Singapore’s wholesale electricity market prices set to fall

Singapore’s highly developed economy is widely considered to be one of the most dynamic and successful in the world. It acts as a regional hub for shipping and petroleum refining and hosts successful export industries in petrochemicals, pharmaceuticals and high-value technology, which have attracted significant global investment.

However the future course of energy prices is a key influencer for both industrial and commercial businesses contemplating expansion or new investment, and to prospective new suppliers of electricity when considering new or expanded generation facilities.

So, what is the forecast for Singapore’s electricity prices?

We believe that Singapore’s wholesale electricity prices are set to fall and this will have profound implications for both energy users and power generators.

To determine the outlook for electricity prices in Singapore, it is important to appreciate how prices are formed. In Singapore's competitive wholesale electricity market, prices are determined by the cost of the highest-cost generator used in any trading period. And, with the anticipated changes to the composition of Singapore’s generating capacity, the cost of the highest-cost generator is likely to change, which means that past prices are not a reliable guide to what the future holds.

Traditionally, Singapore’s generation capacity has been dominated by two main types: highly efficient combined-cycle gas turbines (CCGTs), and relatively inefficient oil-fired plants. Gas prices are indexed to oil prices in Singapore, so fuel prices are relatively consistent across the different types of plants. But the relative inefficiency of the oil-fired plants results in them being consistently higher-cost generators than the CCGTs.

The amount of CCGT capacity, however, and its ability to generate electricity, has for many years been limited by the capacity of the pipelines carrying gas into Singapore from Malaysia and Indonesia. Consequently, while CCGTs have provided the bulk of the generation, the higher-cost oil-fired plants have been required to meet the demand for power, and their operation has kept electricity prices high. This has been particularly profitable for CCGT owners who receive the high market prices for their low-cost generation.

However, recent market developments look set to alter this course.

In a move to diversify its energy sources, Singapore's government instigated the construction of a Liquefied Natural Gas (LNG) receiving terminal, which recently commenced operations. Spurred on by the past profitability of existing CCGT plants, this new source of gas has opened the floodgates to a wave of new CCGT construction projects.

By 2014, almost 3 GW of new CCGT capacity is planned to be built, increasing the CCGT generation capacity to almost 80% of total capacity. As a result, there will be sufficient CCGT capacity to meet all of Singapore’s electricity needs in virtually all trading periods, without the need to frequently fire up expensive oil-fired generation. The effect will be a significant reduction in Singapore’s wholesale electric prices.

We also anticipate a long-term trend in which pricing in the Asia-Pacific LNG market (and perhaps LNG markets more widely) decouples from oil prices. If this occurs, there is potential for natural gas prices to drop below those of oil per unit of energy, which, particularly when coupled with the operation of more efficient CCGT generating plants, would further reduce energy prices in the Singapore market.

This outlook on price is good news for Singapore’s major power consumers, but not for its generators, who will see their margins come under pressure:

Major power consumers should avoid long-term contracts that lock in (or worse, project forward) recent prices, and should instead consider greater exposure to the spot market which will offer these lower prices.

Generators and potential new entrants should plan for a period of lower revenues from the spot market, and consider carefully the economics of any potential new investment in additional capacity, taking into consideration other revenue sources such as vesting contacts, ancillary services and cogeneration.