I REFER to Wednesday's letters ('Tariff hike goes against common sense' and 'Power Points') on the revision in the electricity tariff, and would like to clarify how the Energy Market Authority regulates the tariff proposed by SP Services. Singapore imports all the fuel we need for power generation and the electricity tariff must reflect this cost. Indeed, the cost of fuel accounts for about 60 per cent of the electricity tariff.

While 80 per cent of our electricity is generated using natural gas, the price of this gas is tied by long-term contracts to the fuel oil price. This is the market practice in Asia where fuel oil is the substitute fuel source to gas, and sets a natural benchmark for gas pricing.

The electricity tariff in Singapore is therefore pegged to the fuel oil price. If the fuel oil price goes up, the electricity tariff will be increased. Likewise, if there is a reduction in the fuel oil price, the electricity tariff will be reduced accordingly, as happened in two consecutive quarters last year.

To provide certainty in pricing, the electricity tariff is set in advance for a three-month period based on the three-month forward fuel oil price. For example, the forward fuel oil price quoted last July for delivery between this month and December will determine the tariff for this period.

As the fuel oil price increased sharply in July this year, there was a corresponding spike in the July forward fuel oil price for this month until December. This is why we are experiencing a sharp increase in the electricity tariff now. Recently, the fuel oil price has started to come down. If the downward trend continues this month, we can expect a reduction in the electricity tariff for the first quarter of next year.

The increase in the electricity tariff has nothing to do with the recent Formula One event. The F1 organisers brought in their own generators and equipment for the race. The electricity tariff was not used to pay for the costs of lighting the F1 circuit.

The increase in tariff is also not linked to the privatisation of the electricity industry. On the contrary, the privatisation process has helped to promote greater competition and drive efficiency gains in the power generation companies. This has brought real benefits to all consumers. Despite the substantial rise in fuel oil price over the years, the increase in electricity tariff has been much smaller in comparison. Our electricity price would have been much higher had it not been for competition.

Jenny Teo (Ms)
Director, Corporate Communications
Energy Market Authority (EMA)

This article was first published in The Straits Times on Oct 4, 2008.

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