Oral reply to PQs on Guardrails to Ensure Security of Gas Supply and Expected Cost Impact

Questions

Mr Chua Kheng Wee Louis: To ask the Minister for Trade and Industry in relation to guardrails to ensure the security and adequacy of gas supply (a) whether this is expected to result in higher input costs and retail electricity prices; (b) what is the impact on the marginal cost of producing electricity in Singapore; and (c) what is the expected cost burden across the Government, generation companies and consumers.

Mr Zhulkarnain Abdul Rahim: To ask the Minister for Trade and Industry following the Ministry’s announcement at the Singapore International Energy Week Summit to revise the electricity market structure, what are the plans to update the Code of Conduct for Retail Electricity Licensees to strengthen retail consumer protection.

Ms He Ting Ru: To ask the Minister for Trade and Industry in relation to the stricter rules for energy retailers to strengthen the existing market structure of Singapore’s power sector (a) what are the specific enhanced regulatory requirements and tightened eligibility criteria to be introduced for better consumer protection; (b) what is the projected timetable for implementation of each area; and (c) whether there can be a prohibition on retailers prematurely terminating contracts with retail consumers.

Oral Answer (to be attributed to Second Minister for Trade and Industry Dr Tan See Leng)

1. Mr Speaker, may I have your permission to answer PQs 15 to 17 together?

2. We are at a critical juncture in the development of our energy market. Since the 1990s, we have operated an open energy market, and this has served us well. A competitive market has incentivised generation companies to bring in new and more efficient technologies and offered more choices for consumers. Many consumers have also enjoyed lower electricity prices as a result.

3. However, the energy landscape has changed drastically, and new sources of supply risks and volatility have emerged.

a. First, heightened volatility arising from tight power generation capacity. This has emerged in liberalised markets around the world, where capacity planting decisions are made by private generation companies (or gencos) based on short-term price signals in the wholesale electricity market. For these gencos, high electricity prices typically signal that capacity is tight and new generation plantings are therefore, needed. However, very often, these price signals may be too late, as it takes 4-5 years typically to build a new generator. The time lag between the price signals and construction of new generators leads to shortages of generation capacity and can lead to sharp spikes and protracted elevation of electricity prices, and even blackouts during periods of system stress as we saw in some cities last year.

b. Second, supply risks and volatility arising from disruptions in global gas supply. As we rely on imported natural gas for almost all our electricity production, global supply and demand shocks will spill over into our domestic electricity market. As fuel prices surged last year, our electricity market was severely tested. Gencos were reluctant to contract for gas, for fear that they would be left holding on to expensive gas inventories should prices moderate subsequently. This in turn increased the risks of gas shortfalls and caused prices in the wholesale electricity market to surge.

c. Third, volatility arising from failures in intermediaries. We observed this in the fourth quarter of last year, where six electricity retailers exited the market as they were not sufficiently prepared to deal with the extreme market volatilities. While affected consumers did not experience any disruption to their power supply, some of them experienced inconvenience as well as price surges when sourcing for alternative electricity retail contracts and faced higher prices.

4. These sources of volatility have tested our energy market over the past year, with the ongoing energy crisis. Since the fourth quarter of last year, EMA has put in place emergency measures which have helped to stabilise the market. However, this is unlikely to be the last energy crunch that we will face, and we need to be prepared for a more volatile global energy market going forward.

5. We will therefore need to introduce safeguards to manage the risks of volatilities in our energy market. Last month, the Ministry of Trade and Industry announced that it would be introducing guardrails to strengthen our energy market in three key areas – power generation, gas supply and electricity retail markets. These guardrails are intended to ensure that our energy market continues to function well even under volatile conditions.

6. Mr Speaker, allow me to broadly recap these measures for this House.

7. First, to ensure that we continue to have sufficient generation capacity in time to come, EMA will introduce a centralised approach to facilitate investments in new generation through a competitive tender. The tender will be conducted in advance of when the new capacity is needed, taking into account the lead time required for construction and development. Should there be inadequate private sector interest to plant new capacity, EMA will build the required new capacity.

8. Second, to safeguard energy security and enhance the resilience of our natural gas supply, we will institutionalise some of the measures that we had introduced late last year to safeguard energy security as permanent features of our market. These are the regulations requiring gencos to maintain sufficient fuel for power generation, and the standby fuel facility to guard against risks of gas supply disruptions. EMA will also be working with the industry to explore ways to aggregate gas procurement and obtain longer term, more secure contracts.

9. Mr Zhulkarnain Abdul Rahim and Ms He Ting Ru have asked about our measures to strengthen the electricity retail market. We will enhance the regulatory requirements imposed on electricity retailers to ensure that they are sufficiently prepared and better able to withstand market volatilities. The regulatory enhancements include raising the qualifying criteria so that only credible industry participants with sufficient financial strength and sustainable business propositions will be allowed to retail electricity to consumers. As for whether EMA will prohibit retailers from prematurely terminating contracts with their consumers, this is already the case under the Code of Conduct for Retail Electricity Licensees. Retailers cannot unilaterally terminate contracts unless under stipulated conditions such as if they are exiting the sector, or consumers are insolvent or had a breach of contract. EMA will be launching a consultation in the coming weeks on specific proposals to enhance the regulatory requirements for retailers.

10. For consumers, EMA will look into tightening the eligibility criteria for Wholesale Electricity Price (WEP) plans, so that only larger consumers who are better equipped to deal with the risks of price volatilities would be allowed to enter into such plans. All consumers will continue to have the option of entering into retail contracts with electricity retailers, or, in the case of households and small business consumers, returning to the regulated tariff.

11. EMA is also in discussion with market participants on operational measures to strengthen the wholesale electricity market. Our experience over the past year has demonstrated that a robust wholesale electricity market can have a stabilising influence on the broader retail market and is an important pillar of our efforts to strengthen the electricity retail market.

12. EMA will consult the industry as well as the public on the details of these enhancements and we plan to implement them progressively from 2023. We welcome feedback and suggestions from Members of this House, the industry, and members of the public on our enhancements.

13. Mr Speaker, these measures will incur higher costs. I would like to reassure Mr Louis Chua that in implementing these measures, MTI and EMA will do so in a calibrated way, to balance the cost burden, while ensuring that electricity continues to remain affordable. But the value of a more stable and resilient energy system cannot be overstated. It is fundamental and foundational to our ability to grow our economy to create good jobs for our people and to maintaining our quality of life. EMA will continue to do its best, to ensure that Singaporeans can continue to enjoy a stable, secure and reliable source of electricity, for the years to come.

14. Thank you.