ELECTRICITY VESTING PRICE FORMULA (Benefits to consumers)

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ELECTRICITY VESTING PRICE FORMULA:

(Benefits to consumers): 7.

Ms Olivia Lum Ooi Lin asked the Minister for Trade and Industry as the wholesale electricity price has fallen some 30% and as the Energy Market Authority (EMA) has set the vesting price for the current quarter at $94/MWh and the competitive wholesale price at $64/MWh, a difference of some 27%, (a) how will consumers benefit from this pricing formula; (b) when can consumers expect the EMA vesting price to better reflect the competitive price; and (c) whether EMA will publish data showing how vesting price is calculated.

Ms Olivia Lum Ooi Lin (Nominated Member): I declare my interest as the CEO of Hyflux. Question No. 7, Sir.

The Minister of State for Trade and Industry (Dr Vivian Balakrishnan) (for the Minister for Trade and Industry): Mr Speaker, Sir, in Singapore , the three large generation companies control about 90% of the generation capacity. With their capacity, the generation companies have market power. After approximately two years of deliberations and industry consultations, EMA introduced vesting contracts to control market power and this commenced on 1st January 2004.

Vesting contracts place an obligation on generation companies to sell a specified minimum quantity of electricity. This is about 30% of each generation company's capacity. Generation companies receive the vesting price for these quantities.

The vesting price is set at the Long-Run Marginal Cost (LRMC) of the most efficient generation technology in the system. Currently, this is the combined cycle gas turbine. By setting vesting price to LRMC, we allow the investor in the

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generation plant to recover the costs required to develop the plant, the costs to finance the investments and the costs to operate the plant, including fuel cost. The vesting price for the 1st quarter of 2004 is approximately $94/MWh.

The Member has also referred to "the competitive wholesale price of $64/MWh". For clarity, let me term this the "pool price". Before the vesting contracts were put in place, the wholesale price was the pool price. It was identical. The average pool and therefore the wholesale price last year was $93/MWh. However, after vesting, the wholesale price is now a weighted average of the vesting price and the pool price. For January 2004, the weighted average wholesale price was $84/MWh.

Mr Speaker, vesting contracts have brought market power under control. With market power controlled and the presence of significant excess capacity in the market, competition between generation companies has caused pool prices and therefore, wholesale prices, to fall. Compared to the average wholesale price last year of around $93/MWh, the current wholesale price of electricity has fallen by about 10%.

A lower wholesale price means it costs less to buy electricity at the wholesale market. Consumers who buy directly from the wholesale market would be better off today. However, they are exposed to price volatility as the wholesale price can fluctuate with changes in market conditions. Retailers who have bought on contracts with generation companies and consumers who have bought on contracts with retailers will continue to be governed by the existing contracts which they had entered into and signed.

In the long term, a competitive wholesale price will ensure that retailers

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offer competitive retail prices to consumers. If the retailers do not do so, they will risk losing market share since consumers can also buy from the wholesale market. However, consumers who buy from the wholesale market will have to take the risks of volatility in wholesale prices.

The final part of the Member's question was on whether EMA will publish data showing how vesting price is calculated. The procedures for calculating the components of vesting price are published at EMA's website and the actual vesting price for each quarter is posted by SP Services on its website. For the Member's reference, that is at www.mssl.com.sg .

Ms Olivia Lum Ooi Lin: I understand that the vesting contract price is used to protect the consumers, because 90% of the power is being generated by the four generation companies (gencos). But, at the same time, it is also used to protect the gencos because these vesting contracts are calculated based on their minimum cost of operation. I would like to ask the Minister of State whether, under this regime, there will be more incentives for the gencos to further improve their operations so that they can bring down these operating costs.

Dr Vivian Balakrishnan: Mr Speaker, Sir, the vesting contract price is pegged at the long-term running costs of the most efficient technology currently available. If and when technology changes and there is more efficient technology in the system, the LRMC price will come down. Generation companies with less efficient technology will be at a disadvantage. Indeed, this has already happened to companies which have older technology, for instance, the steam plants which are not as cost-effective as the combined cycle gas turbines. There are strong financial pressures on companies to adopt

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the latest and most efficient technology available.

Ms Olivia Lum Ooi Lin: From the website, we can only find the formula. With regard to my third question, I would like to know whether EMA can publish the data showing how these vesting price formulas are derived.

Dr Vivian Balakrishnan: Mr Speaker, Sir, I cannot make a definitive statement as to the extent of data which will be published because some of these are obviously commercially sensitive. However, let me give an assurance to Ms Lum, and indeed to all the big power consumers in Singapore, that if they need further advice, EMA will provide them with all the advice necessary, so long as we work within the rules of the system and we do not give any one party any unfair advantage. We have spent the last two years consulting industries. We have started another round of consultations in order to explain and inform, so that all the stakeholders will be fully cognisant of the facts before they enter into contracts or make commercial decisions. But ultimately, the responsibility for making these choices must lie with the companies. We cannot run their business for them. We can provide them data and information. They have to make an informed choice and take the market risk accordingly.