How electricity tariff is set

In “Benefits of declining oil prices not trickling down to consumers” (Oct 23), Mr Narayana Narayana asked about the methodology for setting the electricity tariff, which comprises fuel and non-fuel costs.

The former refers to the cost of natural gas, which is used to produce more than 90 per cent of Singapore’s electricity. The main components of non-fuel costs are grid charges, and the capital and operating costs of generation companies.

Goods and Services Tax is not part of the tariff; it is levied on the total utilities bill and paid to the Inland Revenue Authority of Singapore.

Unlike some overseas jurisdictions that impose a green tax on consumers to pay for subsidies given to owners of renewable energy sources, our tariff does not contain additional taxes.

The tariff is adjusted every quarter to reflect changes in fuel and non-fuel costs.

For the former, the established methodology is to use the average daily gas prices in the first two-and-a-half months of the current quarter to calculate the fuel cost component for the next quarter. To illustrate, the fuel cost component of this quarter’s tariff was based on the daily gas prices from July 1 to Sept 15.

The cut-off date was set at Sept 15 to give the Energy Market Authority sufficient time to analyse the data and compute the changes before announcing the tariff late last month.

Using this methodology, there is a lag time because changes in gas prices in the current quarter will only show up in next quarter’s tariff.

The benefits of a drop in fuel costs from Oct 1 to Dec 15 will flow through to consumers via a proportional decrease in next quarter’s tariff.

Given that fuel costs now constitute more than half of the tariff, a 10 per cent decrease in fuel costs, for example, should result in a tariff reduction of approximately 5 to 5.5 per cent, assuming non-fuel costs remain unchanged.

We thank Mr Narayana for his feedback.