Hyflux Overcapacity in power generation
During the current Hyflux episode, we learn about the oversupply in power capacity. 

The Business Times reported: Singapore's power generation sector has a total capacity of 13,350 megawatts (MW). Peak demand, however, averaged only 7,000 MW in the year to March 2017, leaving a spare capacity of 48 per cent in the system.

However, it did not explain why the power generating companies should incur a huge loss, which I understand to amount to $900 million a year. 

The article also reported - "The introduction of these LNG vesting contracts caused the gencos to add nearly 3,000 MW in capacity between 2012 and 2014. These 3,000 MW were not necessary. That created the overcapacity."

I read about the vesting contract in this page.

While I am still unclear about what had happened, I can surmiss that the gencos were "invited" (read compelled) by EMA to sign the vesting contracts and to supply a specified quantity of power at the price fixed by the formula.

It seemed to me that the loss of the LNG gencos were caused by the vesting contracts.

It also appears that the formula for the supply of power might be unfair to these gencos, as it is calculated on a formula that is not related to their actual cost of production.

Hyflux was invited to sign for the "take and pay" contract. Although this was not the same as the vesting contract, the effect is the same. It caused a massive loss to by Hyflux (which I estimate to be $100 million  a year.).

Some people might say that Hyflux could "walk away" and not agree to sign the take and pay contract. This was not possible. Hyflux had already built the power plant with 431 MW in capacity, which is more than actually needed by the desalination plant.

I suspect that the pricing formula is flawed. Instead of the current formula, it should be based on the actual cost of the gencos that are covered under the vesting contracts. 

It is possible that the financial problem and crisis faced by Hyflux is caused to a very large extent by the vesting contract and the pricing formula adopted by the EMA.

On the grounds of fairness to Hyflux and to the 34,000 retail investors who invested $900 million in the preference shares and perpetual securities in Hyflux, I urge the government to make an urgent study into this matter, and to see if the gencos should be compensated with a more appropriate price, rather than the price fixed by a flawed formula. 

The gencos should not be penalised under the vesting contracts for losses that are beyond their control.

Disclaimer: If my facts and interpretations are wrong, I shall welcome a correction.

Tan Kin Lian

 

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