A New Market Structure to Steer Singapore’s Power Sector towards a Clean, Sustainable and Resilient Future
1. Deputy Prime Minister Lawrence Wong, distinguished guests, ladies and gentlemen. Thank you for joining us here this morning.
Our Vision of a Clean, Sustainable, and Resilient Energy Future
2. For several years now, energy transition has been a key theme of the Singapore International Energy Week. And with each passing year, the urgency to transit increases. The UN Climate Report issued in April this year concluded that unless bold actions are taken to cut emissions, the world is on track to more than double the 1.5 degree warming limit set in the Paris Agreement.
3. DPM Wong talked about Singapore’s commitment to achieving net-zero emissions by 2050. Let me share our plans to strengthen our energy market structure to facilitate this transition.
4. The journey of energy transition is like embarking on a sea voyage. The destination is quite clear – clean and reliable energy, sufficient to meet our needs in the future. However, the journey is long and full of unanticipated twists and turns. Sometimes, there are technological advancements that will help to speed up our passage. Other times, there are storms and setbacks that we need to avert and survive before we can continue with the journey.
Stormy Global Energy Markets
5. This year, we are facing a perfect storm:
a. On one hand, there were shortages in fossil fuel production, triggered by under-investment in energy projects and exacerbated by the Ukraine war.
b. On the other, there were severe disruptions in renewable power in many parts of the world, arising from droughts and unexpected weather patterns.
c. Global oil prices have spiked significantly, and reached more than 130 USD per barrel at its peak, about 10 times higher than the trough in April 2020.
d. Spot gas prices saw even more volatility, with the Japan Korea Marker exceeding 84 USD per mmbtu at its peak, more than 40 times the lows in April 2020.
e. Consequently, electricity prices in many markets rose multiple folds.
6. Countries around the world have introduced stabilising measures to cope with the surging prices and energy disruptions.
a. Some have trimmed their sails, so to speak – introducing price caps, suspending markets and nationalising market players.
b. Others have changed course and turned back to coal to meet their energy needs, in the short-term at least.
Impact on Singapore
7. Singapore imports almost all of our energy supply so our energy market will inevitably be affected by global turbulence. As fuel prices surged, our electricity market was severely tested.
a. First, the high gas prices made power companies reluctant to contract for gas, for fear that they will be left holding expensive gas should prices soften subsequently. If power companies all decide to cut back on their gas purchase, the system as a whole will not have secured enough gas for us. As an emergency measure, EMA introduced a standby fuel facility as well as mandated each firm to contract sufficient fuel.
b. Second, we observed that the wholesale electricity market could not function rationally under extreme price volatility. When prices in the wholesale market surged, instead of inducing more electricity supply, some generation companies decided to withhold supply for fear that should there be an unexpected disruption in their supplies, they would have to buy at even higher prices from the wholesale market to meet their commitments. This caused prices in the wholesale market to surge even further. It also adversely impacted some consumers who purchased electricity directly from the wholesale market. Again, EMA stepped in with measures like the Temporary Electricity Contract Support Scheme (TRECS) to bridge the gap.
c. Third, some market participants were not sufficiently equipped to deal with the extreme market volatilities. Most evidently, in the fourth quarter of last year, six electricity retailers exited the market. Some affected consumers were transferred to Singapore Power (SP) to ensure that their power supply is not disrupted.
The Journey: Navigating the Dual Challenges of the Energy Transition and Energy Crisis
8. 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.
9. To navigate the dual challenges of the energy transition and energy security, we need to strengthen our energy market structure.
Strengthening our Market Structure for the Journey
10. Since the 1990s, we have operated an open energy market. This has served us well and many consumers have enjoyed low electricity prices as a result of competition. But the energy landscape has changed significantly in recent years and new challenges have emerged, as I highlighted earlier. We will need to adjust our energy market structure to respond to these changes.
11. Overall, a market-based system remains relevant, but we will need to strengthen the market structure and put in guardrails to ensure that the market continues to function well even under volatile conditions. Let me broadly outline our plans in three key areas:
a. Power Generation Capacity
b. Gas supply
c. Retail Markets
Power Generation Capacity
12. First, we have to ensure that we have sufficient power generation capacity going forward.
13. Today, planting decisions are made by private generation companies which may be based on various factors such as their own business plans, or their outlook for electricity demand. While each of them will make rational decisions individually, there is no assurance this will translate into sufficient generation capacity for our needs, nationally.
a. High electricity prices are the usual signal to companies that capacity is tight and new planting is needed. However, the response may be too late since it will take four to five years to build new capacity. There is also the risk of uncoordinated multiple plantings leading to excess capacity.
b. Investment in generation capacity is a major undertaking with a long payback period. A volatile market in the short-term, uncertain longer term outlook and potential stranding of assets due to the energy transition, make long-term investment decisions in generation capacity difficult for the private generation companies.
14. Therefore, to ensure we have sufficient generation capacity in time to come, we will need to plan for capacity building at the national level.
a. We will therefore introduce a centralised approach to facilitate and guide private investments in new generation capacity through a competitive tender as and when needed for capacity that will be required within the next 5 years.
i. Interested participants can participate in the process and the most competitive proposal will be awarded a licence to build, own and operate the new capacity.
ii. No new plantings will be allowed outside of this process to provide greater certainty to investors and avoid risks of over-capacity.
iii. Should there be inadequate interest to plant new capacity, EMA will build the required new capacity.
15. This approach will ensure adequate capacity to meet our energy needs in the future.
16. Second, having ensured adequate capacity, we have to also enhance the resilience of our gas supply.
17. Today, generation companies in Singapore have significant flexibility to decide on the amount and duration of gas contracts.
a. While this flexibility was intended to allow gencos to benefit from a competitive gas market, it does not provide sufficient assurance that there will be enough gas overall in the system as a whole, to meet our energy needs as a whole.
b. Generation companies also tend to adopt a “herding” behaviour in response to the fluctuations in the gas market when it comes to contracting gas.
i. Such bunching of contracts magnifies Singapore’s exposure to market risks, which is a cause for concern if this occurs during volatile market conditions or when there are major supply disruptions.
18. Late last year, when the global energy market tightened due to a cold winter and worsening security situation, EMA had to introduce temporary crisis management measures to ensure energy security. This includes requiring gencos to maintain sufficient fuel for power generation, and establishing a standby fuel facility to guard against trends of gas supply disruptions.
19. We will institutionalise these as permanent features of our market. In addition, EMA will work with the industry to explore ways to aggregate gas procurement and obtain longer term and more secure contracts.
20. Last but not least, we will strengthen the retail electricity market.
21. EMA has progressively liberalised the retail market over the years and allowed more electricity retailers to participate in selling electricity to consumers.
a. Consumers benefitted from a wider range of retail contracts and have more choices.
b. Competition among retailers also drove down electricity prices for consumers. Over the past few years before the start of the energy crisis, average wholesale electricity prices were below cost of production due to oversupply of gas and generation capacity.
22. However, when the gas market tightened late last year and prices rose sharply, several Independent Retailers exited the market. This suggests that some of these retailers were not sufficiently prepared against market volatilities, and had taken large unhedged positions.
23. Going forward, we plan to strengthen consumer protection by enhancing the regulatory requirements on electricity retailers, so that only credible industry players with sufficient financial strength and sustainable business propositions will be allowed to retail electricity to consumers, and to ensure that electricity retailers are sufficiently resilient against market volatility.
24. On the consumer side, EMA will also look into tightening the eligibility criteria for Wholesale Electricity Price (WEP) plans, so that only consumers who are able to deal with the risks of price volatilities would be allowed to buy at the WEP. All consumers can still enter into retail contracts, while consumers who qualify for the regulated tariffs can also still continue to do so.
25. We are mindful that these adjustments will reduce the flexibility of some market participants. Generation companies cannot plant new capacity as they wish. Consumers may have fewer retailers to choose from. Some may not be allowed to purchase electricity from the wholesale electricity market. However, these measures will bring about a stronger and more secure power system. We will consult the industry and the public on these proposed changes and put in place such enhancements progressively.
26. Having strengthened our ship, we will be able to focus on our journey towards net-zero emission. This is a challenging, but worthwhile but necessary journey.
27. Navigating the dual challenges of energy transition and security will require a collective effort. The only way for all of us to get to our destination safely, is for us to work together. Only when everyone is onboard, can we ensure that no one is left behind.
28. We invite everyone in Singapore – power providers, researchers and consumers – to embark on this journey with us together. We will also work with our international partners to develop and strengthen supply chains, and cooperate on market and regulatory actions to facilitate a stable global energy market.
29. Thank you very much. I look forward to a robust discussion at our Singapore Energy Summit later today.