Ep 20 Replay - Singapore electricity market and renewable import into Singapore with Mike Thomas

[00:00:00] Hi everyone, this is Ben. Yiou and I are working on an episode on decabonizing small and remote grid with a focus on Indonesia. Hopefully this episode will come up soon. In the meantime we just want to re-publish an episode on the import of renewable electricity into Singapore. There has been some recent development which you might hear about later. Thanks.

[00:00:30] As the podcast that aims to put a spotlight on actors in the energy transition sector and to give visibility to issues critical for Asia and the world to achieve net zero.

[00:00:39] Today I'm joined by Mac Tomas, founder and managing director at the Lento Group, an energy economics consultancy at Quadrion Hong Kong.

[00:00:47] Mike and I are going to speak about the Singapore electricity market and the new project to import renewable electricity to Singapore from neighboring countries.

[00:00:56] My main takeaways from our conversation are as follow. First, the two main rivals of the whole electricity market dynamics in Singapore have been the global energy prices and the oversupply of podcasts into Singapore, locked in by long-term contract with a minimum of tech.

[00:01:14] Second takeaway is that the plan to import renewable electricity into Singapore is really a game changer and could help Singapore diversify its energy supply and decabonize.

[00:01:25] As always, if you want to support the show please rate and leave a comment on your podcast provider and speak about the show to someone that might be interested by the energy transition in Asia.

[00:01:37] Hi Mike, welcome to the show. Could you just introduce the Lento Group and explain how you are supporting your clients in Asia?

[00:01:44] Sure, thank you, Jay. And let me here. So the Lento Group we're an economic consulting firm our focus is really just the energy market and we've been operating in Asia Pacific region for 12-13 years now but as a group members of the company go back 25 years in the region providing support.

[00:02:03] And we all kind of got started in the early days when you know sort of energy markets were starting up New Zealand Australia, Singapore, Philippines, Korea markets. But it's now very much energy transition related work, the challenges of bringing in renewables, fostering the right way to do the transition.

[00:02:20] Can you come back more precisely on your about 30 years of career and especially how we interested to know after funding the group about 12 years ago,

[00:02:30] how you have seen the energy landscape evolved in Asia?

[00:02:33] Certainly energy goes back a long way and I guess now we some of us are getting older so we're going back a long way too.

[00:02:40] What we've seen is a number of changes 30 years ago, but I was really getting started as a consultant at energy markets where somewhat new almost theoretical concepts were very few instances UK was was a notable one there were several emerging in South America where actually some of your original thinking was.

[00:02:57] But in Asia there was really just the beginnings and a promise of doing things differently and maybe introducing some efficiency but also you know letting new players come into the markets getting a private sector in a bit more and changing the role of government in the sector was often an important part of that.

[00:03:15] I've been a electricity was being delivered by government department and not necessarily subject to all these market forces but that drove quite a bit of work for some time.

[00:03:25] How do you do that? What do you have to change will people like it when they see it what can go wrong and then a change to progressively when I'll probably post and run post California this many of you know the market in California collapse quite extraordinarily in 2001 and pretty much stopped.

[00:03:44] It's the global interest in new market development so our business shifted to a lot of single buyer markets lot of planning, lot of pricing, tariff IPP is still coming in looking for contracts but none of that really solved the bigger problem which is what happens when a contract it.

[00:04:02] So you sort of IPP as a 20 year contract or something that plant eventually becomes 21 years old what value do you place on it at the beginning it's a non problem nobody thinks about it but as you get closer to 10 11 12 people want to sell their stakes in their things and the incoming investor went to know what kind of values of place right on the back end so markets are back then whether it's a market or whether it's something else you still have to sort of provide some basis for estimating what happens later.

[00:04:31] And now of course we're watching the renewables come in same kinds of problems you know what happens at the end of the feed-in track what kind kind of comes in at the end of a policy or contract and we're also starting to see more private sector stakeholders wanting to participate in these markets so they're wondering how does it work what can you do the big work better so it's really been quite an interesting evolution of the issues.

[00:04:52] So the subject of today is about the Singapore electricity markets and the renewable electricity imports projects that Singapore has if we start with the Singapore electricity market it would be really interesting if you can explain how the Singapore electricity market is organized with its wholesale markets and retail markets and if you could do that by contrasting it with other structure where they competitive electricity markets in the region and I'm thinking about Australia

[00:05:21] and the GDP in for example.

[00:05:23] The Singapore market was one of the early movers in Asia adopting a fairly sophisticated wholesale market in which Singapore restructured its generation that had been largely under two entities into to be privatized gen coast that they then were privatized so you have a mix of purely private and then those under say capital or some corp which are sort of corporatized all competing in wholesale market for some kind of a market.

[00:05:50] The wholesale market for dispatch and for setting a prices they have a great deal of latitude to secure their fuel contracts and to enter into electricity supply contracts retail and interact with customers the market evolved over a long time initially there wasn't retail competition most of the customers would be buying from SP services as sort of as a central buyer and then over time the open electricity market expanded and so now all of the customers in Singapore are free by power.

[00:06:19] Either the market or from stakeholders in a fully competitive way generators did get dispatched but it's quite small market and everybody is essentially using the same fuel natural gas.

[00:06:31] It may come from one place or another may come from another gene may come from type natural gas but it's pretty much all the same and demand has been growing in over a period of time the market has been getting a little bit tighter and in the recent last 12 months it's become quite an exciting place to be if you like watching market data

[00:06:48] and a more expensive place to be if you're paying for electricity.

[00:06:53] It's quite an interesting challenge.

[00:06:56] As you said in Singapore the electricity generation is largely dominated by this gas generation about 90%. Could you explain how this generation makes these impacting the price formation

[00:07:08] and I'm thinking about the price level and the volatility and also how this is impacting the merit or the in the local markets.

[00:07:15] Well electricity is generated from usually from a fuel so of course the price of that fuel is very significant part of the cost of electricity and when you generate electricity you generate it to meet load which can be very high.

[00:07:28] Say you're going to get big times or lower off big times the merit order tries to reconcile how much electricity we need to generate to meet the demand and that determines what facilities what units we actually need to run.

[00:07:40] And you know like any central system you want to run the cheapest ones first and only use the expensive ones later what makes a unit expensive is it might take a little bit more fuel to say no amount of electricity might let be a sufficient.

[00:07:53] The mic older might be a different design it might have other features there's a lot of reasons why units differ in terms of how they perform so when you're trying to meet your load at take two o'clock in the afternoon which might be a higher load during the day then you'll probably be running more of those units and the price.

[00:08:10] In the market will be set in theory by the most expensive unit that you need at that time because that tells you the benefit of using less electricity because you're not the unit you'll be backing off if you're not generating anything that will be the fuel that you save but because fuel is such an expensive part of the whole business of creating electricity especially if it's our gas gas units with the actual technology and relatively less expensive for the gas itself is relatively more expensive.

[00:08:38] We can contrast that with other markets which have some coal the coal might be cheaper but the units are more expensive Singapore really doesn't have the space or currently now at the energy transition the appetite for coal plant so it's been gas.

[00:08:51] Unfortunately in the last year the gas markets around the world have just been humbled by a variety of external forces so that you want to import natural gas lng it's just very expensive for a variety of external to Singapore market reasons and anybody who's looking at you.

[00:09:07] Looking at using gas whether it's in Europe United States or Singapore paying much more for it and as you said the price electricity is really depending on the price of gas could you give an overview of the sources of the gas that are used and imported in Singapore can be piped and also imported to an engine terminal and maybe just explain why Singapore has chosen also to increase the share of lng imports because that's quite interesting.

[00:09:33] Yes certainly well gas supply to Singapore as you know in the past was sourced from Malaysia and Indonesia primarily through pipelines that connected gas supplies in those countries to Singapore and they were supplied under long term contract and then there still is gas being supplied from both countries but the Singapore's grown and developed it's actually transitioned from use of oil to gas but it also wanted to make sure that it had control over while we'll call the security of supply or the ability to source gas.

[00:10:02] From wherever it needed to support the source that gas in order to keep Singapore's lights on any contingency that can be physical a pipeline could be damaged.

[00:10:13] It could be geopolitical it could be commercial there's all sorts of reasons why you'd want to diversify your sources of gas well if you want to source to diversify your sources of gas and you don't have any gas in your own country lng is the way that you do that so lngs liquefied natural gas coming from some other place delivered to Singapore.

[00:10:31] Delivery to Singapore on special boats unloaded at Singapore's lng terminal which takes the liquid natural gas very very cold and warms it up so to speak where it then becomes gas form as post liquid and it blends in with the pipe gas from Malaysia and and Indonesia so no matter what happens and Singapore.

[00:10:51] The LNG now is always required so the price of LNG will sort of be the swing factor for gas supply in Singapore.

[00:11:00] We've talked about the generation side and now let's focus on the electricity price of the world there exists a price as known as the uniform Singapore electricity price or use it.

[00:11:12] Singapore has really followed two major trends they used to be a graduate decline from 2011 to September 2021 and then from September 21 sharp increase could you explain in the line reason for these two trends.

[00:11:27] There's three things going on to explain the two trends so from 2011 until 2020 or there about global fuel markets gas markets and the drivers of those markets have actually largely been coming down.

[00:11:44] So natural gas is often priced with respect to an oil product for reasons that just seem to be institutional convenience and because oil has very well developed trading arrangements gas and often a lot of gas is developed in the same context that oil is developed they have historically been quite strongly linked and also LNG has become more developed.

[00:12:09] So the price of LNG has actually been falling like that market the supply of it's been more competitive more suppliers more sources so from 2011 until 2020 there was a sort of a macro downward trend over time but in Singapore two other things that happen well first that macro trend is obviously changed because oil prices are now much, much highest during the last last 18 months that macro trend is completely reversed.

[00:12:36] But then there's another aspect of Singapore there's more idiosyncratic to Singapore and that is when gas is contracted it's contracted historically at a price and a volume.

[00:12:46] And then if you sum across all of the contracts you find out what your volume is for the market as a whole that volume as a market might have a minimum that is the contract might require that you take a minimum level as well as a maximum which gives you some flexibility.

[00:13:01] So what happens if all of your sum up all of your contracts it's each the amount of gas that you actually need to generate electricity that you actually are using and what happens if you're you over contracted the whole gas supply in that case you want to generate electricity you want to use your gas up though we got into a situation where for variety of reasons demand was projected to be higher and then it didn't turn out to be quite so high.

[00:13:27] So if you look at demand forecast they in 2007 2008 2009 time frame they were pointing at a higher number than we got to in reality when you look at the planting decisions such as encos invested in power stations to meet that growing demand that didn't didn't actually happen so for the sum of all those gas contracts exceeded the need pushing all of the junk coast to use as much gas as they could so that they would avoid having to pay the penalties that were associated with not only the market.

[00:13:56] But with not using they as that they had promised to you so when you sign a contract it has a minimum there's a penalty associated with not using your minimum that's the nature of that contract and so in general the market was facing a question how much do I lose paying penalties if I don't generate or how much do I lose selling electricity at a lower cost because I am trying to avoid that penalty and so for good number of years between 2000.

[00:14:26] 2011 and 2020 the electricity market was colored really the outcomes in the electricity market the use up reflected this idiosyncratic dynamic not the global price of gas not to supply and demand and electricity but how do I manage exposure to over contracted gas supply agreements which is unusual problem to have and if your demand is not growing very fast the difficult problem to get out of because you really required growth

[00:14:55] to get back into that balance that growth started to happen at the back end of the 2018's and by 2020 we were seeing data centers and other things locating and Singapore building demand for electricity.

[00:15:10] We also started to see some of the original gas contracts started to wind down and so suddenly the drivers of the way parties were behaving because they had to use up their gas no matter what because the penalties was material of them you know now those penalties aren't binding anymore because now the gas is contracted and is needed.

[00:15:31] So we saw a step change and that step change in the way gas and electricity were interacting in Singapore happened in that perfect storm kind of way to coincide with the big shift in the global gas markets.

[00:15:44] The pandemic didn't help it created a lot of uncertainty in global fuel markets I don't think there I think it's reasonable that at one point in time in the middle of the beginning of the pandemic people were wondering how long it would last and you'll remember prices in a lot of commodity markets collapse can substantially be just nobody was going out to do any work so that whole situation has come home all at the same time here in late 2021 and now in 2022.

[00:16:11] Yeah, it was really the perfect storm and could you share with you on the potential impact of the energy crunch and some wind of these contracts in Singapore who that would affect the electricity markets and the actor in the electricity market i'm thinking about the gen course retail go and also about myself the end consumer.

[00:16:32] yeah well let's back up for just a second you know there's at one level back in the time period when the penalties are an over contracted gas with women and driver the unexpected driver what were we getting in terms of outcomes we were seeing use of coming out at what we would call an economic terms short run marginal cost.

[00:16:55] of producing electricity what does that mean it means that we were barely covering the and sometimes not even covering the full cost of just the gas that was being used to generate electricity that as far as it goes a lovely situation for the consumer because the price of electricity is being kept quite low.

[00:17:13] But if you think about it it's not sustainable though the electricity is coming in at a cost for many customers that was barely covering the fuel that was being used not the plants that were being maintained to generate it so that created a difficult and obviously unsustainable situation but also.

[00:17:31] It also made it very difficult customers to know what the right prices almost eight years this is going on and so people get quite used to prices and fair few people look at their bill and say oh my bill is so low they might not even think it's low it might even look high but it's it's low relative to the long term sustainable cost of producing electricity so where we are now we're seeing much higher prices because of the pure market disruptions and.

[00:17:59] The man growth and will just say scarcity and disruption but so we pivoted from being well below the sustainable cost in an unsustainable care but we know about and we did this pivot in such a short period of time the long run marginal costs of electricity which covers you know sort of the building of the power station as well as the use of the fuel is there's always been higher price just because of all of these things happening months even that would be a welcome lower price than what people are seeing with the question now is how.

[00:18:29] How does the market reset itself you know in a round reasonable sustainable long term pricing levels and how do people relearn what that should be this is the problem of too many years running around sustainable level with manage the teacher everybody the wrong things.

[00:18:47] No, that's what's really great covering of Singapore electricity markets now maybe let's focus on the projects of importing renewable electricity into Singapore from neighboring countries so essentially the energy market authority email which is the local regulator has issued and the last year to select imported for the new ability into Singapore with this final bid due mid July and I know a lot of people working hard to meet those deadlines.

[00:19:15] And there has been a lot of interest by many investors is about 20 bidders and with project from solar plus battery storage in Indonesia to power imports from Laos and my first question is as part of the tender the EMA has made a technical requirement which are really 2.1 is a known intermittent dispatch and the second one is a plant load factor of PLF at 75% which extension means that the market is going to be a huge number of people.

[00:19:45] So I mean that for most of the project which are solar based they will need to be combined with battery storage to meet those requirements and for reference no more sort of plants load factor is about maybe 20% and so just wondering according to you why has the EMA made such technical requirements.

[00:20:04] But in fact that a little bit is a really interesting set of issues at one level this is an energy transition play the ability to bring in renewable energy or non carbon emitting electricity into Singapore which has space and resource constraints.

[00:20:20] So that makes sense and LNG or gas in this sustainable pricing that we were just talking about being much higher.

[00:20:29] So Singapore very attractive destination for investors looking at ways to get renewable energy into Singapore because in most markets in Asia right now solar and wind compete very very very strongly and laborably against LNG.

[00:20:44] But Singapore also put the premium on security supply and is very prudent and cautious in terms of introducing mega change which just it's clearly a mega change right and it's the beginning of potentially any number of future mega changes if you just try to reach any kind of decarbonization Singapore is going to need a lot of clever solutions.

[00:21:06] 75% how necessary is that or you could probably come up with scenarios where you don't need to put that kind of constraint in if you were just looking at ways of displacing gas from time to time you could probably do smaller projects and build from that.

[00:21:22] But that doesn't get you anything material that just gets you a lot of experiments pilots and things so if you're kind of do a large scale import what you're really trying to do is change the name of the game I think and that means what could we do what could we see if we ask for something that was essentially a base load kind of in by base load I mean 75% of the time this is bringing electricity into Singapore which is on par with sort of operating power station.

[00:21:51] Continuously except for when you're doing some maintenance on it so let's just how else would you find out what's possible and if you look at the scale to somebody's going to build a subsea long distance transmission line that's not being built to sit there.

[00:22:07] You want it to run all the time so is it really a binding constraint so there's even before you put the 75% you know somebody's going to be trying to figure out whether solar plus batteries or solar and wind or

[00:22:20] solar and batteries and hydro or some combination of things can make use of that interconnector at a very high level otherwise it's just sitting there whenever you're not sending any electrons down and it's earning you any money so you could argue that it's really just a you know it's a requirement that probably affects some and it probably affects all earlier because batteries are still relatively more expensive but it's logical in the sense of using the resources of go into this efficiently.

[00:22:49] And it also probably makes a little bit more comfortable with how much of an intermittency does the system have to accommodate versus how much is being accommodated before it comes into the system which makes it easier to learn from.

[00:23:02] But I think you put all of those things together and they can ask for what they asked for.

[00:23:06] And none of these things have to be done this way. They're all choices with consequences but if you're thinking about it from a longer term energy security orientation I understand where they're coming from and there's certainly a lot of investor activity that they've a lot of interest so it doesn't seem to be a fatal flaw we might as well ask for what you want.

[00:23:26] Yeah, exactly. And if we take the counterfactual which would be we just don't require this high plant load factor and then we end up with a lot of non-intermitten dispatch on the grid there are many countries in the region that has added large share of renewables on the grid and could you talk about some example of countries and what was impacts that's adding for example solar in large capacity of what was impact on the grid.

[00:23:55] Okay, so there's been a couple of examples are Australia is a fairly recent example where the eastern Australian market was suspended for reasons of not having sufficient generation resource available.

[00:24:08] And I think fingers are pointed in a lot of different directions and I'm adding it will take some time to actually get a real detailed nuance assessment of what exactly has happened.

[00:24:18] It's a period of time when there's been a lot of units offline for maintenance temperatures were still hot till you know just bad timing some people pointed renewables and say you know if it weren't for the renewables that we wouldn't be having some of these issues.

[00:24:31] I don't think that would affect the maintenance decisions but the market there has been under review from the point of view of how do coal plants exit and what happens if they exit before you really want them to you might say I really want green electricity but you might privately also be saying supported by the market.

[00:24:48] I can fully make the transition a lot of this is timing so I think one of the transitional issues one of the elements in any kind of transition is somebody has to make a call.

[00:25:01] Whether if they meet short term near term or even medium term electricity demand will they get their money back before they're no longer needed.

[00:25:12] So I think when we talk about the under-detentition and imports or anything like that will have an implication for the risk profiles of everything else.

[00:25:20] The still but he really knows how the under-detentition will go how much it would be driven by policy how much impact will have by when and so if we reach a point where is the challenge with the grid yes okay that's so much intermitency but there's other challenges that are created.

[00:25:36] The same type which is how much of the other resource that we need to manage that is going to be provided by the private sector trying to get their money back over 20 or 25 years when on the other hand the energy transition should be over in 20 or 25 years which way will it go so you've got two issues that one is how do you manage the ever changing flow of electrons from different sources and the short term but you have a bigger issue which I think people are becoming more aware of now which is well I have nobody.

[00:26:06] So it builds the bridge that you need to get to the other side because they don't think the bridge will last long enough commercially to get their money back I think that's becoming a really interesting question.

[00:26:17] That's very interesting so it's a plan to increase the new boy trading point into Singapore and the majority of projects as market understand being the solar PV combined with battery from Indonesia.

[00:26:30] Do you think conceptually this might impact the dynamic in the electricity market in Singapore?

[00:26:35] Well I think all of these things are already beginning to have an impact on the dynamic in the market in Singapore it's really built on the same point we were just talking about everybody sees the high use up prices right now maybe they last for longer than we would like but our importance start coming in in say 20 27 and it will be enough and then what happened after that so how do we make it from 2022 to 2020.

[00:27:04] And who makes the moves that are required and what instruments will they be market based merchant decisions by investors looking at market signals or will it need to be a more structured sort of approach that question derizing everywhere I think that cost really isn't investigating the capacity market as a way of managing both the ins and the outs.

[00:27:28] The retirements as well as the new builds I think we're seeing that in a types of solutions in different markets all trying different things market like the Philippines to somewhat more advantage it has a quite diverse range of technologies available and the question is what do you build back do you build one more coal plant or do you build gas plants which would have to be using importedology which is the best way to go so I don't think Singapore is alone.

[00:27:53] In this challenge I don't have a simple answer I know with looking at all of the import options that are available I wouldn't want to pick a winner but it's certainly a wide range of options to choose from and you could argue that diversity of those options would be more sensible than just one all your eggs and one basket's not a security of supplies.

[00:28:14] Yeah exactly and that was also one of the aim of the EMA for this tender just as a conclusion for decades there was a discussion of having integrated grid in Southeast Asia covering all the countries and could you just explain why this idea is so attractive but also why the implementation is so difficult.

[00:28:35] So it's a good question we could take this back at almost an elemental level and say that the Austrian grid has been something like you know there's been talked about for maybe two decades usually at a very technical level and then it dies.

[00:28:50] And now we have a pilot transaction to Singapore that's sort of a first after 20 years what makes it difficult with all the respect to my engineering friends I don't think it's the engineering but that's the most difficult thing here.

[00:29:03] I think it's the commercial and the governance framework, the economic part one issue is you know each of the countries involved in the integrated grid scenarios have different regulatory and commercial systems all of them need to figure out what they charge as the electron passes past them up an electron can get to Singapore

[00:29:23] and we would charge that electron something if it stopped here in Thailand then what should we charge is going through Thailand to Singapore and then Malaysia does the same in the US they have an expression called pan-caking which is you know pancakes you stack them and then we eat them with syrup and butter and then they're lovely for breakfast but the idea is that each jurisdiction is another pancake and by the time you'll get the electron delivered to Singapore you're paying everybody something sometimes it adds up and it makes the deal.

[00:29:52] So there's that you could call that wheeling charges but you know really at the end of the day it's a lack of coordination on the broader market side everybody wants to do something individually and not necessarily the listically or with a regional market we focus on maybe commercial transaction that gets an electron from loud to Singapore but what we don't really focus on is like how do you know three countries actually coordinate optimal use of their electricity supply which touches on broader city supply.

[00:30:21] It is on broader security and supply issues and everything.

[00:30:25] That was fantastic thank you for coming on the show Mike.