Why are electricity tariffs pegged to fuel oil contracts?
Channel News Asia reported that the electricity fees are set to be revised upwards based on rising fuel oil prices of the past few months:
SINGAPORE: After two quarters of downward adjustments, household electricity tariff will go up by 6.93 per cent or 1.25 cents per kilo watt hour (kWh) from July 1 to September 30.
Electricity supplier SP Services said the increase is due largely to higher average fuel oil prices from April to June, which hit S$76.24 per barrel.
This is a 26 per cent increase from the S$60.47 per barrel used in setting the previous quarter’s tariff.
The tariff is calculated based on a new formula which kicks in next month.
Under the revised formula, the electricity tariff for the next quarter will be based on the average fuel oil prices in the preceding three months instead of the fuel oil price in the first month of the previous quarter.
Now the above may make sense, except it does not. 80% of Singapore’s power is generated by natural gas. Therefore it may make more sense for tariffs to be pegged to natural gas prices. However, for some mystifying reason, the Straits Times claims that one has to peg tariffs to fuel oil prices because “there is no natural gas price benchmark”:
Why is it pegged to the price of fuel oil?
Eighty per cent of the electricity generated here is powered by natural gas, but Asia does not have a natural gas price benchmark on which to peg the price of electricity.
Pegging it to the price of the traditional source of electricity – fuel oil – is the next best thing. The cost of fuel contributes up to 60 per cent of the total costs of producing electricity, because of the ups and downs of oil prices. Non-fuel costs, comprising the cost of delivering electricity, remain fairly stable.