Since last year, the global energy market has been grappling with a “perfect storm” of demand and supply factors, ranging from severe weather events around the world to a recovery in economic activities from the COVID-19 pandemic.
Locally, the domestic market was hit by unplanned reductions in the supply of piped natural gas from Indonesia, while electricity demand was higher than usual.
As a result, the Uniform Singapore Energy Price (USEP), or the half-hourly rate at which retailers purchase electricity in the wholesale market, spiked alongside huge volatility in the second half of last year and led to abrupt exits by five electricity retailers.
Such price spikes eat into the margins of retailers who sell electricity to consumers at fixed prices, while market volatility makes it difficult for companies to hedge effectively.
Not much has changed in the global market environment, experts said. In fact, the onset of the Russia-Ukraine war has stirred concerns about further supply disruptions.
“We continue to see high gas prices. We have seen an extended duration of average USEP settlement values exceeding the tariff rate, and electricity futures contracts are no different,” said Dr David Broadstock, senior research fellow at the National University of Singapore’s Energy Studies Institute.
“We are seeing market conditions where retailers cannot rely easily on either the spot or the futures market to obtain electricity to sell on to their customers at or below the tariff rate. This appears to be the case all the way out to September 2024.”
With the Ukraine war adding new complexity to global gas markets and elevated demand, it will be harder to secure long-term supplies at low prices, he added.
UNSUSTAINABLE BUSINESS MODEL?
Dr Broadstock noted that having rates with minimal difference to the regulated tariff “does not seem to be a sustainable business model” for electricity retailers.
“Electricity consumers have seen the recent market exits of retailers and remember the troubles this caused for those needing to secure new contracts,” he told CNA.
“So when examining two very closely priced options, but concerned that the retailer might take the option to exit the market like others have in the past, the tariff rate becomes a fairly attractive option.”
That said, this situation can also be interpreted as retailers expecting SP’s regulated tariff to keep rising for some time.
This means that while the rates offered by retailers now do not seem attractive, they may “in fact turn into a discount-off rate over the contracted period”, said Dr Broadstock.
Asked if more customers are likely to switch back to SP hence possibly resulting in another string of market exits, Prof Mhaisalkar said price is not the only way to attract customers.
“For example, the OEM retailer can bundle their offerings with other unique services or have innovative offerings in green energy. I think consumers will take the total offerings into view when making their decisions.”