PRIVATISATION OF POWER GENERATION COMPANIES

PRIVATISATION OF POWER GENERATION COMPANIES:

(Benefits to Singaporeans): 2.

Mr Viswa Sadasivan asked the Minister for Trade and Industry (a) how Singaporeans have benefited from the liberalisation and privatisation of power generation companies; and (b) whether competition in this sector has helped to reduce costs on a sustainable basis through the desired efficiency gains.

The Senior Minister of State for Trade and Industry (Mr S Iswaran) (for the Minister for Trade and Industry): Mr Speaker, Sir, the electricity industry was liberalised in 2001. We established a regulatory framework for a competitive electricity sector and created the Energy Market Authority (EMA) as the industry regulator. The objective was to foster competition in the market, so as to encourage energy industry players to reduce costs and become more efficient and, thereby, benefit customers. Since liberalisation, we have seen the entry of new power generation companies. Keppel Merlimau Cogen has entered the market, and Island Power is planning to do so.

We have already seen the benefits of competition in the electricity market. Power generation companies have moved towards newer and more efficient

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technologies. Prior to liberalisation, most of our electricity was generated by steam plants powered by fuel oil. Today, more than 80% of our electricity is generated by combined cycle plants fuelled by natural gas. Such gas-fired plants enjoy better efficiencies that translate into lower costs. These lower costs have benefited consumers directly. For example, over the past eight years, since the liberalisation of the electricity market, the price of fuel oil (to which our gas price is pegged) has increased by 160%, from $38.30 per barrel in April 2001 to $99.38 per barrel in January 2010. Fuel accounts for about half of the total cost of generating and transmitting electricity to homes. Despite that, the electricity tariff for households has increased over the same period by only 15%, from 19.87 cents per kWh in April 2001 to 22.87 cents per kWh in January 2010. Along with competitive prices, the reliability of our electricity supply has remained amongst the highest in the world.

As in any market, effective regulation plays an important role. Under the Electricity Act, EMA has the powers to act against behaviour which could have an adverse impact on competition in the market. EMA will continue to review and enhance the regulatory and legislative framework to ensure that the market functions properly and that all consumers enjoy the benefits of competition.

Mr Viswa Sadasivan (Nominated Member): I thank the Minister. The key points he has highlighted include new sources of energy have come about since liberalisation, the price have been kept low, and reliability. Could these not have been achieved without liberalisation?

Mr Iswaran: If I understand the Member's question correctly, the point is whether the same benefits could have been achieved without liberalisation. I think this is a bit of a conjecture because at the end of the day, we are dealing with

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hypotheticals. I would say that the evidence across the world demonstrates that when you have liberalisation, which basically means you open up the sector to allow more players to come in to compete, and achieve several advantages. The first is efficiency gains because they compete to bring their costs down in order to gain a competitive advantage, vis-a-vis each other, which is quite different to the behavioural or incentives for a single market player.

Secondly, when you have a diversity of players, they bring with them different technological backgrounds and different market experiences which will enrich the market environment we are in. For example, in our market today, after the divestment of the Generating Companies (gencos) by Temasek, we have players from China, Japan, France, Malaysia and also from Singapore. We have significant diversity and each of these players has a footprint not just in Singapore but around the world in different markets. So these are benefits that are clear and I think they would be difficult to achieve if we had not gone through liberalisation. So I would say in summary that it is a difficult question to answer because it is hypothetical but I would say that the evidence, when you look at experiences around the world, including places like Australia and Britain which have liberalised since the 1990s, I think it is quite clear that that is the better path if we want to achieve a system that is efficient and that brings benefits to consumers.

Mdm Ho Geok Choo: I have three supplementary questions for the Minister. Firstly, is the average Singaporean household paying more or less for electricity over, say, the last 10 years? Question two is that indeed if there are differences in the amounts paid, are these differences attributable to the competition factor or is it due to other reasons

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affecting the changes in prices? The third question is can Singaporeans look forward to electricity prices that will remain stable and not increase faster than wage increases?

Mr Iswaran: Mr Speaker, Sir, I thank the Member for the questions. Firstly, are households paying more? Sir, I just gave statistics that compared to eight years ago, prices are 15% more costly per kWh, so the answer must be yes. And Member asked what is the source of this cost increase? Is this due to competition? Competition mitigates against the cost rises. In fact, that is the evidence we have seen in our market and it has also been the experience in many other markets. So that is a clear outcome that we have achieved. Having said that, when you compare across jurisdictions, and say that "Well, price in Singapore is x and price in country A is y . Why is there a difference?" There are many other factors that come into play. One of them is the mix of fuels they use. In Singapore, we use 80% gas and our gas is pegged to fuel oil prices. In many of the countries we compare with a substantial amount of electricity comes from coal-fired plants. Now coal is cheaper and coal does not price in externalities like carbon emissions and so on. That is one point of comparison – what is the energy mix they use?

Secondly, in some of these jurisdictions, there are also subsidies. The subsidies mask the true price of electricity and, therefore, when we compare, we must compare like for like and take into account the different constraints the different jurisdictions face.

The third question is can households expect stable electricity prices? It is difficult to answer this. It is a little bit of crystal-ball gazing which I do not like to indulge in but I would make this point. I think our experience in recent times and, really, when you look ahead, what it

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suggests is that volatility is going to be part and parcel of the energy markets of the world. This is because as you have business cycles, as you have demand growing and subsiding, there is a concomitant impact on energy demand and therefore in the way prices move. The recent crisis was a case in point. In the 18-month period, we have seen the oil price go from a peak down and it is now back up again to around $90. So volatility is something we must get used to. The long term trend is probably upward because of the various fundamental pressures like more demand for energy from developing markets.

We have going for us is that our market is a strong and competitive one. So we are able to etch out as many efficiencies as we can. And secondly, in our system, whilst we do not have subsidies, we have other measures which help our households cope with some of these price increases. The chief among which is the Utilities-Save programme which Members would be familiar with. For example, if you take a three-room HDB household, the average monthly electricity bill may be about $60. After we take into account the Utilities-Save rebates, assuming they use it fully to defray the costs, the cost per month will be reduced by about 25%, down to say $40 to $45 a month. These are the ways we help to mitigate the impact on households. But we cannot insulate Singapore or Singaporeans from the global energy market and the long term trends or volatility in global energy prices.