Revision of Electricity Market Structure and Its Impact on Singapore's Energy Security and Prices for Consumers

Mr Zhulkarnain Abdul Rahim asked the Minister for Trade and Industry following the Ministry's announcement at the Singapore International Energy Week Summit to revise the electricity market structure, what are the plans to update the Code of Conduct for Retail Electricity Licensees to strengthen retail consumer protection.

Ms He Ting Ru asked the Minister for Trade and Industry in relation to the stricter rules for energy retailers to strengthen the existing market structure of Singapore's power sector (a) what are the specific enhanced regulatory requirements and tightened eligibility criteria to be introduced for better consumer protection; (b) what is the projected timetable for implementation of each area; and (c) whether there can be a prohibition on retailers prematurely terminating contracts with retail consumers.

We are at a critical juncture in the development of our energy market. Since the 1990s, we have operated an open energy market and this has served us well. A competitive market has incentivised generation companies (gencos) to bring in new and more efficient technologies and they also offered more choices for consumers. Many consumers have also enjoyed lower electricity prices as a result.

However, the energy landscape has changed drastically, and new sources of supply risks and volatilities have emerged.

First, heightened volatility arising from tight power generation capacity. This has emerged in liberalised markets all around the world, where capacity planting decisions are made by private gencos based on short-term price signals in the wholesale electricity market. For these gencos, high electricity prices typically signal that capacity is tight and that new generation plantings are, therefore, needed. However, very often, these price signals can come a bit too late and it takes about four to five years typically to build a new generator. The time lag between the price signals and the construction of new generators, therefore, leads to shortages of generation capacity and can lead to sharp spikes and protracted elevation of electricity prices and even blackouts during periods of system stress, as we saw in some cities last year.

Second, supply risks and volatility arising from disruptions in global gas supply. As we rely on imported natural gas for almost all of our electricity production, global supply and demand shocks will spill over into our domestic electricity market. As fuel prices surged last year, our electricity market was severely tested. Gencos were reluctant to contract for gas, for fear that they would be left holding on to expensive gas inventories should prices moderate subsequently. This, in turn, increased the risks of gas shortfalls and it caused prices in the wholesale electricity market to surge.

Third, volatility arising from failures in intermediaries. We observed this in the fourth quarter of last year, where six electricity retailers exited the market as they were not sufficiently prepared to deal with the extreme market volatilities. While affected consumers did not experience any disruptions to their power supply, some of them experienced inconveniences as well as price surges while sourcing for alternative electricity retail contracts and they faced higher prices.

These sources of volatility have tested our energy market over the past year, with the ongoing energy crisis. Since the fourth quarter of last year, the Energy Market Authority (EMA) has put in place emergency measures which have helped to stabilise the market. However, Members of the House, this is unlikely to be the last energy crunch that we will face, and we would need to be even more prepared for a more volatile global energy market going forward.

We will, therefore, need to introduce safeguards to manage the risks of volatilities in our energy market. Last month, the Ministry of Trade and Industry (MTI) announced that it would be introducing guardrails to strengthen our energy market in three key areas – power generation, gas supply and electricity retail markets. These guardrails are intended to ensure that our energy market continues to function well even under volatile conditions.

Mr Speaker, allow me to broadly recap these measures for this House.

First, to ensure that we continue to have sufficient generation capacity in time to come, EMA will introduce a centralised approach to facilitate investments in new generation through a competitive tender. The tender will be conducted in advance of when the new capacity is needed, taking into account the lead time which is required for construction and development. Should there be inadequate private sector interest to plant new capacity, EMA will step in to build the required new capacity.

Second, to safeguard energy security and enhance the resilience of our natural gas supply, we will institutionalise some of the measures that we had introduced late last year to safeguard energy security as permanent features of our market. These are the regulations requiring gencos to maintain sufficient fuel for power generation and the standby fuel facility to guard against risks of gas supply disruptions. EMA will also be working with the industry to explore ways to aggregate gas procurement and obtain longer-term, more secure contracts.

Mr Zhulkarnain Abdul Rahim and Ms He Ting Ru have asked about our measures to strengthen the electricity retail market. We will enhance the regulatory requirements imposed on electricity retailers, to ensure that they are sufficiently prepared and that they are better able to withstand market volatilities. The regulatory enhancements include raising the qualifying criteria so that only credible industry participants with sufficient financial strength and sustainable business propositions will be allowed to retail electricity to consumers. As for whether EMA will prohibit retailers from prematurely terminating contracts with their consumers, this is already the case under the Code of Conduct for Retail Electricity Licensees. Retailers cannot unilaterally terminate contracts unless under stipulated conditions, such as if they are exiting the sector, or consumers are insolvent or had a breach of contract. EMA will be launching a consultation in the coming weeks on specific proposals to enhance the regulatory requirements for retailers.

For consumers, EMA will look into tightening the eligibility criteria for Wholesale Electricity Price (WEP) plans, so that only larger consumers who are better equipped to deal with the risks of price volatilities would be allowed to enter into such plans. All consumers will continue to have the option of entering into retail contracts with electricity retailers, or, in the case of households and small business consumers, returning to the regulated tariff.

EMA is also in discussion with market participants on operational measures to strengthen the wholesale electricity market.

Members of the House, our experience over the past year has demonstrated that a robust wholesale electricity market can have a stabilising influence on the broader retail market, and is an important pillar of our efforts to strengthen the electricity retail market.

EMA will consult the industry as well as the public on the details of these enhancements. We plan to implement them progressively from 2023 onwards. We welcome feedback and suggestions from Members of this House, the industry and members of the public on our enhancements.

Mr Speaker, all of these measures will incur higher costs. I would like to reassure Mr Louis Chua that in implementing these measures, MTI and EMA will do so in a calibrated way to balance the cost burden, while ensuring that electricity continues to remain affordable. But the value of a more stable, secure and resilient energy system cannot be overstated. It is fundamental and foundational to our ability to grow our economy, to create good jobs for our people and to maintain our quality of life. EMA will continue to do its best to ensure that Singaporeans can continue to enjoy a stable, secure and reliable source of electricity for years to come.

Thank you, Mr Speaker. I have just two supplementary questions for the Second Minister.

I read recently that Indonesia will extend its gas supply contract to Singapore by about five years. I think it was announced over the past week. But, reportedly, based on a Reuters article, distribution volume is reportedly 30% to 40% lower but at higher prices. So, in light of these guardrails which, I recognise, strengthen our gas supply agreements, what is the expected change in the mix between piped natural gas and liquified natural gas (LNG) over the next five years and beyond when this new contract expires?

Secondly – and this is related to my original Parliamentary Question – in terms of the expected increase in the cost of electricity eventually, what is the increase in this gas supply pricing agreement versus what was agreed on in the prior contract?

Currently, the majority of the gas supply comes from piped natural gas and the balance from liquefied natural gas.

As the Member would have known, we have our Singapore LNG (SLNG) terminal and this terminal allows us to import liquefied natural gas from all over the world. And the mix – I do not have it off-the-cuff today – I think that it is probably about 60:40, or 40% LNG. So, that drop from the new gas contract that was signed and entered into – I think that it was announced today – between Gas Supply Pte Ltd (GSPL) and MedcoEnergi (Medco), there is some drop. But the drop will be made up for by imports through LNG. And the shortened period today, the new gas contract of five years, is also a function of the volatility in terms of the pricing that countries all over the world are going through and experiencing.

If the price is pegged at too high a level, then obviously, the ability for us to import LNG from other parts of the world would become more attractive. So, it is actually a fine balance. This is a commercial arrangement between GSPL and the Indonesian entity, just like for the imports of natural gas from other entities, those are also private commercial agreements. I do not think the Government should comment on these things.

To the point about how these gas prices will translate into higher cost, natural gas, over the medium term, is still one of the most environmentally-friendly transition fuel as we move towards our zero-carbon emission target by 2050.

As we progressively move towards renewable energy imports from the region to the ASEAN regional grid, as we adopt and intensify our land use for solar power adoption, as we move towards funding, going into more research into the carbon capture storage solutions, as we go into hydrogen – there is a Parliamentary Question, if we get there, which I will speak more on later – we believe that the dependency in the long haul on natural gas will start to drop.

However, I think the caution that I want to add to this House is that the transition towards renewable energy may not necessarily result in cheaper electricity, because there is a cost in terms of adopting green sources of renewable energy. I hope that clarifies.

Thank you, Speaker. I have just one follow-up supplementary question for the Minister. This relates to retail consumer protection. Will EMA or MTI consider strengthening retail consumer protection and safeguards such as the ease of transfer ability or novation of consumer contracts to alternative retailers, or also maybe a recourse mechanism for a more cost-efficient and expeditious consumer-related dispute resolution.

I thank Ms Nadia for her question. Indeed, EMA will launch a consultation in the coming weeks on specific proposals to enhance some of these regulatory measures and requirements for retailers. As part of the consultation, we will be releasing more details in the coming weeks. We want to reassure the Member that in tightening regulatory requirements, EMA will also strengthen safeguards for consumers affected by exiting retailers, or even retailers who want to novate their agreements. So, the short answer is, we will be consulting more, and we will be tweaking and also improving on the existing suite.

One of the key takeaway is that, the energy market, the Open Electricity Market (OEM) has worked well for us thus far; it has resulted in a lot more efficiencies in terms of the pricing mechanism. What has worked, has worked based on a certain band of volatility. In this particular period of time and in the foreseeable three to five years, as I have shared in my earlier speech, the volatility range has increased significantly. And the existing frameworks would now have to be tweaked, to take into consideration the heightened range, the increase range of volatilities and it is timely for us to also do this public consultation exercise to see how we can work collectively together. As I have also exhorted the House: Members, if you have ideas, please share them with us, we are happy to take them on board.

I thank the Minister for the reply. It is also good to hear that some of these protections for retail consumers will be progressively rolled out from 2023. I just have one supplementary question and it is whether or not there will be consideration given to better consumer education about the choices that they are facing, in terms of which retailer to go for. I think some of the feedback that we often get is that the various options available, the various contractual options, the lock-in periods, even the rates that we are paying, the differing rates; some consumers can find that quite confusing and I am just wondering whether there will be better consumer education or sharper consumer education, so that the consumers do not think, "Hey, there are more protections coming in, therefore, there is no risk or lower risk". Because, as the Minister shared earlier, there is still volatility that we expect in the future. So, whether or not we can start looking at sharpening the consumer education, about the consequences of the choices that they might make.

We will certainly improve, we will certainly consider – we would not just consider, we will certainly add on in terms of strengthening consumer education. But for the Member's information and perhaps to add to her understanding: under the Electricity Act currently, EMA has issued and published on its website, the Code of Conduct for retail electricity licensees.

This Code of Conduct sets out the minimum standards of performance which retail electricity licensees have to adhere to. And particularly, I think three points to protect consumers that would be of interest to everyone here, in addition to Ms He.

These include: one, requiring retailers to comply with fair contracting practices, such as providing consumers with the consumer advisory and fact sheets to summarise the key terms of their retail plans and consumers must acknowledge such information before signing contracts with the retailers.

The second point, the code of conduct also prohibits retailers from unilaterally terminating contracts with consumers, unless under stipulated conditions – such as if they are exiting the sector, or consumers are insolvent, or had breached the terms of their contract with the retailer.

And the third point is that there are safeguards in retailer exits. Exiting retailers are required to refund all security deposits collected from household consumers, after offsetting outstanding charges. Exiting retailers must also approach other retailers to seek their interest and agreement to accept the novation of the contracts on the same terms and conditions before the consumer can be transferred to SP group under the default supply arrangement.

So, there are safeguards today but we will continue to strengthen the education to all consumers. But I want to also seek Members of the House, including Ms He, to underscore the fact that, at the end of the day, energy conservation must still remain the foundation of how we are going to move forward in our overall energy transition story.

Sorry, just to quickly follow up. The question really was – the point I was trying to get at is that, yes, I know that they are required to have certain requirements when they signed a contract with the consumer; there is a checklist, I believe. I am just wondering whether the consumers truly understand, or whether it just becomes one of those check boxes that get ticked. And so, whether has EMA, for example, surveyed how helpful this checklist is, whether the buyers truly understand what they are signing as opposed to, that they kind of "half understand" but just signed a sign a piece of paper. And, whether this is also provided in all four languages.

This will be part of the public consult that we are going out with to see how we nuance it and reach a wider group of Singapore population, and at the same time, improve the communications to them.