In his Budget speech on 20 February 2017, Finance Minister Heng Swee Keat announced plans to implement a Carbon Tax from 2019. The Government is looking at a tax rate in the range of SGD 10 – 20 per tonne of greenhouse gas emissions on the largest emitters, such as power stations and direct emitters. For the power sector, while Carbon Tax is applied on power stations rather than consumers, it turns out to be an extra charge on the consumers of electricity.

Revenue from the carbon tax could help fund measures by industries to reduce emissions and to develop new opportunities in green infrastructure.

Petrochemical Industries

Singapore has three oil refineries run by ExxonMobil, Shell and Singapore Refining Company. These refineries produce petrochemical products which are subject to world market prices. The revenue of these products is unaffected by the introduction of a Carbon Tax. This new tax therefore affects the profit margins; some say that the refineries could see a hit to margins of up to 15% .

The response of Shell and ExxonMobil have been very moderate. ExxonMobil is “committed to working together with the Singapore government on this important issue and finding the balance between addressing the risks posed by greenhouse gas emissions and ensuring Singapore remains a strong, internationally competitive economy, supported by an affordable energy supply.” Shell emphasizes “the critical importance of a policy design which addresses strong economic growth and the competitiveness of Singapore companies in the international market place. It must ensure companies can compete effectively with others in the region who are not subject to the same levels of carbon dioxide costs.”

Power Generators

For the power generators (the Gencos) the picture is very different. The price of electricity is determined by Singapore’s Market Model for the wholesale market of power. The Short Run Marginal Cost (SRMC) of the market’s marginal plant determines the Uniform Singapore Electricity Price (USEP). In Singapore’s case, this is normally a CCGT plant fuelled by pipeline Natural Gas. And the SRMC, and therefore also USEP, includes the costs of Carbon Tax applied on the use of Natural Gas as fuel. The profit margins of the Gencos are unaffected.

If profit margins of the Gencos are unaffected, is there any other way the Carbon Tax affects the Gencos. In Europe and the USA, Carbon Emission Taxes directly impacted the fuel mix used to produce the electricity load. As coal became relatively more expensive than natural gas, producers switched electricity production fuel from coal to natural gas. This immediately reduced the overal carbon emission levels. Is this likely to happen in Singapore?

The answer is unfortunately: No. Singapore’s production mix is not really a mix at all. Almost all electricity is produced by natural gas fuelled CCGT and co-generation plants (more than 95%). The remainder is produced by solar and waste co-generation facilities which run anyway. There is no ability to switch to another fuel to reduce carbon emission levels and to avoid Carbon Tax.

Solar and other Renewables

As solar (and other renewable) power production has no (or reduced) carbon emissions, their profit margins improve as result of Carbon Tax. This premium encourages investment in green projects. However, at the same time, overcapacity of CCGT and the Loss-making Power Generation Sector keeps the market price of electricity, USEP, suppressed; the profitability of the sector, including solar and other renewables, is limited. A solution for the CCGT overcapacity issue and a resulting increase of USEP would have a much larger impact on the profitability of green projects than the Carbon Tax.

Solar has a long way to go in Singapore and it will take a considerable amount of time and effort before solar and other renewables become a seizable factor in Singapore’s production mix.

No Impact for Power Sector

This means that the Carbon Tax has, at least for the foreseeable future, no implications for the power sector other than an increase in the cost of electricity for consumers. It will have none or limited impact on the carbon emission levels of Singapore’s electricity supply. However, the new government funds resulting from the Carbon Tax can be used for improving efficiency elsewhere in the longer term.

See also: The Business Times 24 February 2017, With the carbon tax, a new chapter in Singapore’s economy opens

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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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