Ep 7 Singapore electricity market and renewable import into Singapore with Mike Thomas

Yiou: Welcome to sustainable energy Asia.

Ben: Hi, everyone. It's Ben Welcome to sustainable energy Asia podcast, a podcast that aims to put a spotlight on actors in the energy transition sector. And to give you the BT two issues critical for Asia and the world to achieve net zero. Today, I'm joined by Matt Thomas founder and managing director at Cilento group. An energy economics consultancy headquartered in Hong Kong. Mike and I are going to speak about the Singapore. The tree city market and the new project to import renewable electricity to Singapore from neighboring countries. My main takeaways from our conversation. As follow. First, the two main drivers of the wholesale electricity market dynamics in Singapore have been the global energy prices and the oversupply of gas in Singapore. Look in by long-term contracts with a minimum of take. Second takeaway is that the plan to input renewable twisty into Singapore? Is really a game changer in could help Singapore. If I eat it, energy supply and decarbonize.

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 in the energy transition in Asia.

Hi Mike, welcome to the show. could you just introduce Atlanta group and explain how you are supporting your clients in Asia?

Mike: Sure. Thank you, GE and it's glad to be here. So the Landau group we're an economic consulting firm. Our focus is really just the energy markets and, we've been operating in Asia Pacific region for, 1213 years now. But as a group, members of the company go back of 25 years in the region providing support and, 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 of signaling the right way to do the transition.

Ben: And can you come back more precisely on your about 30 years? And, and especially, I'll be interested to know, after found group, about 12 years ago, how you have seen the energy landscape evolved in Asia.

Mike: Yeah 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. What we've seen is a number of changes. 30 years ago when I was really getting started as a consultant and energy markets were somewhat new almost theoretical concepts, there were very few instances, uh, UK was, was a notable one. There were several emerging in South America where, where actually some of the original thinking was but in Asia there was really just the beginnings and the promise of doing things differently and maybe introducing some efficiency but also, you know, letting new players come in to the markets getting the private sector in a bit more and changing the role of government and the sector was often a, an important part of, of. Often the electricity was being delivered by a government department and not necessarily subject to all these market forces. But that drove quite a bit of work for some time. 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 it changed to progressively what I'll call it to post Enron, post California, as many of, you know the market in California collapsed. Extraordinarily in 2001 and pretty much stopped, there's a global interest in new market development. So our business shifted to a lot of single buyer markets, a lot of planning, a lot of pricing tariffs, IPP is still coming in, looking for contracts, but none of that really solved the bigger problem, which is what happens when a contract. So you sort IPP as a 20-year contract or something that, 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 10, 11, 12, and people wanna sell their stakes in their things. Then the in incoming investor went to know what kind of value a place right on the back end. So, but markets are back then, whether it's a market or whether it's something else, you still have to sort. So provide some basis for estimating what happens later. 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 tariff? What 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, they're wondering, how does it work? What can you do to make it work better? So it's really been quite an interesting evolution of the issues

Ben: So the subject of today is, about Singapore electricity markets and the renewable electricity imports projects that Singapore has. If we start with the Singapore electricity market it'll be interesting if you can explain how the Singapore electricity market is organized with its world cell markets and retail markets and if you could do that by contrasting it with other structure where there is, um competitive electric markets in the region, and I'm thinking about Australia and the Philippines, for example,

Mike: Yeah, 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 GenCos that they then were privatized. So you have a mix of purely private and then those under say couple or some Corp, which are sort of corporatized, all competing in a wholesale market for dispatch and for setting up prices. They have a great deal of latitude to secure their fuel contracts and to enter into electricity supply contracts, retail contracts with customer. The market evolved over a long time. It 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 to buy power from, either the market or from stakeholders in a fully competitive way generator's bid to get dispatched. But it's. Small market and everybody is essentially using the same fuel natural gas. It may come from one place or another. It may come from L and G. It may come from type natural gas, but it's pretty much all the same. And demand has been growing and over a period of time the market's 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 and a more expensive place to be if you're paying for electricity. Um, and you know, it was quite an interesting, uh, challenge. Yeah.

Ben: So, as you said, in Singapore, H generation is largely dominated by gas generation about a 90%. Could you explain how this generation mix is impacting the price formation. And I'm thinking about the price level and the volatility, and also how this is impacting the merit order in the local markets.

Mike: Well, electricity is generated from usually from a fuel. so of course the price of that fuel is a very significant part of the cost of electricity, and when you generate electricity, you generate it to meet load, which can be very high, say don't get peak times or lower off optic 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 and, you know, like any sensible system you wanna run the cheapest ones first and only use the expensive ones later. What makes a unit expensive? Is it, it might take a little bit more fuel to produce the same amount of electricity. It might not be as SU. It might be 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 say 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 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 that's 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 the actual technology are relatively less expensive, but the gas itself is relatively more expensive. Then you can contrast that with other markets which have some call the call might be cheaper, but the units are more expensive. Singapore really doesn't have the space or, currently now with the energy transition, the appetite for coal plant. So it's been. Unfortunately in the last year, the gas markets around the world have just been puled by a variety of external forces so that if you wanna import natural gas LNG. It's just very expensive for a variety of external to Singapore market reasons and anybody who's looking at using gas, whether it's in Europe, the United States or in Singapore are paying much more for it.

Ben: And as you said the price reduced 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? It can be piped and also, imported through an energy terminal. And maybe just explain why Singapore has chosen also to increase the share of LNG imports cuz that's quite interesting.

Mike: Yeah, certainly. Well, well, gas supply to Singapore has, is, 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 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. What we'll call the security of supply, the ability to source gas from wherever it needed to support to source that gas in order to keep Singapore's lights on, any contingency that can be physical, a pipeline could be, damaged 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 a source to diversify your sources of gas and you don't have any. In your own country, LNG is the way that you do that. So LNG is liquified natural gas coming from some other place delivered to Singapore on special boats, unloaded at Singapore's LNG terminal, which takes a liquid natural gas, very, very cold, and Warms it up, so to speak where it then becomes gas form, as opposed to liquid. And it blends in with the pipe gas from Malaysia and then Indonesia. So no matter what happens in Singapore, the L and G now is always required. So the price of L energy, will sort of be the swing factor for gas supply in Singapore.

Ben: Okay. we've talked about the generation side and now let's focus on the electricity price. So, the world price, as known as, the uniform Singapore, electricity price, or us from Singapore, HC pride for us Z, uh, in Singapore has really followed two major trends. There used to be. Gradual decline from 2011 to September, 2021. And then from September 21, sharp increase. could you explain the underlying reason for these two, trends?

Mike: Yeah. There's three things going on to explain the two trends. So from 2011, until 2020, Or they're about global fuel markets, gas markets and the drivers of those markets actually largely been coming down. 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 on gas. And often a lot of gas is developed in the same context that oil has developed if they have historically been quite strongly linked. And, also L and D has become more developed. So the price analogy has actually been falling for quite a long time. The 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. Well, first that macro trend has obviously changed because, oil prices are now much, much higher. So in the last, last 18 months, that macro trend is completely reversed, but then there's another aspect of Singapore. That's more idiosyncratic to Singapore. And that is when gas is contracted, it's contracted historically at a price and a volume. 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. So what happens if either to sum of all of your contracts exceeds the amount of gas that you actually need to generate electricity that you. Or using, and what happened if you are you've over contracted the whole gas supply. In that case you want to generate electricity, you want to use your gas up. So 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. So if you look at demand forecast, say in 2007, 2008, 2009 timeframe they were pointing at a higher number than we got to in reality. When you look at planting decisions GenCos 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 GenCos to use as much gas as they could so that they would avoid having to pay the penalties that were associated with, not that they had promised to use. So when you signed 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. Because I am trying to avoid that penalty. And so for a good number of years between 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 the supply and demand of electricity. How do I manage exposure to over contracted gas supply agreements which is unusual problem to have and be if your demand is not growing very fast, a difficult problem to get out of because you really require growth to get back into that balance. That growth started to happen. At the back end of the 20 eighteens and by 2020 we were seeing the data centers and other things locating in Singapore, building demand for electricity. And 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, cuz the penalties were material then you know, now those penalties aren't binding anymore because now the gas is contracted and is needed. So we saw a, a step change and that step change, in the way gas and electricity were interacting in. Singapore happened in that what perfect storm kind of way to coincide with that big shift in the global gas markets. 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 if you'll remember prices in a lot of commodity markets collapse substantially because 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.

Ben: Yeah, it was really is a perfect stone and could you share your view on the potential impact of the energy crunch and the unwind of these contracts in Singapore, how that would affect the electricity market and the actors in the electricity market. I'm thinking about the GenCos the RetailCos and also, about myself, the end consumer.

Mike: 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 on over contracted gas were the dominant driver, the unexpected driver, what were we getting in terms of outcomes we were seeing USEP coming out at what we would call in economic term the short run, marginal cost of producing electricity. What does that mean? It means that. That we were barely covering. and Sometimes not even covering the full cost of just the gas that was being used to generate electricity. That's as far as it goes a lovely situation for the consumer, because the price of electricity is being kept quite low. But if you think about it, it's not sustainable. So your electricity is coming in at a cost for many customers that was barely covering the fuel that was being used. Not. Plants that were being maintained to generate it. So that created a difficult and obviously unsustainable situation, but it also, it also made it very difficult for customers to know what the right price is. Almost eight years this is going on. And so people get quite used to prices and very few people look at their bill and say, oh, my bill is so low. And 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 fuel market disruptions and demand growth. And we'll just say scarcity and disruption, but so we pivoted from being well, below the sustainable cost in an unsustainable tariff, but we now. And we did this pivot in touch a short period of time. The long run, marginal cost 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 a month, even that would be a welcome lower price than what people are seeing. The question now is how does the market. Reset itself, you know in around reasonable, sustainable long term pricing levels, and how do people relearn what that should be. This is the problem of too many years running at unsustainable level. We managed to teach everybody the wrong

Ben: No, that's all, this was really great covering of Singapore markets. No, maybe let's focus on the projects of importing, renewable electricity into Singapore from neighboring countries. So essentially the energy market authority, EMA which is the local regulator has issue at tender last year to select importer of renewable electricity into Singapore with this final bid due mid-July. And I know a lot of people working hard to meet those deadlines. And there has been a lot of interest by many investors. It is about 20 meters and, which project from solar plus battery storage in Indonesia to hydro power imports from Laos. And my first question is, as part of the tender the EMA has made a technical requirement which are. Three 2.1 is a non intermittent dispatch. And the second one is a plant load factor of LF at 75%, which essentially 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 the. No more solar plants load factor is about maybe 20%. And so just wondering according to you, why has Thema made such technical requirements

Mike: Let's unpack that a little bit. That's 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 so you've you moved import. So that makes sense. And L and G or gas in the sustainable pricing that we were just talking about being much higher, make Singapore a 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 favorably against L and G. Right. But Singapore also put the premium on security of supply and is very prudent and cautious in terms of introducing mega change which this is 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.

Does 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, but that doesn't get you anything material that just gets you a lot of experiments pilots and.

So if you're gonna 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 asked for something that was essentially a base load kind of and by base load, I mean well, 75% of the time, this is bringing in electricity into Singapore, which is on par with sort of operating a power station, 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. 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 gonna be trying to figure out whether. Solar plus batteries or solar and wind or 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 not earning you any money. So you could argue that it's really just a, you know, it's a requirement probably affects some and it probably affects all earlier because batteries are still relatively more expensive, but it's, it's logical in the sense of using the resources that go into this efficiently and it also probably makes a little bit more comfortable with how much 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. But I think you put all of those things together and they can ask for what they ask for none of these things have to be done this way. They're all choices with consequences. 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 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.

Ben: Yeah, exactly. And if we, takes the cofactor, which would be we just don't require this high brand factor. and then we. End up with lot of non-term 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, were the impacts that adding, for example, solar in large capacity, what was the impact on the.

Mike: Okay, so there's been a couple of examples. I think Australia's a fairly recent example where the Eastern Australian market was suspended for reasons of not having sufficient generation resource available. And I think fingers are pointed in a lot of different directions. And I imagine it will take some time to actually get a real detailed, nuanced assessment of what exactly has happened. It's a period of time when there's been a lot of units offline, for maintenance., Temperatures were still hot. So you know, just bad timing some people point at renewables and say, you know, if it weren't for the renewables that we wouldn't be having some of these issues I don't think that would affect the maintenance decisions but the market there is, 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 the green electricity, but you might privately also be saying supported by my non-green electricity until 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. As to 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? So I think when we talk about the energy transition and imports or anything like that it will have an implication for the risk profile of everything else.

 Cause nobody really knows how the energy transition will go, how much it will be driven by policy, how much impact it will have by when. And so if we reach a point where it's a challenge for the grid. Yes. Okay. That's so much intermittency. But there's other challenges that are created.

At the same time, which is, you know, 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 2 issues. Then one is how do you manage the ever changing flow of electrons from different sources in the short term, but you have a bigger issue, which I think people are becoming more aware of now, which is, well, if nobody 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.

Ben: That's very interesting. So we plan to increase renewable trading points into Singapore and the majority of projects,, as market understand being solar PV Combined with battery from Indonesia. How do you think co is, might impact the dynamic in the electricity market in Singapore?

Mike: Well I think all of these things are already beginning to have an impact on the dynamic in the market in Singapore? It really builds 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 power import start coming in and say 20, 27. Will it be enough and then what happened after that? So how do we make it from 2022 to 2027? And who makes the moves that are required and what instruments, uh, 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's arising everywhere. And I think like Australia, isn't investigating a capacity market as a way of managing both the ins and the outs the retirements as well as the new builds. I think we're seeing that in types of solutions, in different markets, all trying different things. Market like the Philippines is a somewhat more advantage. It has a, quite a diverse range of technologies available. And, the question is, what do you build next? Do you build one more coal plant? Or do you build gas plants, which, would have to be using imported L and D, which is the best way to go. So I don't think Singapore's alone 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 wanna pick a winner, but I it's short, certainly a wide range of options to choose from. And if you could argue that diversity of those options would be more sensible than just one, all your eggs and one baskets, not a security of supplies.

Ben: Yeah, exactly. And that was also one of the aim of the EMA for the standard. And just as a conclusion. For decades, there was this discussion of having a integrated grid in south Asia covering all the countries and could you just explain why this idea is so attractive, but also why the implementation is so difficult?

Mike: So that's a good question. We could take this back at almost an elemental level and say that the AIAN grid, has been something like, you know, cuz it's been talked about for. two decades usually at a very technical level and then it dies and, now we have a pilot transaction to Singapore, that's sort of a first, after 20 years, what makes it difficult? With all due respect to my engineering friends, I don't think it's the engineering that's the most difficult thing here. I think it's the commercial and the governance frameworks, the economics 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, if an electron can get to Singapore and we would charge that electron something, if it stopped here in Thailand, then what should we charge going through Thailand to, Singapore and then Malaysia does the same., in the, in the us, they have an express. Called pancake, which is, you know, pancakes, you stack them and then you eat them, with syrup and butter and they're lovely for breakfast. But the idea is that each jurisdiction is another pancake. And by the time you get the electron delivered to Singapore you're paying everybody something sometimes it adds up and it makes the deal nonsensible. So there's, that you could call that wheeling charge. 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 holistically or with a regional market. We focus on maybe commercial transaction that gets an electron from Laos to, Singapore. But what we don't really focus on is. How do you know three countries actually coordinate optimal use of their electricity supply, which touches on broader security of supply issues and everything.

Ben: The twist. Fantastic. Thank you for coming on the show mic.