Energy crunch spurs rethink of over-reliance on fossil fuels

Energy prices are soaring worldwide, and consumers and electricity retailers in Singapore are taking the brunt of the increase.

Of the 12 companies that sell electricity to households, two of them - iSwitch and Ohm Energy - last week formally announced their closure to customers via e-mail. And more closures could follow, experts say.

How will this consolidation of the electricity retail market - or having fewer players in the game - affect consumers?

There are four elements to this.

One, the reliability of electricity supply will not be affected, no matter which retailer a household buys electricity from. People can be assured that even if their retailer folds, their lights will still come on when they flip the switch.

This is because there is no change to the flow of electrons under the Open Electricity Market, which was launched in 2018.

Electricity is generated at seven generation companies here. These electrons flow from the companies into the SP Group-operated national grid, which delivers the electricity to consumers.

What the market liberalisation did change was the flow of money.

Before the electricity market was liberalised, people paid SP Group for electricity. After the market was opened up, households had the option of signing up with other retailers.

Similar to how travel agents buy hotel stays and flight tickets at agent rates and then bundle these into attractive packages for customers, electricity retailers do the same - they buy electricity from the wholesale market and then bundle these with other perks to entice the consumer.

The result? Green consumers had a choice of plans offering them solar power or electricity offset with carbon credits. For the night owls, there were plans that offered greater discounts on electricity prices during off-peak hours.

Most people who switched were enticed by cheaper deals: Many retailers had fixed price plans where consumers pay the same rate over one or two years, despite fluctuations in energy prices.

This brings me to my next two points on how the energy price spike and retailer closure could impact households.

Two, the closure of some of these retailers would mean that consumers will now have fewer plans to choose from.

The third implication is that households which had signed up with the fallen retailers at fixed price rates months ago will no longer get to benefit from the low energy prices once the retailers shutter.

Mr Tan Tsiat Siong, a lecturer at the Singapore University of Social Sciences' School of Business, explained that energy prices in the spot market can fluctuate extensively. "To manage the volatility of cost and earnings, retailers can purchase future contracts from the Electricity Futures Market, fixing their energy costs at a predetermined level," he said.

But Mr Howie Lee, an economist at OCBC Bank, noted that it will be costly for a company to hedge fully, and small power retailers are typically under-hedged compared with larger ones.

He said: "Once wholesale prices soar through the roof, they normally find themselves deep in the red. I recall many power providers urging consumers to lock in two-year fixed prices and at levels much lower than the current tariff. I can imagine how painful it must be for them now and am not surprised some have exited."

The current electricity tariff is 25.8 cents for every kilowatt-hour (kWh) of electricity.

The websites of various retailers show that most new fixed-rate plans are going at around the same rate, when months ago people were paying rates as low as 15 or 16 cents per kWh.

Lastly, the global fuel shortage should underscore to everyone the importance of energy efficiency and also prompt a rethink of mankind's reliance on fossil-based energy.

Energy-efficient appliances such as air-conditioners and refrigerators can be powered with lower electricity input, cutting bills without compromising the need for cooling in Singapore.

But at a broader level, it is worth highlighting that Singapore relies largely on natural gas - a fossil fuel - for its electricity needs.

While Singapore previously relied on piped natural gas from its neighbours, the country has built a liquefied natural gas terminal to boost its energy security, allowing it to import the liquefied form of the gas from all over the world. This terminal started commercial operations in 2013.

But the current fuel shortage has shown that even diversification may not always buffer the country from supply shocks.

In this case, pandemic-recovery economic activity and countries entering the cooler seasons are nudging up fuel demand. And because natural gas produces less carbon dioxide when burnt compared with coal or oil, many countries are switching to this fuel to reduce their carbon emissions.

This further increases the demand for gas.

But the supply is not keeping pace with this, with gas production not yet reaching pre-pandemic levels and renewable energy supply not coming online quickly enough.

Some observers have said that the climate agenda could be set back by the energy crunch as it gives consumers and governments a taste of the costs needed in the great green transition.

But another perspective is that the energy crunch is narrowing the price differences between fossil fuels and renewable energy.

Even in Singapore, this can be seen in the price of household electricity plans. Retailer Sunseap is offering consumers a plan powered by 100 per cent solar energy at 25.8 cents per kWh - on a par with the current regulated tariff.

The science is clear. If mankind does not turn away from fossil fuels, the impact of climate change on economies and societies will be far worse than what was seen during the pandemic.

Asked if the ongoing energy shortage could spur the green transition, OCBC's Mr Lee said: "It will and it should... Renewables will play an increasing role, I have no doubts about that.

"What is needed now is time to help this transition because the infrastructure and investments for building such renewable power sources are not very developed yet."

Professor Subodh Mhaisalkar, executive director at the Energy Research Institute @ NTU, agreed, saying renewables are still a very small fraction of the overall electricity generation market.

The Nanyang Technological University professor added: "We will need fossils in our energy mix even beyond 2050. The challenge is how to balance the availability of fossil fuels to complement the energy transition that is absolutely essential to mitigate the effects of climate change."