Utilities Price of electricity
Many consumers asked the question - why are the retail electricity suppliers able to offer discounts of up to 25% compared to the rates charged by SP Group when it was the monopoly.

The answer has now been provided here. Basically, the price charged by SP Group was determined by the Energy Market Authority. The authority allowed SP Group to keep a margin of 24 percent.

The next question that arises is - why does the EMA allow the SP Group to have such a large margin? This question was not asked. It was not answered.

I wish to ask a follow up question - what is the fair rate for SP Group to keep?

Here is my answer.

SP Group should be allowed to keep a margin that will cover its operating cost and a modest profit. It could be between 5 to 10 percent. We can study the cost structure of efficient operators of other countries. We could also look at the cost structure of SP Group itself. Its actual cost should be quite low, due to its large scale.

Is it a good idea for the energy market to be open to competition, so that the lowest price can be achieved?

My answer is - No. It is a costly exercise. The competition will add to the marketing cost and the cost of duplication. The eventual cost must be higher. 

There is a better way to set a fair price, rather than rely on market competition where there is a limited number of suppliers. The costly competition will bleed all the competitors until the weaker ones drop out. After that, the winner will increase the price to recover all of its past losses. The consumers will have to pay for the cost of competition.

This leads to another question - why are some retail suppliers able to reduce their price below the actual cost, not counting the cost of their operations? The answer is - market competition to weed out the competitors. It is not a predatory business model. It is not sustainable for the long term.

I am rather sad that Singapore has gone down this expensive path. It will add to our cost of doing business, and the cost of living.

Tan Kin Lian

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