Oil and Residential Electricity Tariffs
Oil and Residential Electricity Tariffs

(Graph: Authors. Sources of data: WTI Oil Price – US Energy Information Administration, Electricity Tariffs – Singapore Power website)

WHY YOUR BILLS MIGHT GO UP

Some observers may question the correlation between oil prices and their own energy bills. A few questions are in order.

First, why are oil prices still affecting electricity tariffs despite electricity mainly generated from natural gas in recent years? Second, will electricity tariffs continue to rise in tandem with oil prices?

In Asia, purchased gas imports are typically pegged to oil price changes by pre-determined formulas due to the lack of an established pricing benchmark for gas trade. This nexus between oil and gas prices could weaken though, as more gas is being traded with greater flexibility in the future.

As tariffs are set on a quarterly basis, they can only be adjusted based on historical oil prices, leading to a lag. 

This adjustment makes sense if oil prices were averaged from a previous quarter, with the result then utilised to set electricity tariffs for the following quarter. Hence, in Singapore, changes in tariffs are often one quarter behind changes in oil prices.

Based on this, electricity tariffs, adjusted in line with historical oil prices and factoring in the increase over the last quarter, could rise to beyond 23 cents per kWh for this upcoming quarter. What this means is households and businesses should prepare for yet another quarter of an increase in electricity tariffs – since oil prices already started to move up since mid-2017.

Households already saw increases in electricity tariffs to 22.15 cents per kWh from April to June this year, from 21.56 per kWh in the first quarter of this year and 20.30 cents per kwh from October to December 2017.

SUNNIER OUTLOOK FOR THE LONG TERM

If Singapore households anticipate that electricity prices will continue to rise, then they should plan to conserve energy to save on their utility bills in the coming future. But this could be a hassle for some depending on lifestyles and preferences.

Another option is for consumers to switch to an alternative electricity provider once the rest of Singapore opens to retail liberalisation in the second half of 2018.

The very nature of retail competition will guarantee sizeable discounts off the current default Singapore Power (SP) bills. But it does not mean electricity prices will no longer be affected by oil prices, as alternative offers will have to reasonably reflect the cost of producing electricity from fossil fuels.

For example, if households or businesses choose a discount-off pricing plan which offers a fixed discount off the regulated tariff set, prices will still move up and down over time, but remain at lower levels compared to SP tariffs.

Other types of pricing plans including fixed price plans or peak or off peak price plans may be more suitable, depending on one’s consumption patterns. 

Those selecting hybrid plans with a percentage share of solar energy will enjoy smaller discounts off SP tariffs at present moment, as the cost of producing solar energy is still higher than the raw cost of generating electricity from fossil power plants. 

However, this will change in the foreseeable future, with manufacturing costs of panels growing cheaper over time.

Singapore households and businesses can expect further reductions in electricity costs as more solar power can be more reliably used to meet national demand, once large-scale energy storage systems can be fully harnessed to fill up electricity supply-demand shortfalls reliably.

In short, electricity prices are currently still driven by oil price movements.

Given that electricity retail liberalisation can potentially reduce electricity tariffs and at the same time offer cleaner sources of electricity for those more concerned about the environment, it is best for us consumers to seriously consider switching to alternative electricity providers to enhance our well-being.

(Source: https://www.channelnewsasia.com/news/commentary/electricity-tariffs-july-september-2017-higher-oil-prices-10475162)

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