ECONOMIC REVIEW COMMITTEE'S OBSERVATION ON ELECTRICITY RATES

Mr Low Thia Khiang asked the Minister for Trade and Industry what is his Ministry's response to the observation of the Economic Review Committee's sub-committee on manufacturing that electricity in Singapore has become too expensive.

BG George Yong-Boon Yeo: We need to frame this issue correctly. First, electricity price in Singapore is unlikely to be cheaper in absolute terms than in the neighbouring countries because of certain structural characteristics that are unique to a city state like ours. It is no different as to why property prices here are more expensive than in Kuala Lumpur, Bangkok and Jakarta. Second, the issue then is whether within these structural constraints, electricity prices are as competitive as they could be.

What are the structural factors? Our electricity price comprises two components. One is the cost of generating electricity, and the other is the cost of the infrastructure to deliver the electricity.

Our generation cost is high because we depend on oil and gas for our energy source, unlike many other countries which have recourse to cheaper electricity such as hydro-electricity. Both oil and gas are expensive.

Our infrastructure cost is also high. Because of our small size, we bury our entire electricity network so that land can be freed up for other use. Depending on the voltage level, buried transmission cables cost three to 25 times more than overhead cables. To ensure reliability, back-up capacity has to be installed since faults take longer to locate and fix with buried cables. This makes a buried system much more expensive than comparable overhead systems used in most other countries and cities. This cost translates into higher grid charges.

These then are the constraints. What are we doing within these constraints to ensure competitive electricity prices? On the matter of grid charges, EMA is reviewing the current grid charging framework to find ways to benchmark our grid charges to those imposed in comparable countries and cities.

We have also started to further liberalise our electricity market to make it more competitive. This will help put downward pressure on prices. Competition will force market players to be more cost conscious and squeeze out inefficiencies. It will also encourage players to seek new and cheaper technology to gain market share. With the pending liberalisation, we have seen the entry of seven new licensees in electricity retailing and three new generation licensees.

We can see the impact of competition on electricity prices from the first phase of retail contestability. About 220 customers, comprising the large industrial companies are already contestable. They can buy electricity from these retailers. About 179 (or 80%) have switched to buying electricity from these retailers. Of those who have switched, about 86% were able to negotiate lower prices for their electricity. Retail contestability in the electricity market will be gradually opened to other consumers. 5,000 consumers will become contestable three months after the new market starts. Another 5,000 will become contestable 6 months thereafter. This will open about 70-75% of total demand to retail competition. The EMA is currently studying extending retail contestability to domestic consumers starting end 2003.

Competition has also driven the existing generation companies to seek better efficiencies to gain competitive edge over their rivals. Some had replaced their oil fired plants with gas fired plants. Such plants enjoy better efficiencies and therefore lower costs. This has enabled the Energy Market Authority to lower the price cap on 1st January 2002, which resulted in a 6% reduction in the average electricity price.

In short, Singapore's electricity costs are not low. Many factors resulting in this are beyond our control. However we can expect competition to drive the industry to achieve better efficiencies which will ultimately benefit consumers. The challenge for us is to continue to provide consumers with good quality and reliable electricity supply, and the higher costs this necessarily entails; while keeping electricity prices affordable and competitive. In this regard, we appreciate the suggestions of the ERC sub-committee on manufacturing and my Ministry is carefully studying them to see what more can be done. This is so as we are in full agreement with the sub-committee that keeping electricity prices competitive is an important element for the industry to prosper and thrive.