SINGAPORE: Stricter rules that are being implemented for electricity retailers will ensure the resiliency of the market and offer more protection for consumers, but it may also mean that the era of huge discounts is over, some market observers said.
This is because the enhanced rules – from a minimum net worth to higher hedging requirements – that are progressively being implemented from this month will push up costs for the electricity retailers. Some of these costs may be passed down to consumers, these observers added.
“Nothing will come free. Retailers will have to factor these into their cost structures,” said Professor Lawrence Loh from the National University of Singapore (NUS) Business School.
“There’s this trade-off that we always have to give. The more measures you put, the cost of business will go up, and it will work towards the prices for consumers.”
The enhanced regulatory framework – announced by the Energy Market Authority (EMA) on Jul 31 following a public consultation earlier in the year – will require electricity retailers to have a tangible net worth of at least S$1 million (US$740,000) as part of the qualifying criteria for a licence.
They also need to hedge at least 80 per cent of their contracted retail demand, up from 50 per cent, on a rolling 24-month forward basis, while providing a performance bond for the remaining unhedged quantity.
Unlike before, retailers will no longer be allowed to terminate a contract based on a customer’s death, bankruptcy or insolvency, or the commencement of any bankruptcy or insolvency proceedings.
In addition, retailers that terminate contracts prematurely must compensate their customers with an amount that is equivalent to the early termination penalties they levy.
EMA has said that these changes aim to strengthen consumer protection and ensure that electricity retailers are sufficiently resilient against market volatility.
This was a move to fully liberalise the electricity retail market in Singapore, which started as a pilot project in 2018 before being rolled out nationwide in mid-2019.
Simply put, it allowed all households to pick and choose electricity price plans offered by different retailers, instead of getting power solely from SP Group at the quarterly reviewed regulated tariff.
There are two types of electricity retailers. One is the “gentailers” such as Keppel Electric and Geneco, which generate and sell electricity.
Then there are the independent retailers which do not generate their own electricity but buy electricity from the wholesale market, where prices change every 30 minutes depending on demand and supply.
Hence, conditions in the wholesale market play a key role in determining the business strategies of the latter group of retailers. The ability to hedge against fluctuations is another important factor.
The OEM started with 13 retailers. As of Aug 29, nine players remain in the market.
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Market observers agreed, noting that the new rules will raise the barrier to market entry, as well as beef up the financials and risk management policies of existing electricity retailers.
Prof Loh noted that the additional capitalisation requirement ensures that retailers have “a certain depth in their pockets” so as to stomach volatility.
Retailers will exercise better risk management as part of meeting the new hedging requirement, thereby having a more robust business model, KPMG Singapore’s partner and head of infrastructure advisory Sharad Somani said.
Meanwhile, the compensation to customers for early termination not only ensures fairness, but also adds an “exit barrier” that deters fly-by-night retailers, according to Prof Loh.
“Previously there was none,” he told CNA. “Fly-by-night retailers can come in and go off when the weather turns bad, leaving customers in the lurch.”
“We have to burn the candles on both ends. Now, (retailers) will have to calculate their exposure, not only when entering but when they leave,” said Prof Loh.
In all, the enhanced rules will “ensure only financially strong and technologically robust companies with strong management skills” get to secure a retailer licence, said Mr Somani.
These can, in turn, help to avoid a repeat of the market fallout in 2021.
Then, the local market suffered a spate of sudden exits as wholesale electricity prices went through wild swings. The exits by six retailers marked a setback for the Open Electricity Market, which aimed to provide consumers – both businesses and households – with more choices and lower electricity bills.
“If today’s retailers were to meet the most extreme conditions that resulted in retailers like iSwitch to effectively cease operations overnight in 2021, they would be better buffered to endure such conditions (by meeting the new rules in place),” said Dr David Broadstock, a senior research fellow at NUS’ Sustainable and Green Finance Institute.
However, these new measures may push up business costs and in turn, price plans sold to customers, some experts said.
The rise in costs can come in the form of higher fees for hedging transactions. Electricity retailers will also have to engage independent auditors to verify their hedging performances, which translates into additional expenses, said Prof Loh.
Further, compensating customers for premature termination will require retailers to lock up some capital and that comes with an “opportunity cost” as the money could have been invested elsewhere.
“All these will add to the cost of doing business which means lesser revenue, smaller profitability,” said Prof Loh, adding that “cut-throat” discounts that were doled out in the initial days of the Open Market Electricity may be a thing of the past.
Already, prices offered by the electricity retailers have risen over the past two years amid uncertainties in the global energy market, narrowing what was once a double-digit difference with SP Group’s regulated tariff.
But Dr Broadstock thinks otherwise. While the new requirements will change the business costs for operators in the market, they may not necessarily hit the pockets of consumers, he told CNA.
For example, the introduction of a performance bond will require retailers to set aside some capital now for future transactions. While this means that current operating costs have increased, the additional sum that is set aside is what retailers would have expected to spend as part of doing business.
Said Dr Broadstock: “Therefore, it might be better to think of it as a future expense brought forward, rather than an additional cost. For this reason, end consumers might not see significant shifts in electricity prices due to these regulations.”
He also reasoned that the rule changes do not directly impact the components that determine the regulated tariff, which is what retailers use as a benchmark for their price plans.
Around 75 per cent of the tariff rate is benchmarked against actual fuel and power generation costs, while more than 20 per cent comes from network-related costs such as maintenance.
With that, Dr Broadstock said: “This is no absolute guarantee that we will not see higher bills, but is consistent with the idea that the regulator is trying to improve the quality, and resilience, of retailers, with limited negative impact to consumers.”
Still, the market could see two-year price plans becoming the dominant offering moving forward.
This is because the new hedging and performance bond requirements are centred around a 24-month timeframe, which means that businesses are going to be thinking “in terms of a two-year horizon at any given point in time”, said Dr Broadstock.
“If you are getting physical supply agreements on a two-year cycle, why would you offer your customers otherwise?
“A one-year price plan gives you the availability to change the pricing structure – only if you can retain the customer. You need to have an expectation that in 12 months from now, you will be able to encourage the customer to pay a higher rate. If that expectation is not very clear, then there’s simply a risk (of losing the customer) and that can be avoided by having two-year contracts,” he added.
KPMG’s Mr Somani holds the view that while there would be a reduction in price promotions and discounts offered by electricity retailers, consumers will still benefit in the longer run as the stricter rules encourage “healthy competition among electricity retail businesses to strive for value and innovation, rather than cost”.
“While retailers’ price plans may not be able to offer discounts as seen in the past, the focus will now move towards higher value-added services such as demand management, consumption optimisation, and energy efficiency,” he said.
“Consumers will benefit in the long run as they see stable prices they can trust, and also experience higher value in optimising their energy consumption through better technological and innovative solutions.”
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This is because the enhanced rules – from a minimum net worth to higher hedging requirements – that are progressively being implemented from this month will push up costs for the electricity retailers. Some of these costs may be passed down to consumers, these observers added.
“Nothing will come free. Retailers will have to factor these into their cost structures,” said Professor Lawrence Loh from the National University of Singapore (NUS) Business School.
“There’s this trade-off that we always have to give. The more measures you put, the cost of business will go up, and it will work towards the prices for consumers.”
WEEDING OUT “FLY-BY-NIGHT” RETAILERS
The enhanced regulatory framework – announced by the Energy Market Authority (EMA) on Jul 31 following a public consultation earlier in the year – will require electricity retailers to have a tangible net worth of at least S$1 million (US$740,000) as part of the qualifying criteria for a licence.
They also need to hedge at least 80 per cent of their contracted retail demand, up from 50 per cent, on a rolling 24-month forward basis, while providing a performance bond for the remaining unhedged quantity.
Unlike before, retailers will no longer be allowed to terminate a contract based on a customer’s death, bankruptcy or insolvency, or the commencement of any bankruptcy or insolvency proceedings.
In addition, retailers that terminate contracts prematurely must compensate their customers with an amount that is equivalent to the early termination penalties they levy.
EMA has said that these changes aim to strengthen consumer protection and ensure that electricity retailers are sufficiently resilient against market volatility.
A recap on the Open Electricity Market
This was a move to fully liberalise the electricity retail market in Singapore, which started as a pilot project in 2018 before being rolled out nationwide in mid-2019.
Simply put, it allowed all households to pick and choose electricity price plans offered by different retailers, instead of getting power solely from SP Group at the quarterly reviewed regulated tariff.
There are two types of electricity retailers. One is the “gentailers” such as Keppel Electric and Geneco, which generate and sell electricity.
Then there are the independent retailers which do not generate their own electricity but buy electricity from the wholesale market, where prices change every 30 minutes depending on demand and supply.
Hence, conditions in the wholesale market play a key role in determining the business strategies of the latter group of retailers. The ability to hedge against fluctuations is another important factor.
The OEM started with 13 retailers. As of Aug 29, nine players remain in the market.
Collapse Expand
Market observers agreed, noting that the new rules will raise the barrier to market entry, as well as beef up the financials and risk management policies of existing electricity retailers.
Prof Loh noted that the additional capitalisation requirement ensures that retailers have “a certain depth in their pockets” so as to stomach volatility.
Retailers will exercise better risk management as part of meeting the new hedging requirement, thereby having a more robust business model, KPMG Singapore’s partner and head of infrastructure advisory Sharad Somani said.
Meanwhile, the compensation to customers for early termination not only ensures fairness, but also adds an “exit barrier” that deters fly-by-night retailers, according to Prof Loh.
“Previously there was none,” he told CNA. “Fly-by-night retailers can come in and go off when the weather turns bad, leaving customers in the lurch.”
“We have to burn the candles on both ends. Now, (retailers) will have to calculate their exposure, not only when entering but when they leave,” said Prof Loh.
In all, the enhanced rules will “ensure only financially strong and technologically robust companies with strong management skills” get to secure a retailer licence, said Mr Somani.
These can, in turn, help to avoid a repeat of the market fallout in 2021.
Then, the local market suffered a spate of sudden exits as wholesale electricity prices went through wild swings. The exits by six retailers marked a setback for the Open Electricity Market, which aimed to provide consumers – both businesses and households – with more choices and lower electricity bills.
“If today’s retailers were to meet the most extreme conditions that resulted in retailers like iSwitch to effectively cease operations overnight in 2021, they would be better buffered to endure such conditions (by meeting the new rules in place),” said Dr David Broadstock, a senior research fellow at NUS’ Sustainable and Green Finance Institute.
Related:
HIGHER BUSINESS COSTS?
However, these new measures may push up business costs and in turn, price plans sold to customers, some experts said.
The rise in costs can come in the form of higher fees for hedging transactions. Electricity retailers will also have to engage independent auditors to verify their hedging performances, which translates into additional expenses, said Prof Loh.
Further, compensating customers for premature termination will require retailers to lock up some capital and that comes with an “opportunity cost” as the money could have been invested elsewhere.
“All these will add to the cost of doing business which means lesser revenue, smaller profitability,” said Prof Loh, adding that “cut-throat” discounts that were doled out in the initial days of the Open Market Electricity may be a thing of the past.
Already, prices offered by the electricity retailers have risen over the past two years amid uncertainties in the global energy market, narrowing what was once a double-digit difference with SP Group’s regulated tariff.
But Dr Broadstock thinks otherwise. While the new requirements will change the business costs for operators in the market, they may not necessarily hit the pockets of consumers, he told CNA.
For example, the introduction of a performance bond will require retailers to set aside some capital now for future transactions. While this means that current operating costs have increased, the additional sum that is set aside is what retailers would have expected to spend as part of doing business.
Said Dr Broadstock: “Therefore, it might be better to think of it as a future expense brought forward, rather than an additional cost. For this reason, end consumers might not see significant shifts in electricity prices due to these regulations.”
He also reasoned that the rule changes do not directly impact the components that determine the regulated tariff, which is what retailers use as a benchmark for their price plans.
Around 75 per cent of the tariff rate is benchmarked against actual fuel and power generation costs, while more than 20 per cent comes from network-related costs such as maintenance.
With that, Dr Broadstock said: “This is no absolute guarantee that we will not see higher bills, but is consistent with the idea that the regulator is trying to improve the quality, and resilience, of retailers, with limited negative impact to consumers.”
Related:
Still, the market could see two-year price plans becoming the dominant offering moving forward.
This is because the new hedging and performance bond requirements are centred around a 24-month timeframe, which means that businesses are going to be thinking “in terms of a two-year horizon at any given point in time”, said Dr Broadstock.
“If you are getting physical supply agreements on a two-year cycle, why would you offer your customers otherwise?
“A one-year price plan gives you the availability to change the pricing structure – only if you can retain the customer. You need to have an expectation that in 12 months from now, you will be able to encourage the customer to pay a higher rate. If that expectation is not very clear, then there’s simply a risk (of losing the customer) and that can be avoided by having two-year contracts,” he added.
KPMG’s Mr Somani holds the view that while there would be a reduction in price promotions and discounts offered by electricity retailers, consumers will still benefit in the longer run as the stricter rules encourage “healthy competition among electricity retail businesses to strive for value and innovation, rather than cost”.
“While retailers’ price plans may not be able to offer discounts as seen in the past, the focus will now move towards higher value-added services such as demand management, consumption optimisation, and energy efficiency,” he said.
“Consumers will benefit in the long run as they see stable prices they can trust, and also experience higher value in optimising their energy consumption through better technological and innovative solutions.”
Continue reading...