What is happening?
Natural gas accounts for 95% of the production of electricity in Singapore. As Singapore relies on imported natural gas for its power generation, constraints in supply will impact Singapore’s electricity prices.
The spot electricity prices in the Singapore Wholesale Electricity Market (SWEM) fluctuate every half-hour depending on prevailing demand and supply conditions. 2021 and 2022 saw a global energy crunch of post-pandemic high demand and tight supply conditions. Natural gas demand increased due to recovering global economic activity, while supply became tight due to supply disruptions, production outages to geopolitical tensions.
The monthly average for the uniform Singapore energy price (USEP) doubled within a year from S$67 per megawatt-hour (MWh) in October 2020 to S$156/MWh in September 2021. Between Oct 1 to 14, the average USEP was closer to S$400/MWh. At the time of this article, the daily USEP reached S$415/Mwh.
The recent spot price volatility in the SWEM in Singapore has been attributed to higher than usual electricity demand following the re-opening of borders and businesses and the outage of multiple generation units. There were also planned and unplanned supply disruptions to Singapore’s long-term natural gas supplies from West Natuna and South Sumatra. Whilst generation companies (gencos) have the option to switch from piped natural gas to alternative fuel sources such as Liquefied Natural Gas (LNG), the gencos will need to wrestle with the global shortage of LNG supplies and the high spot LNG prices.
As for businesses (i.e. contestable consumers) who buy power from electricity retailers, the risks of volatile energy prices are best managed by standard price plans (i.e. fixed price plans or discount off tariff plans). However, businesses are faced with higher prices when they renew or enter into new retail contracts, as the contracts will reflect the higher cost of fuel and electricity generation.
In Singapore, regulatory intervention has been needed to help large businesses which could not renew or secure electricity contracts for their power needs because retailers are spooked by the high spot prices, margin squeeze and the exit of at least four retail players. The regulator (EMA) currently works with gencos and electricity retailers to offer one-month fixed price plans to large consumers (with average monthly consumption of at least 4,000 kWh) under the Temporary Electricity Contracting Support Scheme (TRECS). Under this scheme, participating gencos are able to draw on EMA's Standby LNG Facility (SLF), which is replenished with gas purchased from the spot LNG market. The plans need to be re-priced every month to reflect the prevailing global gas prices. With monthly plans, large consumers can avoid being locked into long-term contracts, allowing them to consider other offers if global gas prices fall upon the expiry of the contracts. For the month of August 2022, the fixed electricity rate is capped at 38.231 cents/kWh. It does not include third-party charges such as transmission charges by SP Group and market charges by the EMC. Consumers can sign up for these monthly fixed price plans from 15 July 2022 to 25 July 2022.
What can be done?
Businesses cannot afford to sit on their hands and do nothing amidst the escalating energy crisis. The regulatory intervention and the offer of the TRECS are likely short-term salve.
A prudent approach is to evaluate all the regulatory, contractual, and operational options available to save energy and secure a reliable and cost-effective power supply. In addition, in line with Singapore’s climate ambition to achieve net zero emissions by or around 2050, the businesses’ mitigation measures should be aligned with a plan to be green and sustainable whilst being economically competitive in a low-carbon future.
Electricity pricing has a knock-on effect on production cost, industrial output and profitability; coupled with the looming economic uncertainties, provides a cauldron for contractual claims and disputes. Any slowing down of the production and distribution chain may also have negative impacts on the labour field and borrowing opportunities.
Legal and professional support may sometimes be needed, particularly in the following areas to ride out the storm:
Review of companies’ corporate structure and the interface between group companies; Consideration of restructures, amalgamations or demergers may be needed to streamline decision making, operations and cost-centres.
Energy conservation measures and facility retrofits are one of the foremost actions to be considered to manage energy demand and introduce sustainability practices. Energy savings contracts with Energy Service Companies (ESCOs) can be explored.
Internal review of commercial contracts for actual or potential breaches so as not to be caught off-guard by claims or proceedings on commercial contracts. Variation or supplemental agreements may be needed with counterparties.
Review of loans and access to structured finance, hedging contracts on commodities, retention of liquidity and sale & lease-back. Government grants to enhance productivity and other grants may help in upskilling and upgrading.
Use of digital solutions to improve the productivity, accessibility, and sustainability of energy systems. Adoption of technology to reduce the energy intensity of providing goods and services. Smart use of data to improve efficiency and industrial process.
Staying abreast of energy legislation and policies pertaining to energy use, energy conservation, carbon tax and related issues. Power purchase agreements, demand management and electricity imports are options to combat power supply disruptions.
Bird & Bird is a global law practice with sector specialisation in energy and utilities. Our international energy & utilities team advises commercial enterprises and public sector entities on a wide range of legal issues including power purchase agreements, demand response programs, microgrids, energy storage, carbon mitigation, IP assets, hydrogen fuel cells, green loans, and electricity futures. We provide legal support to our clients on M&A, fund-raising, energy regulation, project management, sustainability reporting, intellectual property, commercial contracts, and dispute resolution.