A Discussion on Electricity prices in 3 Parts
On the last day of every quarter, come rain or shine, a short but concise media bulletin will be released by SP Group. First, through their own website then the mainstream media. The arrangement will always be the same: for the next quarter: electricity tariffs will [increase/decrease] by [a certain percentage], the [increase/decrease] is largely caused by the cost of natural gas for electricity generation, which [increased/decreased] by a [certain percentage].
Unless a member of the electricity industry, it is odds-on that most people will struggle to even answer the first degree of “why” questions. Why did gas prices increase? How does it compare to oil prices? If I compare electricity generated with oil and with that of gas, would one be cheaper than the other?
That, however, would be both too heavy and boring a topic for the ELECTRIFY.SG blog, as well as not being too relevant to you, the savvy consumer. What we will be focusing on instead are the factors that drive electricity prices in Singapore.
In other words, the question we will answer over this 3-part series is essentially this: what could possibly happen in the next 12 months that will determine how [increase/decrease] is checked off, and how will it determine the mythical [certain percentage].
Along the way, we would inevitably touch on certain aspects of the electricity industry to explain why certain things matter and why certain things do not. But I promise the dry bits will be kept to a bare minimum.
Shale vs OPEC
The bout is between American-speaking (I know it is really English) and non-English-speaking oil. It is time for a history lesson, and it would be a lot easier — and funnier — to understand if we translated this tale into carrots.
OPEC is a group of farmers that have been selling carrots for the past 50-odd years. This group of farmers really made their money in the 1970’s when the Yom Kippur War broke out in 1973, leading them to proclaim a carrot embargo against the United States, then the world’s biggest consumer of carrots, for supporting Israel in the conflict. Since then, entire economies have been built on carrot money. With the world so reliant on carrots and OPEC collectively sitting on the world’s biggest carrot farms (or market).
This all started to change from 2014, when a general oversupply of carrots (farmers were enticed by high carrot prices to increase carrot harvesting), coupled with the resumption of Iran as a carrot farmer and marketplace, led to carrot prices crashing to $30/basket. It was also at this time that the role of US carrot farms changed from that of purely domestic consumption to export, made possible by the utilisation of a technology called fracking. In carrot terms, fracking is like a giant vacuuming technology that allowed US farmers to access carrots that are buried deep underground and were previously inaccessible. Carrots that were farmed through fracking are termed “Shale”.
Shale carrot harvests, though smaller than OPEC carrot harvests, are now sizeable enough to have an impact on global carrot prices. In December of 2016, the OPEC group of farmers announced that they were cutting carrot supplies in a bid to prop carrot prices back up again; which succeeded, for a while. Whatever gains that were made all but disappeared by March 2017 when it was reported that not only had Shale carrot farming been on the rise but Shale carrot reserves were also at an all-time high, effectively negating the OPEC carrot cut. It also did not help that some OPEC farmers did not fully comply with their assigned reduction amounts; understandable, as carrot prices recovered slightly so the more carrots these farmers sold, the more money they would make.
The sentiment now is that the OPEC cut will be extended from June 2017, for whatever it may achieve, so carrot prices now have taken that into account. Shale production is not going to be slowing down anytime soon. Shale carrots are also a lot cheaper to harvest, so Shale farmers are more comfortable with current prices than OPEC farmers. Should OPEC collectively decide to reverse their decision and end the cuts or should compliance with the cuts be a lot less stringent this time around, you can expect carrot prices to take a dip for the worse; or better, depending if you are a carrot farmer or consumer.
In Part 2 of this series on Opening the Black Box, we will be discussing the impact of geopolitics, both global and regional, on electricity.
