Cautious steps

Lau Gar Ning, CEO,
Tuas Power, Singapore

On 1 October 1995, Singapore took its first step towards restructuring its electricity and gas industries with the corporatization of the electricity and gas departments of the state-owned Public Utilities Board (PUB) and the transfer of these portfolios to a newly-formed, vertically integrated entity, Singapore Power (SP).

At the same time, Tuas Power Ltd., a separate wholly owned subsidiary of Temasek Holdings (Private) Ltd., was formed to develop and operate Tuas Power Station and to compete against the generation companies of Singapore Power.

Further to its restructuring effort, the Singapore government set up the Singapore Electricity Pool (SEP), which started operating on 1 April 1998. The SEP acts as a wholesale market where electricity is traded between generation and supply companies.

A review of the electricity market in 2000 unveiled several key initiatives. The concern of many industry stakeholders was a lack of system clarity and the conflict of interests that existed in SP. SP, through its subsidiary PowerGrid, also acted as a market operator and power system operator.

In a bid to create a more level playing field, a clear separation of the competitive businesses from the natural monopolies was instituted. In April 2001, SP divested its two generation companies. The Energy Market Authority (EMA) was formed to carry out regulatory functions. EMA also took over the role of power system operator. The Energy Market Company (EMC) was formed to undertake the function of market operator.

On June 24 2002, the EMA commenced the eight-week trial period for the new software that will support the New Electricity Market (NEM). The EMA has indicated that the NEM will commence in October.

The revised electricity pool in the NEM will provide a co-optimized market for energy, regulation and reserve.

Several changes have already been made to the Pool Rules to ensure that the market sets off the right price signals for investors, an important feature that the government wishes to achieve. The NEM will also incorporate various check and balance mechanisms that will reduce the influence of market power and drive competition.

Retail competition will be introduced in phases, beginning with the largest electricity users and cascading to households. Currently, consumers with a contracted capacity of over 2 MW can choose an independent retailer. By 2003, consumers with annual consumption of at least 240 000 kWh will be able to participate in the NEM.

Seventy per cent of the current pool of large consumers has already switched supplier. Initially, the market reacted cautiously. However, the array of choice offered by retailers to help lower electricity costs and the opportunity to play a more active role in monitoring their electricity consumption have prompted many to switch.

Market education is important. Consumers need to be able to view electricity investment beyond the cost of electrons. Increased standards of consumer services and the availability of value-added tools are important by-products of competition.

To capture the wide range of consumers in the NEM, competing retail players are expected to offer various types of packages designed to meet the needs of the different pockets of consumers. Consumers will ultimately be presented with a plethora of choices, each presenting an opportunity to manage electricity costs more effectively. Competition, especially in a market with generous generation reserve capacity, certainly has the potential to bring down electricity costs in the long run.

The next step in the deregulation process is the 100 per cent divestment of the three generation companies owned by Temasek, namely Tuas Power, Power Seraya and Senoko Power.

Singapore is set to continue with its efforts to deregulate the electricity industry. The question is the pace of the deregulation. As experiences in other markets have shown, deregulation needs to be fine-tuned constantly as the market evolves. This will ensure that electricity prices are determined by market mechanisms, rather than regulatory or market power.

In the course of introducing competition in the electricity market, the authorities must take care to ensure that market equilibrium and reliability of supply is maintained. Several factors are needed to bring about a smooth transition into the competitive environment.

The new market created should reflect a level playing field for all players. Market operations and access to transmission and distribution infrastructure need to be transparent and anti-competitive behaviour deterred.

For the consumers, competition should translate to more competitive pricing in the long run. Consumers will also have a choice of electricity products to suit their needs. New and innovative solutions offered by the retailers will help consumers monitor and manage their electricity costs more effectively in order to achieve an optimal balance in their electricity usage and expenditure.

The liberalization of the electricity market, especially for a small island-state like Singapore, is a complex operation that needs to be approached cautiously. Eventually, the reformed market should bring about efficiency gains that will benefit all stakeholders.

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