Carbon tax likely to be passed on to end consumers

A carbon tax would likely be passed on to end consumers in the form of higher electricity prices, power generation companies have warned.

This is especially because the power generation sector in Singapore has little room to further improve its energy efficiency, given that most electricity is already produced using efficient combined-cycle gas turbine technology and natural gas.

"The generating companies are using the most efficient technology in the market. They are using the cleanest fuel," said Lim Puay Kong, president and CEO of Tuas Power, which holds the largest share of the power generation market.

The tax will be a "severe financial burden", he told The Business Times.

"This is going to be passed through to the consumer, simply because the electricity we produce is to meet demand."

Concurring, Senoko Energy, which holds the second highest market share, said that the tax will likely add some "hundreds of millions of dollars" to the total cost of producing electricity in Singapore.

"Such a large burden cannot be borne by a sector which today is struggling to be profitable," said CEO Paul Maguire.

"As a result our expectation is that like other regulatory costs it will ultimately be passed through to the end consumer, just like the Goods and Services Tax (GST)."

The carbon tax deals another blow to a sector that is already bleeding due to massive overcapacity in the market, with a generation capacity that is more than twice the peak demand.

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The power generation companies are also facing new competition in the form of independent electricity retailers which are sprouting up ahead of a full liberalisation in the market mid-next year.

YTL PowerSeraya, the third of the three large generating companies in Singapore, raised similar concerns.

"While the decision to adopt carbon pricing is a good move to manage climate change, the additional cost of more than S$70 million per year (for each company) will have to be addressed given the current overcapacity situation, intense competition in the retail electricity market, as well as challenges presented by the economic situation for power generating companies in the industry," said its CEO Chan Swee Huat.

These costs come in spite of the company having reduced its carbon intensity by about 30 per cent from a decade ago, after investing in more efficient combined-cycle power plants which run on natural gas instead of using older steam plants which ran on fuel oil.

"YTL PowerSeraya will work closely with the relevant authorities and stakeholders during the consultation process to provide its inputs, ahead of the carbon tax implementation in 2019," he said.

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The Energy Market Authority said in response to a BT query that it will, with other relevant government agencies, hold consultations with the power generation companies to identify any areas of support that they may need.

Industry observers concur that Singapore's power generation sector is cleaner than other countries which may use coal to produce electricity.

Still, Lynette Cheah, assistant professor at Singapore University of Technology and Design, had found in a 2014 study that marginal emission rates often spike much higher during peak periods as additional power generators are put into action.

Hence, the sector could be made more efficient through implementing peak and off-peak pricing, as well as demand side management schemes, she told BT.

If the carbon tax is passed on to end-consumers, this will also help to moderate demand, Ms Cheah added.

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"Ultimately the bulk of the emissions comes from the demand itself."

Wood Mackenzie analyst Chong Zhi Xin noted that since the carbon tax is applied evenly across all the power generation companies, "it's quite a fair system".

In comparison, ExxonMobil and Shell, which own refineries and petrochemical plants in Singapore, had earlier flagged concern over the impact of a carbon tax on Singapore's competitiveness as an export manufacturing centre, versus other countries.

Damian Chan, executive director of energy and chemicals at Singapore Economic Development Board, said in response that the government will consult with the industry on the impact, and will also study the experience of other countries.

"The sector is built on the premise of long-term sustainability and we are committed to its growth by striking a balance between Singapore's carbon commitment and cost competitiveness," he said.

"We will continue partnering companies to improve the productivity of their operations by encouraging energy efficiency projects and exploring carbon reduction technologies such that the sector remains globally competitive."

This article was first published on February 22, 2017.
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