the energy transition.”
The EMA has, meanwhile, been working with various regional partners over the last two years on trials to refine technical and regulatory frameworks for future low-carbon electricity imports. A trial to import 100 megawatts (MW) of electricity from neighboring Malaysia via an existing interconnector is expected to commence early next year.
Other trials include plans to import 100MW of solar-generated electricity from Pulau Bulan in Indonesia, which is expected to be commissioned by 2024, and a power integration project to import up to 100MW of renewable hydropower from Laos to Singapore via Thailand and Malaysia using existing interconnections from 2022 to 2023.
Subodh Mhaisalkar, executive director of NTU’s Energy Research Institute, said the forthcoming electricity import trials are welcome news. “It is likely that the energy crisis facing the world and in particular tighter gas supplies and rising prices may be with us through a big part of 2022. These electricity import possibilities are thus timely,” he told Asia Times.