SINGAPORE: Electricity retailers in Singapore may have to meet new requirements ensuring they have sufficient financial standing, under changes proposed by the Energy Market Authority (EMA).
In a consultation paper released on Wednesday (Feb 1), the authority is also proposing that customers be compensated if retailers exit the market and terminate contracts prematurely.
These proposals aim to strengthen consumer protection and ensure that electricity retailers are sufficiently resilient against market volatility, following a spate of retailer exits that sent shockwaves through the local market in late 2021.
Singapore's electricity retail market has been progressively liberalised since 2001. The final phase was the nationwide rollout of the Open Electricity Market in 2018 which allowed all consumers to choose who they wish to buy electricity from. This competition has benefited consumers, EMA said.
But a global energy shock in the fourth quarter of 2021 led to high and volatile prices in Singapore’s wholesale electricity market.
Independent retailers, which do not generate their own electricity but buy electricity from the wholesale market, were especially affected by these volatile market conditions.
In the end, six of these retailers exited the market, while another two prematurely terminated consumers’ contracts. Collectively, they supplied about 9 per cent of all electricity consumers.
“While the entry and exit of retailers are features of an open and competitive retail market, the number of exits suggests that some retailers were not sufficiently prepared against market volatilities,” EMA said in its consultation paper.
These retailers may have large unhedged positions and when wholesale electricity prices rose, they ended up having to buy electricity at high prices and sell at much lower contracted rates to consumers. As a result, they were no longer able to sustain their operations and exited the market.
The recent market upheaval also highlighted the issue that consumers are not sufficiently protected when retailers exit the market or if retailers prematurely terminate contracts.
While security deposits from household consumers are safeguarded and refunded when retailers exit the market, retailers typically do not have any contractual obligations to compensate consumers in the event of early termination of contracts.
“This stands in stark contrast to the fact that most consumers are required to pay an early termination fee if they choose to prematurely terminate contracts,” the authority said.
With that, EMA is proposing four regulatory changes.
First, the authority is looking at requiring all electricity retailers to have a paid-up capital or tangible net worth of at least S$1 million as part of the qualifying criteria for a licence.
Currently, applicants for an electricity retailer licence have to submit a comprehensive business plan and a viable hedging plan, as well as demonstrate that its management has at least five years of experience in either energy retailing or commodity trading.
Having an additional capitalisation requirement will ensure that electricity retailers are “credible and have sufficient financial standing”, according to the consultation paper.
The authority is also proposing that retailers seek its approval before the appointment of key roles, such as chief executive officer, managing director and any person with “substantial direct or indirect influence” over the company’s key decisions.
This is to ensure that electricity retailers are headed by “competent and honest individuals”, noted EMA, adding that its assessment will broadly include an individual’s honesty, integrity, reputation, competence, capability and financial soundness.
Stricter hedging requirements for all retailers were also recommended.
At the moment, retailers in the Open Electricity Market are required to hedge at least 50 per cent of their contracted load against wholesale electricity prices. Those not involved in the Open Electricity Market are not subject to hedging requirements.
To strengthen the resiliency of electricity retailers, especially their ability to withstand market volatility, EMA intends to require all players to hedge at least 80 per cent of their retail contract quantity on a rolling 24-month forward basis.
A performance bond will also be required to cover the remaining quantity that is unhedged.
In addition, EMA is seeking monthly updates from retailers about their projected contracted demand profile and executed hedges on a 24-month forward basis.
Each retailer will be required to engage an independent auditor to verify its hedging performance.
There are several proposals to better protect retail consumers against early contract terminations.
Currently, retailers are not allowed to terminate a contract, unless the consumer is insolvent or bankrupt or deceased, has breached the contract, or has been transferred back to SP Group as a last resort.
EMA intends to amend this to clarify that even if a consumer is insolvent, bankrupt or deceased, a retailer will not be allowed to unilaterally terminate a contract as long as there is no payment or contractual default.
Retailers that terminate contracts prematurely will also be required to compensate their consumers, with the compensation amount having to be “at least the same” as the penalties levied on consumers.
Retailers are presently not obligated to provide compensation. Hence this proposal will ensure that both consumers and retailers receive “equal protection” in the event of early termination, EMA said in its consultation paper.
Adding that early terminations may have led to some consumers having to purchase electricity at higher rates from an alternative arrangement, the authority said it is also considering whether retailers should be required to compensate consumers for the difference, should the retailer exit the market.
Such a move would benefit consumers, although EMA also noted that it will likely add “significant costs” for electricity retailers, making it less viable for them to operate.
The consultation period for these proposals, during which the EMA invites comments from the public and industry, will end at 5pm on Mar 3.
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In a consultation paper released on Wednesday (Feb 1), the authority is also proposing that customers be compensated if retailers exit the market and terminate contracts prematurely.
These proposals aim to strengthen consumer protection and ensure that electricity retailers are sufficiently resilient against market volatility, following a spate of retailer exits that sent shockwaves through the local market in late 2021.
Singapore's electricity retail market has been progressively liberalised since 2001. The final phase was the nationwide rollout of the Open Electricity Market in 2018 which allowed all consumers to choose who they wish to buy electricity from. This competition has benefited consumers, EMA said.
But a global energy shock in the fourth quarter of 2021 led to high and volatile prices in Singapore’s wholesale electricity market.
Independent retailers, which do not generate their own electricity but buy electricity from the wholesale market, were especially affected by these volatile market conditions.
In the end, six of these retailers exited the market, while another two prematurely terminated consumers’ contracts. Collectively, they supplied about 9 per cent of all electricity consumers.
“While the entry and exit of retailers are features of an open and competitive retail market, the number of exits suggests that some retailers were not sufficiently prepared against market volatilities,” EMA said in its consultation paper.
These retailers may have large unhedged positions and when wholesale electricity prices rose, they ended up having to buy electricity at high prices and sell at much lower contracted rates to consumers. As a result, they were no longer able to sustain their operations and exited the market.
The recent market upheaval also highlighted the issue that consumers are not sufficiently protected when retailers exit the market or if retailers prematurely terminate contracts.
While security deposits from household consumers are safeguarded and refunded when retailers exit the market, retailers typically do not have any contractual obligations to compensate consumers in the event of early termination of contracts.
“This stands in stark contrast to the fact that most consumers are required to pay an early termination fee if they choose to prematurely terminate contracts,” the authority said.
With that, EMA is proposing four regulatory changes.
Related:
ADDITIONAL CRITERIA OF PAID-UP CAPITAL
First, the authority is looking at requiring all electricity retailers to have a paid-up capital or tangible net worth of at least S$1 million as part of the qualifying criteria for a licence.
Currently, applicants for an electricity retailer licence have to submit a comprehensive business plan and a viable hedging plan, as well as demonstrate that its management has at least five years of experience in either energy retailing or commodity trading.
Having an additional capitalisation requirement will ensure that electricity retailers are “credible and have sufficient financial standing”, according to the consultation paper.
SEEK APPROVAL FOR KEY APPOINTMENT HOLDERS
The authority is also proposing that retailers seek its approval before the appointment of key roles, such as chief executive officer, managing director and any person with “substantial direct or indirect influence” over the company’s key decisions.
This is to ensure that electricity retailers are headed by “competent and honest individuals”, noted EMA, adding that its assessment will broadly include an individual’s honesty, integrity, reputation, competence, capability and financial soundness.
RAISING HEDGING REQUIREMENTS
Stricter hedging requirements for all retailers were also recommended.
At the moment, retailers in the Open Electricity Market are required to hedge at least 50 per cent of their contracted load against wholesale electricity prices. Those not involved in the Open Electricity Market are not subject to hedging requirements.
To strengthen the resiliency of electricity retailers, especially their ability to withstand market volatility, EMA intends to require all players to hedge at least 80 per cent of their retail contract quantity on a rolling 24-month forward basis.
A performance bond will also be required to cover the remaining quantity that is unhedged.
In addition, EMA is seeking monthly updates from retailers about their projected contracted demand profile and executed hedges on a 24-month forward basis.
Each retailer will be required to engage an independent auditor to verify its hedging performance.
COMPENSATION FOR CUSTOMERS
There are several proposals to better protect retail consumers against early contract terminations.
Currently, retailers are not allowed to terminate a contract, unless the consumer is insolvent or bankrupt or deceased, has breached the contract, or has been transferred back to SP Group as a last resort.
EMA intends to amend this to clarify that even if a consumer is insolvent, bankrupt or deceased, a retailer will not be allowed to unilaterally terminate a contract as long as there is no payment or contractual default.
Retailers that terminate contracts prematurely will also be required to compensate their consumers, with the compensation amount having to be “at least the same” as the penalties levied on consumers.
Retailers are presently not obligated to provide compensation. Hence this proposal will ensure that both consumers and retailers receive “equal protection” in the event of early termination, EMA said in its consultation paper.
Adding that early terminations may have led to some consumers having to purchase electricity at higher rates from an alternative arrangement, the authority said it is also considering whether retailers should be required to compensate consumers for the difference, should the retailer exit the market.
Such a move would benefit consumers, although EMA also noted that it will likely add “significant costs” for electricity retailers, making it less viable for them to operate.
The consultation period for these proposals, during which the EMA invites comments from the public and industry, will end at 5pm on Mar 3.
Continue reading...