The Journey Began

In a shining afternoon in late November 2008, it was not a usual lunch for Mr. Yeoh and his power team who had been gathering in Singapore for almost a week. Lehman’s Brothers declared bankruptcy on 15^th September 2008, weeks later Singapore Temasek announced to halt the tender process to divest PowerSeraya, the last of the 3 largest power generation companies in Singapore. YTL Power had earlier failed to bid for the first two power assets, Tuas Power and Senoko Power, after putting in months of effort in studying the competitive electricity market in Singapore and participating in the tender process since late 2007. Yeoh, the executive director of YTL Power, had to seriously consider if and how he could still buy over PowerSeraya.

After going through rounds and rounds of number crunching with his power team and advisors, Yeoh finally made up his mind on putting forward an unsolicited proposal to Temasek to acquire PowerSeraya at an enterprise value of S$3.8 billion.

Ms Gwendel Tung, Director, Investment, Temasek said, “After we stopped the tender process last week, YTL Power International put forward an unsolicited proposal which met our requirements. We are pleased with the successful outcome of the PowerSeraya divestment.”

Commenting on the acquisition, Tan Sri (Dr) Francis Yeoh, Managing Director of YTL Power said, “We are delighted to have this opportunity to acquire PowerSeraya. The 3,100 MW operated by PowerSeraya will give us significant participation in the Singapore energy market. Its attraction lies both in its strong position in the energy market and its complementary multi-utility business. YTL Power, through its wholly owned subsidiary, Wessex Water in the UK, has considerable expertise in the water sector and the acquisition of PowerSeraya will enable us to grow out utility business in the region. We are very pleased to have been chosen as a partner by Temasek.”

PowerSeraya is the third and final of Temasek’s power generation companies to be sold under its divestment plan announced in July 2007. The first, Tuas Power, was sold to China Huaneng Group for S$4.2 billion in March 2008, while Senoko Power was bought by a consortium led by Japan’s Marubeni Corp for S$3.97 billion in September.

Mr. Wong Kim Yin, Managing Director, Investment, Temasek, added, “With the sale of PowerSeraya, Temasek would have fulfilled its commitment to help develop a competitive power generation market in Singapore. Since the restructuring over ten years ago of our generating assets into three independent operating companies, we have received steadfast support from the Union of Power and Gas Employees. Without their cooperation and support for a competitive, efficient and world-class power industry, this progressive development over the last 14 years would not have been possible. We would also like to acknowledge the contributions of the past and present staff, management and the board of directors of PowerSeraya. We thank them, along with their counterparts in the Tuas and Senoko gencos.”

That marked the onset of a rewarding quest by YTL Power into Singapore power market. PowerSeraya had a licensed generating capacity of 3,100 MW, providing about 27% of Singapore’s electricity needs. For the year ending 31 March 2008, it had revenue of S$2.8 billion and EBITDA of S$355 million.

Overview of Singapore Electricity Market

In 1990s, the electricity and piped gas undertakings under Public Utilities Board (PUB) were corporatized to introduce competition in the energy sector. Energy Market Authority (EMA) was subsequently set up in 2001 as part of Singapore government’s effort to oversea the further liberalization of the energy market. As a regulator, EMA was tasked to ensure that Singapore has a reliable and secure energy supply and to promote effective market competition.

Over the years, the electricity sector was progressively liberalized and restructured. Key developments included opening up the generation and retail electricity markets to commercial players, establishing a regulatory framework as well as introducing a wholesale electricity market with spot bidding every 30 minutes. The divestment of the largest 3 electricity companies (Senoko, Tuas and PowerSeraya) in 2008 was part of its effort to introduce effective market competition.

In April 2018, EMA commenced the soft launch of the Open Electricity Market, where households and businesses in Jurong can choose to buy electricity from a retailer at a price plan that best meets their needs. The initiative was extended across Singapore by zones from November 2018 with all customers enjoying this choice and flexibility by May 2019.

A reliable electricity supply is critical to Singapore’s economic development. EMA also puts in place regulatory measures to further strengthen the reliability of Singapore’s electricity supply. This is done through reviews with industry players to enhance emergency preparedness of the power sector.

With these measures in place, Singapore’s electricity grid maintains its status as one of the most reliable in the world, with an average interruption time of less than 1 minute per customer per year.

Key Players in Singapore Power Sector

Singapore has only a handful of big power generation companies (gencos):

·         Senoko Power (3,300 MW of licensed capacity)

·         PowerSeraya   (3,100 MW of licensed capacity)

·         Tuas Power      (2,670 MW of licensed capacity)

·         Sembcorp        (1,600 MW of installed capacity)

·         Keppel Power (1,300 MW of licensed capacity)

·         Pacific Light    ( 800 MW of installed capacity)

·         Tuaspring       ( 396 MW of installed capacity) (acquired by PowerSeraya in 2022)

EMA reported that the total electricity generation capacity increased from 12,024.6MW in 2020 to 12,179.1 MW in 2021. The growth was largely attributed to the increase in solar power installed capacity that grew to 487 MW in 2021.

As of March 2022, Combined Cycle Gas turbine (CCGT) Co-generation and Tri-generation plants collectively accounted for 84.9% (or 10,357.9 MW) of the total generation capacity in Singapore. The rest are from steam turbines (763.6MW), solar power (515.9MW), Waste-to-energy (393.0MW) and Open Cycle Gas Turbine (180.0MW).

[all data is taken from EMA website]

Fuel Mix for Electricity Generation

In 2021, Natural Gas accounted for 94.9% of fuel mix in Singapore electricity generation. Other energy products (eg. municipal waste, biomass and solar) accounted for 2.9%, while the rest were contributed by Coal (1.2%) and Diesel & Fuel Oil (1.0%).

Natural Gas has been the dominant fuel source for electricity generation in Singapore for the past decade. It comes in the form of piped gas from Malaysia and Indonesia, and Liquefied Natural Gas (LNG), both are priced at similar level pegged to international crude oil prices.

In an attempt to diversify the fuel mix, EMA issued the first Request for Proposal (RFP1) on 12 November 2021 for the import of up to 1,200MW of electricity to begin by 2027. EMA then issued the second Request for Proposal (RFP2) on 1 July 2022 and streamlined the process of RFP1 and RFP2 together to solicit interests for a target of 4,000 MW of electricity import to Singapore by 2035.

[All data is taken from EMA website]

Competitive Electricity Wholesale Market

Singapore operates a competitive electricity wholesale market (or an electricity “pool” market) that clears a wholesale electricity price (WEP) (or the “pool” price) every half an hour. For every half an hour of the day, gencos bid their capacity in tranches at different bid prices into the pool and all these capacity bids will be stacked up from the lowest price to the highest. The capacity bid in the stack that corresponds to the projected power demand for that half an hour will be cleared as the marginal unit, and the price bidded by that marginal unit will be the marginal price and cleared as the pool price for that half an hour. Then each genco will get paid the same pool price to sell the bid capacity into the pool and consumers/retailers pay the same pool price to buy electricity from the pool.

The peak electricity demand in Singapore reached about 7,560 MW in July 2021 with average power demand at about 6,000MW in 2021. To illustrate how the pool works, lets take a example and assume for the half an hour at 9.00-9.30am the projected power demand is 6,050MW. Assume that Senoko, PowerSeraya and Tuas each bids 1,500MW of their most efficient capacity at say a price of S$150-153/MWh, Sembcorp bids 800MW at S$149/MWh, Keppel bids 700MW at S$155/MWh, Tuas bids another 200MW of its less efficient capacity at S$160/MWh, PowerSeraya bids another 130MW at S$190/MWh etc. Stacking up the capacity bids from the lowest price will see Senoko 1,500WM, Tuas 1,500MW, Seraya 1,500MW, Sembcorp 800MW and Keppel 700MW (total 6,000MW) all cleared for generation for the half an hour, with Tuas’ 200MW capacity bid becoming the marginal unit and hence the pool price clears at its marginal price of S$160/MWh. All the 6,000MW capacity bidded at prices lower than the marginal price will get paid at the same cleared pool price of S$160/MWh.

As almost 95% of the fuel mix in Singapore is from natural gas that is priced at almost the same price for all gencos, it is hence an efficiency game where the most efficient generators will always get cleared for generation and earn the highest profit margin.

Even though the total installed capacity of over 12,000MW is much higher than the peak demand of 7,500MW in Singapore, the “efficient” capacity that burns natural gas amounts to about 9,000MW (after deducting off co-gen and tri-gen capacity for steam generation). Furthermore, these gas turbines cannot run if there is not enough gas supply and hence the efficient capacity may be further restricted by the total gas supply signed by each genco. It is estimated that gas supply signed up by gencos should enable baseload running of efficient gas turbines up to a maximum capacity of 8,000 MW. Taking out some for internal consumption and provision for spinning reserves, the total net efficient capacity may come to about 7,500MW which is just enough to meet the peak demand. As a result, the marginal unit that sets the pool price is always a combined-cycle gas turbine unit which is the most efficient in Singapore. However when an efficient gas turbine (typically 350-400MW) is taken out of service for maintenance or repair, then a less efficient unit will become the marginal unit. In the example above, Seraya’s next capacity bid of 130MW will become the marginal unit and the pool will clear at a much higher price of S$190/MWh.

The pool demand is forecast to vary for each half an hour of the day with demand typically higher during the day and lower at night. Pool prices will become very volatile when some generating units are down and supply is tight. For example, the lowest pool price in 2018 was at S$85.18/MWh and the highest pool price at S$963.02/MWh.

Vertical Integration

To minimize the effect of pool price volatility on gencos’ revenue and profit, each genco generally has its own retail arm to sell electricity to households and businesses in Singapore. The electricity retailers sell electricity contracts to customers at various forms (fixed price, oil hedged, wholesale prices etc) and at various tenors (from one month to maximum 2 years). Each Genco then enters into a Contract-for-Differences (CfD) with its retailer as a financial hedge against volatile pool prices.

Say a genco can generate baseload of 1,600MW of efficient capacity for the month of January and has hedged the oil prices for such generation, then it can enter into a CfD to sell 1,600MW of capacity to its retailer for the month of January for a certain fixed price of say S$190/MWh (which excludes the transmission and distribution charges). So the retailer can try to sell off such electricity supply at a fixed price, regardless of the pool prices. The pool prices may fluctuate every half an hour and trade from S$100/MWh to S$300/MWh in the month of January, but the genco will get paid at average S$190/MWh, the CfD price hedged with its retailer.

In such a vertical integration structure, each genco is shielded from pool price volatility, and effectively the battle field is in the retail electricity market. The lower the cost structure of a genco is, the lower price it can offer its retailer to sell electricity at and gain more market share.

Vesting Contract and Market Power

Introduced in 1 January 2004, vesting contracts are aimed at curbing the exercise of market power by the generation companies, to promote efficiency and competition in the electricity market for the benefit of consumers.

Vesting contracts are signed between generation companies and SP Services Ltd, the default electricity retailer. With the vesting contracts, generation companies are committed to sell a specified amount of electricity (viz the vesting contract level) at a specified price (viz the vesting contract price). This removes the incentives for generation companies to exercise their market power by withholding capacity to push up spot prices in the wholesale market.

The vesting price is set taking into account both the long run marginal cost (LRMC) of the most efficient generation technology that accounts for at least 25% of the total electricity demand in Singapore. The vesting contract level is set to effectively curb the exercise of market power based on projected electricity supply and demand.

To ensure the vesting contracts reflect the prevailing market conditions, EMA reviews the vesting parameters every 2 years or at other times when it considers necessary.

The vesting level has been reduced from a high of 65% for 2005-2006 to 55% for 2007-2008 to 30%-25% for 2015 and 20% for 2016 and further reduced further to less than 20% that matched LNG Vesting Scheme after 2016.

With the commissioning of Singapore’s LNG Terminal in 2013, a total of over 3,000MW additional capacity (Senoko 862MW, Keppel 813MW, Pacific Light 800MW, Tuas Power 406MW, Sembcorp 404MW and Tuaspring 396MW) was added to the electricity supply pool. To support the investment decision of the LNG Terminal, EMA introduced the LNG Vesting Scheme upon completion of the LNG Terminal in 2013 for a period of 10 years. Contrary to the initial Vesting Contracts that were meant to curb market power, this LNG Vesting Scheme is meant to provide a certainty to revenue and earnings for new generation plants at the LNG Vesting Price, i.e. the Long Run Marginal Cost (LRMC) of LNG fuelled CCGT.

Such LNG Vesting Scheme has led to addition of all these new capacity in 2012-2015, which caused a substantial oversupply of CCGT capacity and a collapse in pool prices. Such oversupply situation has caused gencos to stop investment in any new capacity after 2016 as most of the gencos were loss making after 2016. Gencos could only make money from LNG Vesting Scheme that has provided decent profit margin.

EMA has determined that for 2021-2022, the LNG Vesting Contract Price shall be S$111.23/MWh which includes a fuel component of S$58.11/MWh (based on an average gas price of S$7.87/GJ) and a total non-fuel margin of S$51.27/MWh (a small increase from S$48.26/MWh for 2019-2020). Based on this determination, an investor who invests in a new 419.9MW of new CCGT at a capital cost of S$701.2 million is estimated to get a non-fuel margin of 419.9MW x 8760h x 61.8% x S$51.27/MWh = S$116.5 million a year. Deducting off a projected annual fixed operating cost of S$22.2m, the investment is supposed to give a gross profit of S$94.3 million a year and a return on equity of 9.39% to the investor.

[All data is taken from EMA website]

Tight Supply in Current Market

Due to lack of investments since 2016, the electricity market in Singapore has turned into a tight supply situation, which is visible from more occurrences of pool price spikes to over S$440/MWh recently and the narrowing of electricity retail plan discount to SP Group’s regulated tariff to less than 1% (from as high as 30% discount in 2018).

A search on the Open Electricity Market’s price comparison website on 4 Aug 2022 showed the cheapest fixed price plan offered by a retailer was 31.30 cents per kWh (or S$313/MWh) for a contract period of 24 months. In comparison, SP’s electricity tariff for households stood at 32.28 cents per kWh for 3Q2022. Other fixed price plans, with contract durations of between 6 to 24 months, ranged from 31.60 cents per kWh to 48.15 cents per kWh. No discount-of-tariff plans – where retailers give a fixed discount off SP’s tariff – were available.

Retailers are generally conservative in their offering while global energy prices are still at elevated level. Gencos are even more conservative in their investment plan due to uncertainties in fuel supply mix after 2023 when the initial 10 years of LNG supply expires.

Paradigm Shift in Fuel Mix

With the first 1,200MW of power import initially expected from 2027, there is a gap in fuel supply between now and 2027 and the current tight supply situation is expected to persist until a new generation capacity comes into market.

Taking advantage of the tight supply, Keppel announced on 30 August 2022 that it would develop Singapore’s first hydrogen-ready power plant on Jurong Island with a total investment cost of S$750 million. This will add 600MW new capacity of CCGT in 1H 2026 the earliest if it materialises.

Singapore electricity demand grew 5.3% to 53.5 TWh in 2021 as the country came out of covid-19 lockdown measures. Assuming Singapore electricity demand grows by a normal 2.0% p.a., peak demand is expected to grow from 7,560 MW in 2021 to about 8,510 MW in 2026, an increase of 950MW. Hence the 600MW of new capacity from Keppel will not be enough to cover the expected rise in demand in next 4 years, and will not change the tight supply situation at least until 2027.

With the RFP1 to solicit the first 1,200MW of power import now streamlined with RFP2 process to solicit interests for power import of up to 4,000MW by 2035, it is not clear if the first 1,200MW of power import will still materialize in 2027. At the same growth rate of 2.0% p.a., peak demand is expected to reach 9,975 MW by 2035, an increase of 2,415MW in 14 years from 2021. In the next 13 years to 2035, some of the older generators in Singapore especially those of E-class CCGT or fuel oil-fired steam turbines will be retired due to inefficiency, estimated totaling 800 MW to 2,000MW. It is hence reasonably expected that the 4,000MW of power import will be brought in gradually over the next 13 years to meet the power demand increase of 2,415MW and the retired capacity.

The power import shall mainly comprise renewable energy such as solar power. The expected bidders come from power developers based in Malaysia, Indonesia and as far as Australia. Singapore would typically demand high security of power supply from any power import, hence resulting in double redundancy and “fail-safe” arrangements in any undersea power cables to be pulled from Indonesia and Australia, hence much higher costs. With the costs of solar panels and batteries skyrocketing in past 2 years, the cost of generating solar power and transmitting it into Singapore from Indonesia or Australia will no longer be cheap, and will even be more expensive than generating power using the most efficient CCGT burning gas priced at current crude oil prices of USD80-85/bbl.

Any such developer who wants to participate in the power import into Singapore will need to participate in the competitive electricity market there, as Singapore government shall not guarantee any offtake quantity nor power pricing. It hence presents huge risks for these power import developers, especially those with no presence in Singapore currently, as they may face a situation that their power offer from abroad may not even get dispatched in Singapore competitive pool if crude oil prices tank to below USD60/bbl.

Therefore, Singapore government or EMA may need to introduce some form of vesting contracts again in order to attract interests for power import, like they introduced LNG Vesting Scheme to attract investments in new LNG generation capacities back in 2013. But this time round, developers of power import will be more cautious in their approach, having seen the over-supply situation created by the flux of new LNG Vesting capacities in 2013. EMA on the other hand shall also prefer a steady grow in power import rather than a sudden big influx of power import, having learnt the lesson from the 2013 LNG import arrangements that created an immediate over-supply situation in 2014-2016 and subsequent lack of investments in 2016-2022.

PowerSeraya can play defensive by continuing to operate as the most efficient CCGT plant to defend its market share in the midst of influx of power import, or may be aggressive in bidding for part of the power import via its parent YTL Power who has large tract of land in Kulai ready to be deployed for large scale solar power farm development.

A rewarding journey

The investment in PowerSeraya has definitely been rewarding for YTL Power. It is estimated that YTL Power had fully recouped all its equity money invested into PowerSeraya in the few years following its acquisition in 2008 when generation margin was good at as high as S$60-80/MWh. While it did make some small losses in year 2020-2021 during the pandemic years where power demand was weak, PowerSeraya rebounded fast after the pandemic, taking advantage of the recovering power demand and healthy generation margin.

From the quarterly results announced by YTL Power, PowerSeraya’s contribution to YTL Power’s pretax profit shows good strength right into the latest Q1FY2023:

Back calculations show that PowerSeraya gross margin almost reached S$47/MWh in the latest Sep 2022 quarter. The gross generation margin should gradually climb up further in the next 3-4 years to possibly S$60-80/MWh again.

It is rather difficult to value the business of PowerSeraya as it is cyclic with topline & bottomline affected by demand & supply dynamics. One straightforward way is to fall back to the vesting contract non-fuel margin which is determined by technical & financial experts appointed by EMA and accepted by all stakeholders.

After the completion of acquisition of Tuaspring’s 396 MW CCGT plant, PowerSeraya now has about 2,000 MW of efficient CCGT power plants in Singapore. Based on the parameters determined by experts for vesting contracts, the capital costs (or replacement value) of a 419.9MW CCGT plant in Singapore is S$701.2 million as determined in 2020 review. Hence, PowerSeraya’s 2,000 MW of CCGT plants would be valued at a replacement cost of 2,000/419.9 x S$701.2 = S$3,340 million.

Based on vesting contract non-fuel margin of S$51.27/MWh and average plant load factor of 61.8%, PowerSeraya’s 2,000MW CCGT plant should generate annual gross margin of:

  2,000 MW x 8,760h x 61.8% x S$51.27/MWh = S$555.1 million

Deducting off operating expenses of S$70 million and interest expenses of S$25 million, free cash flows would be S$460 million a year. Using the pre-determined equity return of 9.39% as in vesting contract, PowerSeraya’s 2,000 MW of CCGT plant would be valued at S$4,900 million.

Another way to value PowerSeraya is to look at its gross margin in past 20 years:

This gives a 20-year simple average of S$35.25/MWh. The simple average is dragged down by the exceptionally low power demand in 2020-2021 during the Covid-19 pandemic. Also, taking a simple average is not reflective of the actual gross margin, as the plant load factor (the plant generating rate) is generally higher when supply is tight and gross margin is high, eg. plant load factor could be as high as 70%-80% in 2008-2013 but much lower at 50%-60% in 2014-2021. Hence, a weighted average is closer to S$40/MWh.

Using an average plant load factor of 65% and weighted average margin of S$40/MWh, PowerSeraya’s 2,000MW CCGT plant may generate gross margin of

  2,000 MW x 8,760h x 65% x S$40/MWh = S$455.5 million per annum

Annual free cashflows may top S$360 million. At 7.0% FCF yield, PowerSeraya’s 2,000MW CCGT plant may be worth S$5,150 million.

The market has obviously not realized the value of PowerSeraya, given that the market capitalization of YTL Power (RM6.0 billion) is lower than even the replacement value of PowerSeraya’s CCGT plant (S$3,340m x 3.3 = RM11.0 billion).

I am confident that as PowerSeraya reports improving earnings in coming quarters, the market will sooner or later appreciate the value of PowerSeraya, which should be about S$5.15 billion x 3.3 = RM17.0 billion. This alone is 180% higher than the entire market capitalization of YTL Power, which means investors are getting all other assets (Wessex Waters, Jordan Attarat Power, Jawa Power, Yes 5G business, digital bank licence, green data centre park etc) of YTL Power for free.

A bold decision in 2008 by Yeoh at the right time on a right price has brought in a champion asset from Singapore that will benefit YTL Power for generations to come. With prudent management and sound expertise in power generation & electricity retailing, PowerSeraya shall enjoy steady growth in next few decades by continuous repowering of its generating assets and active participation in the power expansion exercises in Singapore and regional areas.