Full Retail Contestability in Singapore's Electricity Market: What to Expect for Residential and Small Business Consumers
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Policy Brief 20
8 December 2017
Full Retail Contestability in Singapore’s Electricity
Market: What to Expect for Residential and Small
Business Consumers
Allan Loi, Anthony D. Owen, and Choo Qian Ke
SYNOPSIS
Singapore is gearing up towards Full Retail Contestability (FRC) for its electricity market in the second
half of 2018. This will enable both residential consumers and small business owners to select from a
variety of electricity providers and pricing arrangements. In order to gain market share, the retailers
will no doubt soon begin to try to get the attention of consumers through a plethora of branding and
pricing strategies, and catchy advertisements. Consumers may find it quite challenging to fully
understand the differences among the various options made available to them. The purpose of this
policy brief is to elucidate what consumers should expect when FRC commences.
KEY POINTS
• A multitude of pricing innovations will be made available for heterogeneous consumer
preferences, many of which will include products not directly connected to energy use.
• There is a need for consistent and effective monitoring of electricity retail market
competitiveness, with measures to encourage innovative tariffs and, if necessary,
facilitate the comparability of electricity prices introduced.
• Important factors that will affect the success of FRC are unbiased information about what
the various retailers plan to offer and measures that could reduce switching costs.
• As small electricity users are new to retail choice, inertia may be a factor that limits the
potential welfare improvements brought about by FRC.
INTRODUCTION equivalent to S$406 in bill costs based on low-
The move towards full retail competition (FRC) tension tariffs at 20.30 cents per kWh as of the
for Singapore’s electricity market in the second last quarter of 2017. Many of these electricity
half of 2018 marks the final step towards account holders do not have experience in
consumer empowerment and competitiveness retail choice, and will have to rely on
amongst electricity suppliers. This means that information presented to them in order to
small users of electricity will no longer be make optimal decisions about retailers and
constrained by a de-facto administratively pricing options.
designed tariff. For the first time, there will be
a selection of electricity retailers from which As of October 2017 there were 27 registered
consumers can choose the one that best suits electricity service providers listed. This is a
their individual needs. threefold increase from three years ago when
there were only eight. As competition for
Currently, less than 20 per cent of electricity market share will be intense, various
users still pay regulated tariffs. These users innovative marketing strategies and billing
include 1.4 million households, as well as structures will be devised to entice consumers
several small business owners whose monthly to switch from Singapore Power (SP) Services
electricity usage does not exceed 2000 kWh, to the new electricity providers.
Energy Studies Institute A Research Institute of
29 Heng Mui Keng Terrace,
Block A, #10-01, Singapore 119620
Tel: (65) 6516 2000 | Fax: (65) 6775 1831
esi.nus.edu.sg
Full Retail Contestability in Singapore’s Electricity Market
A potentially large number of new price plans These strategies ensure some form of product
will be made available, including time-of-use differentiation, hence potentially shaping the
and fixed pricing, integrated billing design, as market into a monopolistically competitive
well as other non-price bundled attributes. one, with differentiated groups of consumer
This makes it imperative for consumers to loyalties emanating from the uniqueness of
actively learn about all the plans on offer in each supplier “brand”.
order to benefit from their first switch in the
liberalised market. Diversity of Price and Non-price Bundled
Attributes.
ANALYSIS Experiences in other countries, as well as the
Although electricity is a homogeneous information offered on the websites of
commodity, there is a tremendous range in retailers in Singapore, show that there are
consumer preferences. Thus the retailers must many ways that tariffs can be structured,
learn about the particular sets of preferences sometimes with a combination of both price
held by the smaller consumers, notably the and non-price attributes. There are already
residential and small business consumers, for many well-established pricing mechanisms in
whom the potential cost savings from lower use around the world. Currently, Singapore
prices may not be significant enough to spur residents purchase electricity from a variable
them to switch to a new provider. More than standing offer, where tariffs are administrated
10 new entrants have joined the retail market by a single service provider. Such tariffs are
in the past three years, some of which may also known as legacy offers. When retail
have limited experience in electricity retailing. competition commences, consumers will be
These retailers must hence differentiate presented pricing choices that are typically
themselves and build trust with consumers via categorised into three main types: fixed,
branding efforts that cater to particular groups dynamic, and threshold–based prices.
of the newly contestable consumers.
Fixed price plans allow consumers to purchase
Product Differentiation and Branding electricity at one standard rate regardless of
Newer retailers, such as MyElectricity have changes in the cost of producing and delivering
already started to brand themselves as an electricity. While these completely protect
electricity service provider (ESP) that focuses consumers from large volatilities in fuel price
on ‘state-of-the-art’ technology to provide movements, the average rates for such prices
electricity for both commercial and industrial are relatively higher compared to other price
(C&I) consumers, as well as household structures.
consumers in Singapore. They plan to
continuously upgrade their software solutions Dynamic tariffs allow prices to change
and to leverage on collaborative opportunities depending on the nature of the pricing contract.
with other service providers to offer The range of contractual arrangements under
integrated billing solutions for consumers. this category is very diverse, catering to
consumers with a wide range of risk tolerances.
There are also some retailers targeting A time-of-use (TOU) arrangement could allow
demand response solutions for end- consumers to enjoy lower prices during pre-
consumers. Red Dot Power is one such specified periods, such as weekday evenings or
company, aiming to help consumers save weekends and public holidays, while
electricity by finding efficient ways to reassign penalising electricity use through higher
and reduce power usage so as to reduce both prices during other times of the day or week.
costs and damage to the environment. Others These dynamic plans could also come in the
are offering clean electricity. For example, Sun form of guaranteed discount rates, where
Electric and Sunseap Energy will focus promises are made to peg prices to pre-
exclusively on solar energy-related services, specified percentage discounts off the
whilst Environmental Solutions (Asia) will wholesale prices. More adventurous
offer 100 per cent carbon neutral power to the consumers could even try plans indexed to
small consumers of electricity. volatile fuel prices.
ESI Policy Brief No. 20 | 8 December 2017 | 2Full Retail Contestability in Singapore’s Electricity Market
Finally, threshold-based tariffs are related to on whatever information they are exposed to,
charges that allocate limits on demand, beyond and their own personal preferences.
which prices could increase greatly. One
example is demand charges where consumers The availability of information about the new
are penalised with higher prices if they use a suppliers and the costs of switching will be
large amount of electricity in a short period of crucial. In the Norwegian electricity market,
time (i.e. 5 minute period). Another example is households did not switch to the lower cost
a capacity charge, where fixed prices are paid spot pricing products for 14 years from 1991
for pre-specified amounts of consumption on a to 2004. During this period, consumers were
weekly or monthly basis, beyond which higher levied switching fees, and were constrained to
rates start to kick in. Such tariffs are related to switching only at the end of each quarter. In
demand-management where costs are saved addition, spot price information was not made
by reducing or shifting consumption of publicly available until 2004. In the
electricity. subsequent three years with reforms
removing the switching fees, 34 per cent of
The flexibility offered by pure-price households put themselves on spot-price
mechanisms may not be sufficient to convince products, which was a threefold increase from
consumers to switch to another price plan or before 2004. A smart home field experiment in
retailer. This is where bundling strategies Germany in 2013 also suggested that benefits
come in, whereby incentives are designed for from dynamic pricing plans are not obvious to
spill-over benefits into other markets of consumers, with 69 per cent of participants
interest to consumers. Such incentives are preferring standard tariffs. Also, the time taken
customised to consumer needs and vary to switch may become a barrier as it increases
widely from insurance plans, membership with the complexity of the switching process.
schemes and even discounts off purchases of Experience in the Nord Pool suggests that for
other durable goods. Green products an annual switching rate of 10-15 per cent, the
associated with clean energy such as solar- time taken to switch should be a maximum of
based offers are also an integral part of some 14 days.
plans. Such offers are only possible from the
formation of strategic alliances with other Even with sufficient information available and
companies which could further enhance the switching hassle minimised, there are other
branding effect, potentially leading to greater barriers that could prevent consumers from
market share as the market consolidates in the switching. The expected gains from switching
longer term. may be lower than the actual gains, amounting
to a gap between perception and reality, as
For consumers who are not interested in shown by a 2016 research report by the
switching plans after liberalisation, there Council of European Energy Regulators (CEER)
should ideally be a default supplier offering for the Netherlands and Spain. According to
variable standing offers that they can continue this report, there was a 70 per cent gap
to rely on. between the expected and actual gains, and the
switching rates were very low. Evidently, the
Consumer Inertia towards Retail Choices consumers were not yet ready to trust new
It is likely that consumer inertia towards retail retailers in the industry.
choice will be a challenging obstacle to
overcome during the first few years following To facilitate the switching process, Electrify.sg,
FRC. Small businesses and residential an independent organisation that serves as an
consumers in Singapore will likely be averse to online marketplace for users to shop for power
venture into the unknown territory of retail service providers, has an interactive online
choice for electricity, and may not attempt to portal (electrify.sg) to help consumers
learn anything about the new pricing plans on compare and purchase electricity price plans
offer. This is hardly surprising due to a lack of and services. SP Services has also set up an
prior experience in retail choice. In order to online portal (www.openelectricitymarket.sg)
judge whether it is worthwhile switching from to provide information on Singapore’s
default prices, consumers will have to depend electricity market. The information available
ESI Policy Brief No. 20 | 8 December 2017 | 3Full Retail Contestability in Singapore’s Electricity Market
via these portals will contribute to negating the consumers who lack prior experience but are
effects of consumer inertia. willing to consider alternative retail choices.
Given that markets may not operate efficiently
Consumer Welfare and the Need for Effective without measured intervention, the
Monitoring of Retail Competition government and retailers should work
Questions about consumer welfare will likely together to prepare adequately for the
be addressed in the future, which may lead to challenges that follow deregulation.
the re-assessment of retail choices in
Singapore. Will there be a need to lay down In summary, the conditions for FRC are based
rules for tariff re-structuring if the packages on the following key factors, namely: abundant
offered are not sufficiently coherent for public information for consumer engagement,
consumers to make fully-informed decisions? adequate retail choices, and sufficient
Will consumers really benefit from integrated technological and process
deregulation? infrastructure to facilitate switching. When
these conditions are met, FRC has great
According to a report on the Australian market potential to reduce average energy costs for
released by the Grattan Institute in 2017, retail consumers, decrease their power consumption
prices in Victoria increased between 2011 and which in turn benefits the environment, and
2014 with retailers charging higher mark-ups enhance home and business experiences to a
than before. This could be due to increased new level with more integrated and
customer engagement costs arising from personalised solutions.
competition, which are in turn passed down to
consumers. WHAT TO LOOK OUT FOR
• The number of consumers who switch to
In response to the price increases that new electricity service providers in the
occurred following retail competition, the UK first 12 months following the
tried to introduce constraints on market commencement of FRC.
competitiveness to protect vulnerable • The branding and pricing strategies of the
consumers. Limits on tariff innovation, such as retailers seeking to draw consumers.
banning complex tariff types and limiting • Whether the switch to new service
consumer choices on bundling services, were providers and pricing plans will lead to
imposed. However, these measures were later sizeable energy and price savings or other
found to be ineffective because suppliers had benefits for consumers.
to remove some innovative bundling strategies
from the market, a few of which were Allan Loi, Anthony D. Owen and Choo Qian Ke,
beneficial to lower-income families. are, respectively, Research Associate, Principal
Fellow, and Intern at the Energy Studies
Instead of imposing constraints on the market Institute of the National University of Singapore.
when problems arise, retail competitiveness
should be regularly monitored as it evolves. Keywords: Singapore Electricity Retail
Information on retailers’ cost structures and Competition, Full Retail Contestability,
retail margins should be gathered so as to Singapore Electricity Providers
detect any barriers that could prevent the
realization of potential benefits accruing from The views and opinions expressed in the ESI
FRC. Subsequent intervention could come in Policy Briefs are those of the authors and do not
the form of regulations that ensure the necessarily represent or reflect the views of the
availability of sufficient tariff options for Energy Studies Institute, NUS.
consumers of differing risk profiles, as well as
regular updates on electricity market Copyright © 2017 Energy Studies Institute. ESI
Policy Briefs can be reproduced, provided prior
information whenever the need arises. written permission is obtained from ESI, the
content is not modified without permission
CONCLUSION from the author(s), and due credit is given to the
The concept of retail choice for the smaller author(s) and ESI. Contact: Ms Jan Lui
consumers of electricity in Singapore is novel.
It presents a steep learning curve for
ESI Policy Brief No. 20 | 8 December 2017 | 4You can also read
