11 March 2011

Impact of Fuel Oil Price on Electricity Tariff

Parliament was told on 4 March 2011 that the current volatility in the global markets for oil would not fully translate into higher electricity tariffs for households.

It was attributed to several factors.

The Singapore dollar is strong

To cushion the impact of higher prices, the Singapore dollar has not only to be strong, but also to keep strengthening against the US dollar.  However, the Singapore dollar probably cannot continue appreciating without affecting export competitiveness.

Natural gas is the primary fuel for electricity generation

We have been told repeatedly that the industry practice in Asia is to peg the price of the natural gas used for generating electricity to the price of fuel oil.

The fuel cost component (in cents per kWh) of the low tension tariff was closely correlated to the price of fuel oil (in S$ per bbl) in the past two years, as may be seen from the table below.  (The tariff itself does not change at the same rate as the price of fuel oil because fuel cost accounts for just about half the tariff.)

In light of the peg, it is puzzling why the fuel cost component of the tariff will not fully reflect the price of fuel oil.

CCGT (combined cycle gas turbine) plants are very efficient

Higher prices of fuel will be mirrored in the fuel cost component of the tariff unless the efficiency of the existing CCGT plants is rising or there is increased use of CCGT plants away from less efficient alternatives.

The efficiency of Singapore's power generation plants appears to have had little impact in recent years.  For example, comparing the tariffs for Q1 2011 and Q3 2007, we find that the fuel cost component of the tariff has risen (28.2 per cent) by almost the same percentage as the price of the fuel oil peg (28.4 per cent).

The electricity market is competitive

Almost four-fifths of the tariff is currently paid to the generating companies, comprising fuel cost (mentioned above) and non-fuel power generation cost.  The latter covers the generating companies' depreciation, rental, manpower costs and profit, among others.

The non-fuel power generation cost has increased steadily and significantly, rising 46 per cent from 4.51 cents per kWh in Q3 2009 to 6.59 cents per kWh in Q1 2011.  This is an annualised rate of increase of 29 per cent, a surprisingly high figure in a regulated market.

If we assume that all consumers, not just non-contestable households and small businesses, pay some form of non-fuel generation cost, the generating companies would have collected $445 million in non-fuel generation cost in Q3 2009 and will collect $693 million in Q1 2011 (based on Q4 2010 demand).











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Notes

Speech by Mr S Iswaran, Senior Minister of State for Trade and Industry, during the Committee of Supply Debate Head V (Ministry of Trade and Industry) 4 March 2011 Ministry of Trade and Industry. 

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