Introduction
Mr Speaker – electricity is a basic necessity of modern living. However, as a small nation with few natural resources, we are forced to rely on others for our energy needs. According to the Energy Market Authority (“EMA”), 95% of our electricity is generated using imported natural gas. This leaves us vulnerable to global events, including rising gas prices, tensions in the Middle East and supply disruptions, which all may cause energy prices to spike unexpectedly. It is therefore in our national interest to conserve energy and diversify our energy sources.
While the electricity tariff has experienced some ups and downs in recent quarters, the SP Group recently announced that electricity tariffs for the fourth quarter of this year would go up by 3.7 per cent per kilowatt-hour (“kWh”), due to higher fuel costs. This in turn will result in higher electricity bills for households and small businesses, adding to high costs of living that Singaporeans are struggling to grapple with.
As far as electricity usage is concerned, our priorities should be encouraging energy conservation and managing costs for consumers. To this end, I have noted recent government announcements, such as the setting up of GASCO to centralise gas procurement by next year, which has the potential to bring down the cost of gas for power generation. There is also a pilot initiative next year to offer rebates to consumers who reduce usage during peak hours. However, in my opinion, more can be done to: (1) encourage conservation of electricity and (2) lower costs for consumers.
Past Debates over Electricity Pricing
First, on the pricing of household electricity. About 15 years ago, in 2008, this House debated public concerns about high electricity prices. At that time, I raised the possibility of adopting a tiered pricing model, which would enable households who consumed moderate amounts of electricity to pay for usage at a lower rate, if their consumption did not exceed a certain threshold. Households who consumed electricity in excess of the threshold would pay for the excess at a higher rate.
In rejecting my suggestion in 2008 and again in 2010, then MTI Senior Minister of State S Iswaran argued that the Government intended to facilitate competition in household electricity pricing through opening the retail electricity market. The Government touted more flexible choices and “competitive pricing” with the new open electricity market (“OEM”) for consumers. Please allow me to quote what then SMS Iswaran said:
“…in the long term, EMA is working towards opening up the household electricity market for competition so that consumers will be able to purchase electricity direct from different suppliers through a range of retail packages that they offer. Ms Lim asked whether the Government will allow such retail electricity sellers to use a tiered system. Once such a market is established, then we should leave it to the market to work out what are the different ways they can meet customer needs… If we were to introduce a tiered system today, it means Government is deciding what is an acceptable level of electricity consumption and establish that as the threshold… This is quite a problematic process in terms of determining the key levels of thresholds. So it would be far superior to allow the market to work, for us to give targeted subsidies to those who need it and when the market is fully liberalised, the players can then work out the schemes as we see in other sectors like telecoms.”
Limitations of the OEM
It was thus a key plank of the government’s strategy to bank on the open electricity market to manage electricity prices for consumers. Accordingly, the OEM for households was rolled out in 2018, to great fanfare. This did not last. As we are all acutely aware, six retailers have since exited the market. Many were under-hedged and were stuck with lower-priced fixed rate electricity contracts while energy prices rose unexpectedly. This drove them to a loss-making proposition, leaving them no choice but to exit the market. Today, most of the remaining retailers are backed by power generation companies while two others offer plans with only “marginal price differences from the regulated tariff“.
In the wake of the problems with the OEM, the EMA tightened its requirements for OEM retailers in July 2023. These tighter requirements include requiring a licensee to hedge at least 80% of their contracted retail demand, set up funds to pay for premature termination of contracts, and others. A ChannelNewsAsia report from August this year observed that these additional requirements could result in higher prices for consumers.
The uptake of price plans from retailers has also been slow. As of 1 March 2023, only 40.6 per cent. of residential units have adopted the retail price plan. According to a report by the Oxford Institute of Energy Studies, barriers to switching in the retail electricity market include complexity of the retail market and electricity tariffs, transaction costs, uncertainty of service quality and behavioural biases, among others. There is also the question of how viable it is to have many retailers competing for the relatively small domestic market in Singapore.
As matters stand now, much uncertainty remains over the revamped OEM model. It is unclear whether consumers will benefit from the liberalisation of the electricity market, and if so, to what extent.
What, then, are other options for managing household electricity bills? So far, a large part of the government’s answer has been to distribute U-Save vouchers, mainly to HDB households. While U-Save vouchers are useful, they are effectively taxpayer subsidies for certain types of households. As a complement to these measures, the government could review its electricity tariff structures. In particular, I would ask the Government again to consider implementing a tiered pricing structure for household consumers. Further or alternatively, the government should consider a pricing structure that is based on time of use, that discourages electricity consumption at peak hours. Both of these have the potential to lower electricity costs for consumers.
Tiered Pricing
Tiered pricing is known in some countries as increasing block tariffs (“IBT”). Under such a system, households that consume electricity below a certain threshold would be charged at a lower rate, while those consuming higher amounts would pay higher rates for the excess consumption. In Singapore’s context, one could set the threshold amounts looking at the consumption patterns tracked by the EMA. Thus, for example, in deciding where to set the threshold amounts, one could take reference from the average consumption per month for 3-room HDB households, which is around 22 kWh.
In 2010, then SMS Iswaran responded that tiered pricing would amount to the Government essentially deciding what an “acceptable” level of electricity consumption is. I do not agree with this characterisation. What we would be doing is to encourage energy conservation by charging a lower rate for what is deemed a basic necessity.
Tiered pricing of household electricity is used in many countries. To understand more about it, we could look to the benefits in several other countries where it has been implemented.
One such example is China. In 2012, China rolled out a tiered electricity pricing system across 29 provinces, with three tiers. The specific levels differed, depending on the province, but generally, the lowest pricing tier (Tier 1) aimed to capture about 80% of residential households, Tier 2 had 15%, while Tier 3, the highest pricing tier, covered the remaining 5%. A report by the China Economic Quarterly International showed that in the years following the implementation of tiered pricing, there was a 6.1% reduction in electricity consumption. While each jurisdiction will decide how to set their tiers, this example shows that tiered pricing can have a positive effect in reducing overall consumption.
Another example is Hong Kong. Hong Kong has two major suppliers of household electricity, namely HK Electric, and China Light and Power. Both of them offer tiered pricing, with as many as seven tiers. Small users pay preferential rates. According to the Hong Kong Environment and Ecology Bureau, tiered pricing is deployed for residential consumers to “promote energy efficiency and conservation”.
Tiered tariffs can also be found in a host of other jurisdictions, including the United States, the United Kingdom and South Africa. In fact, a World Bank study of 60 developed and developing countries showed that 60% of countries surveyed made use of tiered pricing or volumetric IBTs. The study noted that the rationale for a tiered pricing structure was to provide a ‘social safety net’ whereby all consumers could assess a basic subsistence volume of consumption at a very affordable tariff, while ensuring that the revenue shortfall was covered by surcharges on the largest consumers. The study found that volumetric IBTs had “a material effect on affordability”.
Mr Speaker, I note that in a more recent Parliamentary Answer to a Question raised by Mr Don Wee in 2022, the Minister for Trade and Industry again rejected a tiered pricing approach. MTI stated that electricity should be priced at its “full cost of production and delivery” and warned of “inadvertent implications”. The Minister gave an example of a multi-generational household paying more if they lived in a single home, than in two smaller homes. While this may be true, this phenomenon already exists in many government policies. The larger, multi-generational household is already receiving less S&CC and U-Save rebates, has less subsidies for long-term care, is disqualified from the Silver Support Scheme and so on. There is probably no policy with perfect outcomes; so, let us not let perfect be the enemy of the good.
Time of Use Pricing
My second point is for the government to look at helping households manage electricity consumption through discouraging use at peak hours. This could be done by charging lower rates at non-peak hours.
The EMA is already doing this for business consumers. Business consumers can make use of EMA’s Demand Side Management (DSM) scheme to lower their electricity bills, by adjusting when and how much electricity they use. Businesses can participate in the Demand Response programme, where they can voluntarily reduce electricity usage when prices are high. Such behaviour also benefits the system, as it reduces the capacity required at peak periods. It is well-known that a key driver of the costs of producing electricity is not the total load, but the peak hour load. Having a cheaper rate for off-peak consumption would benefit the system as a whole, as it will go towards ensuring that the peak demand can be more efficiently met by the existing transmission grid.
Can such differentiated peak and non-peak pricing be applied to households as well? Such Time of Use charging has been offered for decades around the world, in major cities including London, San Francisco and Sydney. What is its potential for Singapore households?
Just last month, the government announced a pilot scheme called Residential Demand Response programme, to be launched by the second half of 2024. Under this pilot programme, Singaporean households will be issued with smart meters and will receive alerts to actively reduce consumption during peak hours, in exchange for financial reward such as rebates. This scheme is, in effect, a differential pricing scheme, but based on time of use.
The government’s planned financial incentives to reduce peak hour consumption could be further developed. We could work towards a system where the electricity tariff for off-peak consumption for households is lower than the tariff for peak hour consumption. This allows households to manage their electricity costs by adjusting their time of use.
In making these suggestions today, it is not my intention to over-simplify the issues associated with electricity pricing, which can be a rather technical matter. Nonetheless, with the concerns about global energy supply and costs looming in the horizon, this is an issue that deserves attention.
Conclusion
Mr Speaker, recent global conflicts and tensions have made Singapore even more vulnerable to rises in the prices of oil and gas, on which we rely for our energy needs. With 95% of our electricity generated from natural gas, Singaporean households are at risk of higher electricity bills. At the same time, as the government has recently highlighted, imported supply uncertainties make it imperative for Singaporeans to conserve electricity. I believe household electricity costs can be managed through adjusting the electricity tariff structure, such as through tiered pricing and differential charging to encourage off-peak consumption. Such reforms would recognise that electricity is a basic good, and yet incentivise energy conservation.