What's it Worth?
The much anticipated deregulation of Singapore's power market
kicked off in earnest in April with the transfer of generating
companies Senoko Power and PowerSeraya to Temasek Holdings and the
parallel transfer of the energy management unit of PowerGrid to the
local regulating body, the Energy Market Authority (EMA).
Sponsors and project finance bankers are now awaiting the next stage ? the sale of Tuas Power, Senoko Power and PowerSeraya to private investors. The privatization timetable has already slipped slightly and is now expected in the first quarter of 2002. Market observers expect that the companies will be sold-off 100% with the government retaining no interest in the assets. A slice of Singapore Power itself may also be up for grabs but government sources have not yet revealed their plans.
Interested parties are also awaiting the new rules and regulations that will govern how divested power companies supply electricity into the electricity pool. According to Khoo Chin Hean, chief executive of the EMA, power companies will be able to sell energy into a wholesale pool and will have to buy and sell spinning reserve in a reserve market. Power companies will also be able to enter into bilateral deals with retailers and settle outside the pool.
At the same time, Khoo says the regulator will continue with the current price regulation for the monopoly part of the industry and the Grid. That means that the government will continue regulating transmission and distribution rates through a consumer price index minus X mechanism, under which annual electricity rates will rise by the rate of inflation, minus a productivity factor ?X'.
However, the precise details of the power pool regulations have taken longer to revise than was originally expected. ?We think that the revised rules will be out in September or possibly a little later,? says one banker with past experience of financing the Singapore electricity industry.
Neil Cornelius, managing consultant at ICF Consulting, a consultancy that put together energy market analyses for the sponsors of Singapore's first private merchant power plant, says that a switch to nodal pricing is on the cards. ?That's not a huge step for the Singapore market because it's a small system and there are limited transmission variations across the grid,? he says.
Together with the new pooling rules, contractual arrangements are likely to switch to vesting contracts to limit the potential for gaming in the market, in lieu of a continuing reliance on revenue caps, says Cornelius. Gaming is a distinct possibility when there are only a limited number of generating companies in a given energy market. In that situation power producers may chose to set electricity prices at relatively high levels since consumers have limited leeway to switch to other suppliers. Under the vesting contracts approach, generating companies will be locked into contracts for a significant share or perhaps all of their electricity output, reducing the potential for gaming.
Although the Singapore government has not formally stated that nodal pricing and vesting contracts are the methods that they will use to control the market, Cornelius says, ?Observers are pretty certain that is the direction they will take.? Indeed, a number of consultation documents have been presented to the government recommending those two features.
In addition, Khoo says that one arm of the EMA, called the Energy Market Company, will be responsible for carrying out market surveillance. ?Upon their findings, or complaints from the market of anti-competitive behavior, the EMA will have powers provided under the Electricity Act 2001, to investigate and take appropriate action against anti-competitive behavior by [electricity] companies,? Khoo explains.
Any project potential?
Whether the respective sell-offs of Tuas Power, Senoko Power, PowerSeraya and possibly a slice of Singapore Power itself translate into project finance opportunities is a key question for bankers. ?It will, of course, depend on the acquirer whether they take out a non-recourse finance facility or bridge finance the acquisition and then take the deal to the capital markets at a later stage,? says Peter Ho, in Citibank's Hong Kong project finance team.
Whatever funding approach sponsors opt for, they will be anticipating highly attractive pricing given the funding precedents for projects in the Singapore market during the last three years. As one financier says, ?I can't see the government throwing in any surprises which will would substantially impact on funding costs when they announce the contractual and pooling framework.?
Project finance pricing precedents were set several years ago with the financing of the first merchant power company in Singapore (SembCorp) and the financing of Sembawang Utilities and Terminals (SUT). The SUT deal which funded the first phase of a multi-utility project at Pulau Sakra, Jurong Island featured spreads tiered down from approximately 110 basis points over to below 90 basis points. It should be noted, however, that the project's revenue contracts were already lined up before financing, and market risks were far lower than the level of risk expected for the privatized power companies.
The SembCorp utilities combined cycle co-generation plant was financed via a S$460 million loan underwritten by lead arrangers Sumitomo Bank, Citibank, BNP Paribas, KBC Bank and Overseas Union Bank, and arrangers Bank of Tokyo Mitsubishi, Industrial Bank of Japan, Dexia Public Finance and Fortis Bank.
The loan split into four tranches: a S$300 million, 14¼ year term loan; a S$90 million, 7 year term loan guaranteed by Singapore's Economic Development Board; a S$40 million, 14¼ year loan designed as a secondary fuel tranche for emergency diesel; and a S$35 million, portion as a backstop facility in case gas was not supplied on time.
As in the SembCorp deal, fuel risks will also be an issue in the new power market. Khoo says, ?currently we allow fuel price changes to be passed through under the price regulation mechanism. In the deregulated market, companies will have to take what ever measures to shield themselves from this, for example, by hedging.?
According to market sources, the gas industry will be restructured in a similar way to support a competitive framework for the electricity industry. The ownership of the gas transportation business, which is considered a natural monopoly, will be separated from the contestable sectors of gas import, trading and retail. In all likelihood, the restructuring of the gas industry will translate into lower energy costs for power producers.
Financiers say that between seven and 10 individual companies have already expressed an interest in a significant stake in one or more of the assets up for sale. Between 1997 and 2000, energy companies ? both Asian and non-Asian ? have scaled back their ambitions in the region's power industry. But according to Bruce Weller at BNP Paribas' Singapore based project finance department, the quality of Singapore's power market, combined with a lack of other opportunities in the region in the short term, has created strong interest in the local disposal process.
?Who eventually teams up with whom is still being worked out,? says Weller, ?and investors are holding back from making a firm commitment to bid until the pooling rules and vesting contract details have been revealed.? Market sources therefore expected a flurry of activity in the final quarter of this year as sponsor groups finalize partnership arrangements in preparation for the bidding process.
Greenfield opportunities
Off the acquisition trail, good opportunities for involvement in the Singapore market will be more difficult to come by. ?There's a high reserve margin and over supply in the market,? notes Peter Ho.
The supply/demand equation is not likely to change radically any time soon. According to official figures electricity demand is projected to grow at 4% to 6% per annum over the next five years. Based on the known planting proposals, there will be adequate generating capacity to meet projected demand over the next five years. For the record, ICF Consulting estimates that long term electricity demand growth in Singapore will be about 4%.
Analysts believe that the global economic downturn, which is having a visible impact on the Singapore economy, may force a revision in official demand growth predictions. This is all the more likely since the power sector in Singapore is more vulnerable to an economic slowdown than in most other developed countries due to the unusually high proportion of overall electricity demand that derives from the industrial base. Nevertheless, Khoo defends the official figures, ?demand growth in Singapore has been strong historically even during previous economic hiccups,? he says.
On a more positive note for the foreign power companies who are targeting the Singapore market, the traditional reliance on oil fired generating capacity implies that Singapore currently has a high cost generating mix. Rather than entering the market in a situation of insufficient supply, lower cost combined-cycle gas turbine (CCGT) technology could give market aspirants a window of opportunity to enter the sector as lower cost electricity producers. Khoo agrees: ?We expect there will be interest in building new CCGT gas plants as these are more efficient than the oil fired steam plants.?
Bankers tell Project Finance that at least two sponsors, one local and one foreign, are looking at entering the market with CCGT plants right now. ?One of the companies has told us that they will approach the financial community in the next two months with a greenfield power plant proposal,? says a banker in Singapore.
Sponsors looking at greenfield opportunities will need to be particularly careful, however, to weigh up the potential for existing power plants to re-power using CCGT systems. ?In the short term this is a more likely scenario than the establishment of completely new CCGT power stations by market entrants,? believes Cornelius. New power plant plans will need to be assessed, therefore, on the basis that a substantial percentage of the existing power stations in Singapore are indeed re-powered.
Cornelius also advises that companies looking at the upcoming asset sales look carefully at re-powering opportunities. ?When it comes to valuing the respective assets, it will be critical for bidders to take into account the re-powering potential relative to the re-powering opportunities of the other power plants which are up for grabs.?
Retail sector deregulation
According to the Energy Market Authority, the new electricity retail market is being deregulated in three phases. In phase one, retailers will be able to compete for all non-domestic consumers with an annual consumption exceeding 240,000 kW. In phase two all non-domestic ?low tension' consumers with an annual consumption exceeding 120,000 kW will also become contestable. In phase three, all the remaining domestic and non-domestic consumers will be deregulated. The EMA has not yet officially announced the actual dates of these phases of deregulation.
Khoo says the development work for the new retail market is in progress. ?Barring problems with the software integration and testing we expect to be ready [to launch phase one] sometime in November 2001.? After the new market kicks off, Khoo says the EMA will continue to open up competition over a period of about six months, and will eventually allow retail competition for about 70% of the total market.
Power Senoko, PowerSeraya, and Tuas Power, will be allowed to operate in the retail sector. There, they will join Keppel Fels Energy Supply Tractebel Asia and SembCorp Power, which have already been granted licenses to retail electricity. An unlimited number of electricity retailers is theoretically allowed. Khoo says, ?We do not set any quotas on the number of licenses for retailing and generation. Our requirements are essentially that the licensee has the financial and operational standing to carry out their business.?
Sponsors and project finance bankers are now awaiting the next stage ? the sale of Tuas Power, Senoko Power and PowerSeraya to private investors. The privatization timetable has already slipped slightly and is now expected in the first quarter of 2002. Market observers expect that the companies will be sold-off 100% with the government retaining no interest in the assets. A slice of Singapore Power itself may also be up for grabs but government sources have not yet revealed their plans.
Interested parties are also awaiting the new rules and regulations that will govern how divested power companies supply electricity into the electricity pool. According to Khoo Chin Hean, chief executive of the EMA, power companies will be able to sell energy into a wholesale pool and will have to buy and sell spinning reserve in a reserve market. Power companies will also be able to enter into bilateral deals with retailers and settle outside the pool.
At the same time, Khoo says the regulator will continue with the current price regulation for the monopoly part of the industry and the Grid. That means that the government will continue regulating transmission and distribution rates through a consumer price index minus X mechanism, under which annual electricity rates will rise by the rate of inflation, minus a productivity factor ?X'.
However, the precise details of the power pool regulations have taken longer to revise than was originally expected. ?We think that the revised rules will be out in September or possibly a little later,? says one banker with past experience of financing the Singapore electricity industry.
Neil Cornelius, managing consultant at ICF Consulting, a consultancy that put together energy market analyses for the sponsors of Singapore's first private merchant power plant, says that a switch to nodal pricing is on the cards. ?That's not a huge step for the Singapore market because it's a small system and there are limited transmission variations across the grid,? he says.
Together with the new pooling rules, contractual arrangements are likely to switch to vesting contracts to limit the potential for gaming in the market, in lieu of a continuing reliance on revenue caps, says Cornelius. Gaming is a distinct possibility when there are only a limited number of generating companies in a given energy market. In that situation power producers may chose to set electricity prices at relatively high levels since consumers have limited leeway to switch to other suppliers. Under the vesting contracts approach, generating companies will be locked into contracts for a significant share or perhaps all of their electricity output, reducing the potential for gaming.
Although the Singapore government has not formally stated that nodal pricing and vesting contracts are the methods that they will use to control the market, Cornelius says, ?Observers are pretty certain that is the direction they will take.? Indeed, a number of consultation documents have been presented to the government recommending those two features.
In addition, Khoo says that one arm of the EMA, called the Energy Market Company, will be responsible for carrying out market surveillance. ?Upon their findings, or complaints from the market of anti-competitive behavior, the EMA will have powers provided under the Electricity Act 2001, to investigate and take appropriate action against anti-competitive behavior by [electricity] companies,? Khoo explains.
Any project potential?
Whether the respective sell-offs of Tuas Power, Senoko Power, PowerSeraya and possibly a slice of Singapore Power itself translate into project finance opportunities is a key question for bankers. ?It will, of course, depend on the acquirer whether they take out a non-recourse finance facility or bridge finance the acquisition and then take the deal to the capital markets at a later stage,? says Peter Ho, in Citibank's Hong Kong project finance team.
Whatever funding approach sponsors opt for, they will be anticipating highly attractive pricing given the funding precedents for projects in the Singapore market during the last three years. As one financier says, ?I can't see the government throwing in any surprises which will would substantially impact on funding costs when they announce the contractual and pooling framework.?
Project finance pricing precedents were set several years ago with the financing of the first merchant power company in Singapore (SembCorp) and the financing of Sembawang Utilities and Terminals (SUT). The SUT deal which funded the first phase of a multi-utility project at Pulau Sakra, Jurong Island featured spreads tiered down from approximately 110 basis points over to below 90 basis points. It should be noted, however, that the project's revenue contracts were already lined up before financing, and market risks were far lower than the level of risk expected for the privatized power companies.
The SembCorp utilities combined cycle co-generation plant was financed via a S$460 million loan underwritten by lead arrangers Sumitomo Bank, Citibank, BNP Paribas, KBC Bank and Overseas Union Bank, and arrangers Bank of Tokyo Mitsubishi, Industrial Bank of Japan, Dexia Public Finance and Fortis Bank.
The loan split into four tranches: a S$300 million, 14¼ year term loan; a S$90 million, 7 year term loan guaranteed by Singapore's Economic Development Board; a S$40 million, 14¼ year loan designed as a secondary fuel tranche for emergency diesel; and a S$35 million, portion as a backstop facility in case gas was not supplied on time.
As in the SembCorp deal, fuel risks will also be an issue in the new power market. Khoo says, ?currently we allow fuel price changes to be passed through under the price regulation mechanism. In the deregulated market, companies will have to take what ever measures to shield themselves from this, for example, by hedging.?
According to market sources, the gas industry will be restructured in a similar way to support a competitive framework for the electricity industry. The ownership of the gas transportation business, which is considered a natural monopoly, will be separated from the contestable sectors of gas import, trading and retail. In all likelihood, the restructuring of the gas industry will translate into lower energy costs for power producers.
Financiers say that between seven and 10 individual companies have already expressed an interest in a significant stake in one or more of the assets up for sale. Between 1997 and 2000, energy companies ? both Asian and non-Asian ? have scaled back their ambitions in the region's power industry. But according to Bruce Weller at BNP Paribas' Singapore based project finance department, the quality of Singapore's power market, combined with a lack of other opportunities in the region in the short term, has created strong interest in the local disposal process.
?Who eventually teams up with whom is still being worked out,? says Weller, ?and investors are holding back from making a firm commitment to bid until the pooling rules and vesting contract details have been revealed.? Market sources therefore expected a flurry of activity in the final quarter of this year as sponsor groups finalize partnership arrangements in preparation for the bidding process.
Greenfield opportunities
Off the acquisition trail, good opportunities for involvement in the Singapore market will be more difficult to come by. ?There's a high reserve margin and over supply in the market,? notes Peter Ho.
The supply/demand equation is not likely to change radically any time soon. According to official figures electricity demand is projected to grow at 4% to 6% per annum over the next five years. Based on the known planting proposals, there will be adequate generating capacity to meet projected demand over the next five years. For the record, ICF Consulting estimates that long term electricity demand growth in Singapore will be about 4%.
Analysts believe that the global economic downturn, which is having a visible impact on the Singapore economy, may force a revision in official demand growth predictions. This is all the more likely since the power sector in Singapore is more vulnerable to an economic slowdown than in most other developed countries due to the unusually high proportion of overall electricity demand that derives from the industrial base. Nevertheless, Khoo defends the official figures, ?demand growth in Singapore has been strong historically even during previous economic hiccups,? he says.
On a more positive note for the foreign power companies who are targeting the Singapore market, the traditional reliance on oil fired generating capacity implies that Singapore currently has a high cost generating mix. Rather than entering the market in a situation of insufficient supply, lower cost combined-cycle gas turbine (CCGT) technology could give market aspirants a window of opportunity to enter the sector as lower cost electricity producers. Khoo agrees: ?We expect there will be interest in building new CCGT gas plants as these are more efficient than the oil fired steam plants.?
Bankers tell Project Finance that at least two sponsors, one local and one foreign, are looking at entering the market with CCGT plants right now. ?One of the companies has told us that they will approach the financial community in the next two months with a greenfield power plant proposal,? says a banker in Singapore.
Sponsors looking at greenfield opportunities will need to be particularly careful, however, to weigh up the potential for existing power plants to re-power using CCGT systems. ?In the short term this is a more likely scenario than the establishment of completely new CCGT power stations by market entrants,? believes Cornelius. New power plant plans will need to be assessed, therefore, on the basis that a substantial percentage of the existing power stations in Singapore are indeed re-powered.
Cornelius also advises that companies looking at the upcoming asset sales look carefully at re-powering opportunities. ?When it comes to valuing the respective assets, it will be critical for bidders to take into account the re-powering potential relative to the re-powering opportunities of the other power plants which are up for grabs.?
Retail sector deregulation
According to the Energy Market Authority, the new electricity retail market is being deregulated in three phases. In phase one, retailers will be able to compete for all non-domestic consumers with an annual consumption exceeding 240,000 kW. In phase two all non-domestic ?low tension' consumers with an annual consumption exceeding 120,000 kW will also become contestable. In phase three, all the remaining domestic and non-domestic consumers will be deregulated. The EMA has not yet officially announced the actual dates of these phases of deregulation.
Khoo says the development work for the new retail market is in progress. ?Barring problems with the software integration and testing we expect to be ready [to launch phase one] sometime in November 2001.? After the new market kicks off, Khoo says the EMA will continue to open up competition over a period of about six months, and will eventually allow retail competition for about 70% of the total market.
Power Senoko, PowerSeraya, and Tuas Power, will be allowed to operate in the retail sector. There, they will join Keppel Fels Energy Supply Tractebel Asia and SembCorp Power, which have already been granted licenses to retail electricity. An unlimited number of electricity retailers is theoretically allowed. Khoo says, ?We do not set any quotas on the number of licenses for retailing and generation. Our requirements are essentially that the licensee has the financial and operational standing to carry out their business.?
Request a Demo
Interested in IJGlobal? Request a demo to discuss a trial with a member of our team. Talk to the team to explore the value of our asset and transaction databases, our market-leading news, league tables and much more.