Singapore to set up centralized gas procurement, supply entity for power sector

Singapore will set up a state-backed gas company to handle gas procurement and supply for the power sector, in a move that creates a new centralized system to ensure energy security, Gan Kim Yong, Minister for Trade and Industry, said at the Singapore International Energy Week 2023.

The move is in line with the broader trend of increased government intervention in the energy sector since the Russian invasion of Ukraine that saw countries taking control of various parts of the supply chain during tumultuous global fuel markets.

These interventions ranged from implementing price caps on electricity and gas sales during extreme price movements, to providing funds to utilities to help them tide over excess losses.

Singapore's Ministry for Trade and Industry and the Energy Market Authority will establish an entity, or "Gasco," that will centralize the procurement and supply of gas for the power sector by aggregating gas demand from power generation companies, or gencos, the regulator EMA said in a statement Oct. 23.

"Moving forward, we will take a more deliberate and coordinated approach to gas procurement," Gan said. "This will create greater economies of scale which will allow us to negotiate more favorable gas contracting terms, procure gas from diverse sources to reduce concentration risk, and enter into longer-term gas contracts to provide more stable prices and supply."

Market participants said they were awaiting further details of how the new system will pan out and what kind of pricing would be implemented by the Gasco to resell to domestic consumers.

The new system also raises question about the role of local companies like Pavilion Energy that were previously tasked with importing gas to meet domestic demand, they said.

Inadequate system

The EMA said the new gas procurement framework follows an announcement in October 2022 about the setting of "guardrails to strengthen Singapore's energy market structure."

These included a centralized process to coordinate electricity generation capacity, enhancing regulatory requirements on electricity retailers and a temporary price cap to guard against extreme price volatility in the wholesale electricity market, all of which were implemented in 2023.

The EMA said it had reviewed the current gas procurement framework to ensure sufficient supply from diverse sources for power generation, and to create a more stable system, as more than 95% of Singapore’s electricity is currently generated using natural gas.

However, currently the gencos decide individually on the volume and tenure of gas purchased based on their own commercial considerations, and developments in recent years have shown that this framework does not provide assurance about sufficient supply, especially during a crisis when market conditions are volatile, the EMA said.

"When each genco seeks to optimize for itself, it can inadvertently lead to suboptimal system-level outcomes" the EMA said, citing the example of the 2021/2022 global energy crisis when the gencos reduced gas purchases due to high prices, leading to large swings in wholesale electricity prices.

"Gencos have also been reluctant to enter into long-term gas contracts which typically offer a greater certainty of delivery and price stability. This is because gencos do not want to be exposed to gas market volatility and uncertainties in the long term," the EMA said.

"In addition, global developments and the energy transition are likely to lead to more volatile oil and gas markets, which may further reduce the risk appetites of generation companies," it added.

New framework

EMA said it intends to set up the "Gasco" in 2024 and will consult the industry on details of the centralized gas procurement framework in the coming months.

Under the new mechanism, the Gasco will procure additional gas volumes needed should overall electricity demand exceed the amount indicated by the gencos, the EMA said.

The centralized procurement approach will apply to all future gas demand from the power sector, including gas contract renewals, and gencos will be allowed to continue with the existing gas supply contracts they have with their respective gas suppliers, the regulator said.

Meanwhile, other industrial gas customers can continue to procure gas or LNG through licensed gas importers and will not be subject to this new framework, the EMA said.

The regulator said the Gasco, as the sole procurer of upstream gas for the power sector, will have stronger negotiating leverage, and be in a better position to negotiate for more favorable contracting terms and optimize system needs.

It will be able to procure gas or LNG from diversified sources to reduce concentration risk by using greater economies of scale as well as enter into longer term gas contracts which can help to provide more stable prices and supply, the EMA said.