Retailer's exit from Singapore's electricity market: No need for warning bells

Earlier in January, electricity retailer Red Dot Power (RDP) announced its exit from the electricity market, citing a “financial challenging period.”

RDP was one of the 14 electricity retailers that participated in the pilot launch of the Open Electricity Market (OEM) in 2018. The news of their exit has spooked consumers who were starting to overcome their initial scepticism towards switching to other retailers; despite assurances that affected customers will be transferred back to SP Services without disruption to their electricity supply.

Consumers are now questioning whether it is feasible for so many retailers to survive in a small yet highly competitive market like the OEM, and whether they should even bother to switch from SP Group if their electricity providers are on naturally shaky ground.

Liberalisation for many years
The phrase “Open Electricity Market” (OEM) is commonly associated with the final stage of the electricity sector liberalisation in Singapore, where all consumers can choose amongst competing retailers to enjoy lower electricity prices and a wider range of plans, regardless of their electricity consumption levels.

However, industrial, commercial and large domestic consumers have had access to this choice for several years. Only the residential electricity market was left to be fully liberalised, which is what happened last November with the launch of the OEM.

Since the opening of Singapore’s retail electricity market in 2001, the market has been dominated by “Gentailers”, which is a term used for retailers who share a parent organization with a generation company.

RDP was one of the first “independent retailers” to enter the market when it received its retail license in 2014. It also had the largest market share amongst the independent retailers at 0.8% as of March last year, where independent retailers had a combined share of about 2% of electricity demand.

Thus, RDP had a sizeable number of commercial and industrial consumers in its customer base; and it added about 120 households to its clientele in the Jurong soft launch of the OEM.

RDP’s decision to exit the retail market altogether means that it is giving up its entire consumer base. Given that households have a much smaller electricity consumption as compared with commercial and industrial consumers, RDP was probably unable to develop a successful business case in the overall retail market, as opposed to speculation that the design of the OEM or the sudden competition for residential consumers led to their exit.

It is possible that RDP may have banked on achieving better profitability after entry into the residential market but did not find the success that it envisaged. It is also plausible that RDP wants to focus its energy on other initiatives.

The company is currently leading a consortium to install and operate one of the two large batteries being set up under the government’s energy storage test bed programme. It is also one of the major players in Singapore’s electric vehicles charging station business, with a stated aim to setup 50 such stations across the city by this year.

Whatever the case, RDP’s exit means that we need to take a deeper look at the obvious questions on everyone’s mind: Can the 13 active electricity retailers (and the 18 others with electricity retail licenses) survive for the long term in the market? Or will the electricity market go the way of the ride-hailing sector, with consumers ending up with an oligopolistic situation dominated by one or two players? Most importantly, will there be an outcome that is bad for consumers?

Lessons from the East and West
International examples offer an instructive guide on how retail electricity markets tend to mature.

Australia, New Zealand, and the state of Texas have had retail electricity competition for a number of years. Whilst Australia and New Zealand’s electricity market design closely matches that of Singapore in many aspects, Texas is considered to have one of the most successful retail electricity markets in the world.

All three jurisdictions, despite the differences in their geographical size, electricity demand, number of generators etc. have stabilized at about 30 – 40 retailers operating in their electricity market. More importantly, in all three markets, the incumbent gentailers continue to hold on to the lion’s share of their respective markets since the markets’ inception.

This is not to say that the incumbents have not seen their market share recede over the years.

However, only in New Zealand have independent retailers managed to claw away 8% of the market from the incumbents. In the case of Australia and Texas, market share lost by incumbents has been grabbed by other smaller gentailers whilst independent retailers continue to maintain a combined share of about 1 – 2%.

Yet, this is in no way a determinant for whether these markets are considered successful.

In Texas, 92% of all consumers have exercised their right to choose an electricity provider at least once. Average fixed price contract tariffs have reduced as compared to tariffs in 2001, even if these were not adjusted for inflation, making it a highly successful market.

However, Texas consumers continue to stick with trusted and financially stable retailers despite the smaller retailers offering even lower prices. In fact, studies have shown that more than half of the consumers have never bothered to use online electricity–rate comparison tools.

On the other hand, Australia’s 35 odd retailers now offer more than 3,000 different plans to consumers. Experts suggest that this has been done to confuse consumers and lock them into unfavourable tariff plans. As a result, the market has seen a significant decline in the levels of residential and small business consumer confidence.

Gentailers vs Independent Retailers
However, the overall experience seems to suggest that retail electricity markets tend to gravitate towards one that comprises of the large incumbents and a steadily growing number of new independent retailers.

And whilst incumbents continue holding on to a major portion of the market, independent retailers are able to survive even with a small market share. The fact remains that independent retailers are at a disadvantage as compared to gentailers because they do not have access to their own generation assets through which they can hedge against price fluctuations in the wholesale market, whilst offering fixed-price contracts to their consumers.

Instead, they are either dependent on hedging contracts with generators who will typically offer them worse terms than those offered to their own retail arms.
Indeed, this was a concern raised by RDP in a submission made to the Energy Market Company.

Alternatively, independent retailers can procure electricity futures, which make up legally binding contracts for the purchase of fixed quantities of electricity at a fixed price at a point of time in the future.

Singapore launched an electricity futures market in 2015 with precisely this objective, and the growing trade volume in the market suggests that it will play a major role in facilitating the sale and purchase of electricity amongst participants at transparent prices.

Whilst Red Dot Power may have decided to pack their bags in this market, there are 30 other retail license holders listed on the EMA’s website. Out of these, only 13 are currently offering plans in the OEM.

One can hope that as the remaining players throw their hats in the ring, they are able to utilise the futures market and can manage to differentiate themselves by providing innovative offerings.