Energy prices are the costs of building, funding, maintaining, and operating power plants and electricity grids. Energy prices are affected by several factors, including fuel and infrastructure costs. In Singapore, wholesale electricity prices are known as Uniform Singapore Energy Prices.
Energy prices have a significant influence on many companies. Rising energy prices usually lead to higher operating costs for most companies and energy retailers. Energy-intensive industries like aviation and shipping are most heavily affected by rising energy prices. Energy retailers buy energy from the wholesale Singapore energy market and resell it to consumers for profit. Higher wholesale energy prices generally translate into higher resale prices and lower profit margins for energy retailers.
Energy prices directly impact electricity generation companies, or Gencos. Higher wholesale electricity prices create higher profits for them and vice versa.
This article illustrates and analyses the impact of changing energy prices on businesses. It also discusses whether improving energy prices could have saved Hyflux from bankruptcy and prevented the KPMG audit partner allegations.
Negative Impacts of Changing Energy Prices on Companies
Decreased Energy Prices
Energy-generating companies (Gencos) will experience decreased profits as they sell energy to the wholesale Singapore Energy Market at a lower price. Hyflux is one such example. The company’s power generation project, Tuaspring, made losses due to depressed wholesale energy prices in 2016-2018. The impact of decreased energy prices on Hyflux will be further explained in the second part of the article.
Increased Energy Prices
Uniform Singapore Energy Prices spiked in 2022. High wholesale prices negatively impact electricity retailers and other businesses as operating costs increase. 6 energy retailers exited Singapore’s OEM, and many SMEs experienced a 3-5 times increase in their electricity bills.
Low energy prices negatively impacted electricity generation businesses, reducing their profit margins. For example, Hyflux was affected by low wholesale electricity prices in 2016- 2018, causing Tuaspring to suffer losses.
Hyflux ventured into the energy market with Tuaspring’s power plant when electricity prices were reasonably high in 2011-2012. However, Hyflux did not anticipate that wholesale energy prices would dip and remain persistently low in 2014-2017. Hyflux also did not foresee Singapore’s OEM launch in 2018, which further depressed wholesale electricity prices.
Hyflux was in severe financial distress as it could not recuperate losses from decreasing energy prices. Its annual earnings dropped drastically. The company’s expansion into the energy business worsened its existing financial difficulties.
Positive Impacts of Changing Energy Prices on Companies
Decreased Energy Prices
Uniform Singapore Energy Prices decreased and stabilised in 2023 due to falling global gas and oil prices. This led to EMA suspending its 2021 scheme to cushion high electricity prices. Following the scheme suspension, an increased number of businesses signed long
term contracts with energy retailers to buy electricity at fixed prices for specified periods. This behaviour is likely due to speculation that energy prices would increase again in the future.
Fixed price contracts bind energy retailers to offer electricity at a certain price regardless of the current wholesale energy prices. With lower Uniform Singapore Energy Prices, energy retailers would enjoy increased profit margins as their costs would decrease despite their revenue from fixed price contracts remaining constant.
Other energy-reliant businesses in different sectors can also reduce operating costs. Cost savings are most significant for energy-intensive industries.
Increased Energy Prices
Rising energy prices encourage businesses to develop cost-efficient processes that help manage higher operating costs.
Impact on Economy
Improved Economic Activity
Cost-effective energy consumption improves employment and reduces utility operating costs. More resources can be diverted to governments, households, and businesses.
Improved energy prices boost economic activity as energy providers can offer better service to consumers. Other businesses also enjoy lower electricity costs and provide better customer experiences. It improves overall economic productivity and service quality.
Hyflux’s Downfall
Hyflux Bankruptcy and KPMG Controversy
Hyflux, a Singapore-based water treatment firm, filed for bankruptcy protection in 2018. Hyflux’s bankruptcy happened after divesting its integrated water and power project, Tuaspring, in 2017. Hyflux later alleged that KPMG had been negligent in auditing their 2011-2017 financial accounts, as reported in The Business Times. KPMG refuted the allegations and argued in its defence that the obligation to prepare the financial statements in compliance with the law and reporting standards lies with the plaintiffs’ management and board.
Impact of Energy Prices on Hyflux’s Financials
Hyflux’s financials were stretched in 2016 after accumulating debt from expanding into international markets and service diversification. Low Uniform Singapore Energy Prices in 2014-2016 affected Hyflux’s profits and finances, leading to its ‘first full year of losses’ in 2017, as reported by CNA. Hyflux reported a net loss in Q3 2017, mainly attributed to the Tuaspring project. Tuaspring’s power plant had been making losses since commencing operations in 2016.
The Uniform Singapore Energy Price was low in 2014-2016 due to an oversupply of gas and energy generation, causing national electricity supply to exceed demand. The Energy Market Authority (EMA) liberalised Singapore’s electricity market by establishing the Open
Electricity Market (OEM) in 2018, allowing rival energy providers to enter the market. Consumers who bought electricity from the wholesale market at SP’s regulated tariff could enjoy cheaper prices offered by energy retailers. This depressed wholesale electricity prices and affected Tuaspring’s profitability.
Uniform Singapore Energy Prices remained weak in 2017 and continued to take a toll on Hyflux’s financial distress, causing Hyflux’s divestment of Tuaspring, according to CNA’s timeline of events.
Conclusion
How Hyflux Could Have Taken Advantage of Improved Energy Prices
Hyflux was confident it could use Tuaspring’s onsite power generator to run the desalination plant and sell excess electricity to the grid for substantial revenue.
Hyflux did not foresee future price changes and sector deregulation that would have affected their earnings. They committed to the Tuaspring power generator project and offered low price bids but were not able to protect the company should energy prices decline in future.
Hyflux could have participated in the soft launch of Singapore’s OEM in 2019 instead of holding out until EMA fully rolled out the policy.
Later on, it could have taken advantage of improved energy prices in 2021-2022 by offering long-term fixed-price plans to consumers. This could have allowed Hyflux to use the temporary EMA scheme to earn revenue from selling fixed-price plans.
