Carbon tax expected to lead to higher electricity prices

The Pulau Seraya Power Station on Jurong Island. The carbon tax will apply to power stations and other large direct emitters.
The Pulau Seraya Power Station on Jurong Island. The carbon tax will apply to power stations and other large direct emitters.ST PHOTO: ALPHONSUS CHERN

Power generators will pass on costs to consumers, but tax could spur development of cleaner tech: Economists

The carbon tax announced in Monday's Budget will push up costs for power generators and translate into higher electricity prices for consumers, companies and economists say.

But some welcomed the move, saying it could spur the development of cleaner technologies.

The tax will start from 2019, and be levied on greenhouse gas emissions at between $10 and $20 per tonne. It will be applied to power stations and other large direct emitters, rather than electricity users.

Revenue from the carbon tax will help fund measures by industries to reduce emissions, Finance Minister Heng Swee Keat said in his Budget speech. "The impact of the carbon tax on most businesses and households should be modest."

But some cost increase is likely to be inevitable.

Most electricity here is generated using natural gas, which already results in relatively less emissions than other sources like coal, said Mr James Allan, a director of consultancy Frontier Economics.

Singapore's land scarcity also means power generators have limited scope to invest in zero-emission energy sources like wind or solar power, he noted. This means the carbon tax will push up costs for power generators, which will in turn pass these on to consumers.

"Singapore enjoys a competitive wholesale electricity market. It is likely that the generators, facing similar increases in costs, would pass the carbon tax through to the market, retailers and ultimately consumers in the form of higher electricity prices," Mr Allan added.

The tax comes as the power-generation sector grapples with overcapacity and intense competition in the retail electricity market.

The tax will "add some hundreds of millions of dollars to the cost of producing electricity" every year, said Mr Paul Maguire, president and chief executive of Senoko Energy.

"Such a large burden cannot be borne by a sector which today is struggling to be profitable.

"As a result, our expectation is that, like other regulatory costs, it will ultimately be passed through to the end consumer, just like the goods and services tax," he said.

The carbon tax would translate into a rise in electricity prices of 0.43 cent to 0.86 cent per kilowatt hour (kwh), or a 2.1 per cent to 4.3 per cent increase, according to estimates by the National Climate Change Secretariat.

The median household living in a four-room flat paying around $72 a month in electricity bills could see an increase of $1.70 to $3.30 a month.

Grid operator Singapore Power said in response to queries that it has been developing solutions to help consumers save energy. These include partnering companies to develop "innovative sources of renewable energy and sustainable energy-storage solutions".

Another key issue with a carbon tax is that it impacts low-income households more, said Professor Euston Quah, who heads the department of economics at Nanyang Technological University.

"(But) this can be mitigated through subsidies and lump-sum transfers to the poor," he noted.

Prof Quah thinks that the tax is a good move on the whole as it "could... motivate the development of new technologies which are less carbon-intensive".

The tax, he said, also encourages residents to understand that "our... behaviour affects the environment".

A version of this article appeared in the print edition of The Straits Times on February 25, 2017, with the headline 'Carbon tax expected to lead to higher electricity prices'. Print Edition | Subscribe