Form April 2018, 108,000 household accounts and 9,500 businesses in Jurong Singapore have the option to buy electricity from a retailer of their choice, or continue buying electricity from SP Group at a Regulated Tariff. Jurong is selected as an initial phase prior to a Full Retail Competition later this year. We predict that it will be an overwhelming success.

Non-Contestable Consumers and Vesting Contracts

Retail customers are the last group of Non-Contestable Consumers: customers who can only buy electricity at a Regulated Tariff. This Regulated Tariff relates much more to the Vesting Contract Price than the market price of electricity or the Wholesale Electricity Price (WEP). During the last 5 years the Vesting Contract Price, and therefore the Regulated Tariff, has been significantly higher than the WEP (with the exception of July 2015).

Figure: Regulated Tariff Energy Costs vs WEP

In the last 5 years, Singaporean Consumers paid over 3.5 Billion SGD to the Vesting Contracts on top of the wholesale costs of electricity. Almost all of this is charged onto the Non-Contestable Consumers as part of the Regulated Tariff. The Vesting Contracts were never intended to be a support-line for a loss-making Power Generation Sector Crushed by Massive Overcapacity. But the introduction of the LNG Vesting Scheme has turned the Vesting Contracts in just that.

The LNG Vesting Scheme was launched to provide for an incentive to build new CCGT power generation plants fuelled by re-gasified LNG. The new plants contributed to an overcapacity which pushed Generation Sector in unsustainable losses. The LNG Vesting Scheme provides for some relieve for the generators, but is almost solely paid for by Non-Contestable Consumers.

When Retail Customers become Contestable Consumers…

Retail consumers can now become Contestable Consumers. They can ‘escape’ from the consistent overpayment of electricity over and beyond the WEP. While most of the Vesting Contract payments are allocated to the Non-Contestable Consumers, the Contestable Consumers pay only a very small part of it. (As the pool of Non-Contestable Consumers reduces, this share will start to increase). Also, Vesting Contract payments are allocated proportionally to all Contestable Consumers, including large businesses and industries. This means a significant reduction to a retail costumer’s electricity bill.

The only thing retail customers need to do to become Contestable Consumer, is to sign up with an new electricity supplier. Preferably a supplier who is forwarding most of the difference between the WEP and the Regulated Tariff Energy Cost to the customer.

Retail Competition and Electricity Retail Suppliers

In anticipation of the Full Retail Competition, a large number of electricity retail suppliers have emerged. EMA and SP Services have setup a website to help retail customers to choose a new supplier: Open Electricity Market. Suppliers list their offerings next to each other to provide for full pricing transparency. Fierce retail competition between the suppliers will force the them to forward as much of the benefits to the consumers as possible.

Retail customers who switch to a new supplier make substantial savings on their electricity bill. These savings do not affect the profitability of the Generation Sector, nor does it necessarily undermine the profit margin of retailing. They are paid for by all other existing Contestable Consumers, i.e. large businesses and industries. The Full Retail Competition is in fact a redistribution of the Vesting Contract payments currently paid by the Non-Contestable Consumers to existing Contestable Consumers. Last year alone the Non-Contestable Consumers contributed approximately SGD 650 million to the Vesting Contract payments.

When cheaper prices for retail customers are not the result of a squeeze of a supplier’s margin, it is not surprising that so many electricity retail suppliers want to be part of this redistribution.

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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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