Dear Readers,
As you are aware that currently the world are experiencing high and expensive Utilities bills due to a series of world events:
- Climate Change - heatwave across the globe prompt many to switch on Air-conditioner
- Geopolitical military conflict causing economic sanctions and embargo on energy supplies
- High demand of electricity from manufacturing industries like semiconductors, global data center, bitcoin mining activity, electric vehicles and consumers own more than 1 electronic devices.
- High demand of energy commodities for power generation under cutting down on greenhouse gas emissions which can be reduced by making power with renewables and other climate friendly energy resources, where renewable energy are inefficient under cloudy, winds and water power plants are not always operating under full load.
- Quantitative Easing (QE) and low interest rate result in increasing money supplies causing hyperinflation to stimulate ailing economy.
- Currency devaluation (weakening) imports inflation, Currency strengthening mitigate inflationary pressure. USD being the world reserve currency used for international trade settlement where commodities are priced denominated in USD settlement.
- Easing of border restrictions and compliance measure brought about economic activity recovery post covid-19, result in revenge travelling, products and services consumption.
- Supplies chain disruptions, congestion and lockdown of ports triggered by Covid-19 widespread infection.
https://voxeu.org/article/western-sanctions-russia-are-working-energy-embargo-now-costly-distraction
https://www.cnbc.com/2022/05/24/these-ports-are-causing-the-most-congestion-in-supply-chain.html
Many people on the street didn't see the inflation coming impacting and affecting their lives before US inflation hit 9.1% in June 2022.
Types of Inflation
Demand Pull :
- When the government lowers taxes, it also drives demand.
- Consumers have more discretionary income to spend on goods and services.
- When that increases faster than supply, it creates inflation.
- For example, tax breaks for mortgage interest rates increased demand for housing.
Cost Push :
- Minimum Wage
- Trade Protectionism imposing or increasing trade tariffs.
- The most common cause of Cost-Push inflation starts with an increase in the cost of production, which maybe expected or unexpected. For example, the cost of raw materials or inventory used in production might increase hence lead to higher costs.
Understanding Definition of Inflation and Deflation
- Inflation is define as general increase in prices of products and services during economic expansion phase.
- Deflation or recession is define as declining GDP growth of 2 and more consecutive quarters where prices of products and services treading lower in a downward trend due to declining price of raw materials commodities caused by the over exuberance in the financial markets resulting in a steep drawdown and nasty selloff,
How To Leverage & Capitalised On Increasing Utilities Costs?
Open Electricity Market (OEM)
Since 2001, Energy Market Authority (EMA) has progressively opened up the retail electricity market to competition to allow business consumers more options to manage their energy cost.
Instead of buying from Singapore Power Group (SP Group) at the regulated tariff, eligible consumers can choose to buy electricity from :
- A retailer at a price plan that best meet the needs or
- The wholesale electricity market at the half hourly wholesale electricity prices.
Those who exercise thise choice are termed as contestable consumers.
In 2018, EMA began the rollout of the OEM initiative which allows 1.4 million consumer accounts, mainly households to enjoy more choices, savings and flexibility when buying electricity.
Regardless of their choices, consumers would still enjoy the same reliable supply through the national power grid through peak and off peak hours without any supply disruption.
For more details on OEM can be found at www.openelectricitymarket.sg.
Regulated Tariff
As a default option, residential consumers in Singapore buy electricity from Singapore Power Group (SP Group), a market support services company regulated by Energy Market Authority (EMA).
The tariff set by SP Group is reviewed every quarter (3 months) and is regulated by EMA to reflect the actual cost of electricity.
This tariff comprises 2 key components:
- Fuel Cost
- Non - Fuel cost
Breakdown of Electricity Tariffs
Fuel Cost
This component of the tariff is calculated using the average of daily natural gas prices in the first 2 and a half month period in the preceding quarter.
For example: the average natural gas price between April and June is used to set the tariff for July to September.
This helps to smoothen out any large swings volatility in the oil markets.
For households, this means electricity tariffs that are reflective of prevailing market conditions.
Around 95% of Singapore's electricity is generated from imported natural gas, the prices of natural gas are indexed to oil prices.
This is the market practice in Asia for natural gas contracts.
Non - Fuel Cost
This part of the tariff reflects the cost of generating and delivering electricity to consumers, includes
- Power Generation Cost -
- This covers mainly the costs of operating the power stations, such as the manpower and maintenance costs, as well as the capital costs of the stations.
- Network Costs -
- This is to recover the cost of transporting electricity through the power grid.
- Market Support Services (MSS) Fee -
- This is to recover the costs of billing and meter reading, data management, retail market systems as well as for market development initiatives.
- Power System Operation & Market Administration Fees -
- These fees are to recover the costs of operating the power system and administering the wholesale electricity market.
Technical Analysis of Natural Gas
Based on Natural Gas Chart Technical Analysis, bullish chart pattern observed was Cup & Handle and Ascending Triangle, Natural Gas all time high was 15.78 in December 2005,
Natural Gas price is forecast and predicted to reach 13.52 using the depth of the cup & handle 9.42 (high) as a resistance - 5.325 (low) as a trough = 4.095 + 9.42 = 13.52
It was observed as well that price of Natural Gas and Crude Oil (WTI) had a divergence between them since July 2022 where Crude Oil (WTI) price continue to descend while Natural Gas price rallied after reaching 5.325 (low) from 9.66 (high) set in June 2022 computed 44.99% drawdown from June 2022 high.
Natural Gas and Crude Oil both commodities have further upside target to break all time high 15.78 for Natural Gas and 147 for Crude Oil (WTI) hence electricity tariff will rise further causing inflationary pressure where consumers have to pay more for utilities.
Which Plans to Choose Fixed or Discounted?
When inflation occurs over an extended period of time due to economic expansion phase, driven by demand pull and cost push inflation, where govt lowers taxes and expanding M2 money supplies to save the ailing economy hit by black swan events subprime mortgage crisis and Covid-19 pandemic to stave off deflationary pressure in a recession where many people lose their jobs and earnings due to lockdown and layoffs.
Once we identified an uptrend for commodities which will contribute to inflationary pressure, therefore the course of action you need to take is lockdown your Utilities bills by signing up for a Fixed Price Plan (fixed rate) for the maximum tenure offered by the retailer Utilities service provider, fixed plan are offered by 12months, 24months and 36 months.
Based on the above charts illustrations, Fixed Price Plan (fixed rate) will be constant no change when the Utilities price are adjusted every quarters (3 months) by Energy Market Authority of Singapore (EMA) for the wholesale electricity market.
However there is a drawback when a consumer had a fixed rate plan contract at the peak of the inflation tied down with 12 months, 24 months and 36 months, the longer the term is contracted the higher loss is experience when regulated tariffs was adjusted lower every 3 months during the inital phase of deflation and reession where all asset prices collapse from the peak due to over exuberance.
To tackle this situation, consumer can switch to the discounted plan where the discounted regulated tariff was computed 20% discount off regulated tariff adjusted every quarter high or low.
Unfortunately i last run a check on the discounted regulated tariff price plan offering by the retail service provider at https://compare.openelectricitymarket.sg/#/pricePlans/list.
There was no available price plan.
Conclusion
Consumer who signup for the fixed plan at the later stage, at the peak of the inflation will be the biggest losers.
Regulated tariff will be adjusted lower every 3 months due to declining commodities raw materials price but consumer overpaid Utilities charges with a fixed plan which works against the consumer.
Only discounted regulated tariff plans benefit the consumers in a recession or deflationary environment.
