Speaking on March 4th 2021 at the Committee of Supply 2021, second Minister for Trade and Industry Tan See Leng said that “over the medium to long run, electricity prices normalising is inevitable”. But the structure of the Singaporean Market Model and its reliance on natural gas fuelled CCGT power plants makes this unlikely to happen.

Wholesale prices of electricity have been depressed since 2014. We have argued the Loss-making Power Generation Sector in Singapore requires Bold Steps to incentivise investment in new plants and infrastructure. These investments are necessary to keep up the reliability of the power network.

Intense competition amongst the different gencos to sell electricity has led to electricity prices falling below the full cost of producing electricity.

Minister for Trade and Industry

The Supply Cushion indicates the level of available but unused capacity. Some of it is required to guarantee supply adequacy which can be called up when required.

Figure: Supply Cushion

High levels of the Supply Cushion mean that a substantial amount of the unused capacity can be classified as overcapacity. It is often thought this is the reason for depressed electricity prices. And, when over-capacity eases, prices automatically improve. But in the case of Singapore, this argument is misconstrued.

We argued that since 2014 electricity prices do not depend on changes in demand and/or supply. Mainly changes in fuel costs (i.e. natural gas) drive changes in electricity prices . Almost all of the price-setting gencos use similar natural gas fuelled CCGT power plants. These plants, with similar short term marginal cost of production, supply the extra electricity when needed for additional demand. As the production costs is the plants is the same short term marginal cost, electricity prices do not materially increase as a result of the increased demand.

As the short term marginal cost is less than the full costs of plant, gencos will continue to struggle making profits. And consequently, there is no economic incentive to invest in new plants and infrastructure to maintain the reliability of the power network.

What we need to do is to prevent a swing from a glut to a severe shortage of capacity. This will result in sharp price spikes and perhaps, even blackouts…

Minister for Trade and Industry

A loss in reliability of the power network does most likely result in transmission constrains and large impacts of unplanned maintenance or outages. In practice this means an increase of price spikes and the potential of blackouts. The potential impact manifested itself in July 2015 and to a lesser extend in November 2020.

Price spikes do lead to higher average prices, but do not often result in commercial investment decisions for new plants. The investment would reduce the bottlenecks and occurrence of the price spikes.

We agree with the minister, “the overcapacity situation will likely be alleviated in the near future with rising demand driven by the growth of sectors such as data centres, 5G networks, agri-tech, as well as the adoption of EVs; and the low electricity prices today are currently also dis-incentivising the generation companies from investing in new plants”.

However we do not foresee that wholesale electricity prices with significantly rise above the short term marginal cost of power generation. Unless it is combined with high volatility as a result of a reduced reliability of the power network and infrastructure.

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Martin J. van der Lugt

Martin works as an independent consultant for the energy industry. He gained wide ranged experience in the gas and power markets in Northwest Europe working for European and American energy companies and as an independent consultant. He has a particular interest in the developments of the Southeast Asian markets and is open to discus opportunities.

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