Will rising oil prices affect my electricity bill

Will rising oil prices affect my electricity bill?

Flip a switch and it’s there for you - electricity is a core necessity in our lives. As a result, we often just pay our electric bill without much thought…until it suddenly goes up without us knowing!

The thing is, most of our household electricity consumption tends to stay relatively constant over a long period of time and the moment we see an increase in our bill, blaming the retailers, electricity generators or even the government seems to be the most common knee-jerk reaction.

However, that isn’t always true and there is a factor that dictates how high or low your electric bill will be: the oil price.

What does the oil price have to do with our utility bill?

Quite a lot in fact!

The 2 Components Of Your Electric Bill

When you are paying for electricity (the SP Services electrical tariff), you are paying for the cost of the generation of electricity or how much is needed to create it.

This tariff comprises of two key components - the non-fuel cost and the fuel cost.

The non-fuel cost is quite fixed, and doesn’t really change much. It is also rather standard, and consists of :

  1. Power Generation Cost - The costs needed to operate power stations that include manpower, capital and maintenance costs.
  2. The Grid Charge Cost - The cost of transporting electricity through the power grid to your homes
  3. Market Support Services (MSS) Fee - The costs of billing and meter reading.

However, the other 50% of your electricity bill comes from fuel cost which is highly variable and changes everyday with even possibilities of big fluctuations.

95% of Singapore’s electricity is generated by gas; and yes, you might have guessed it, our gas supply is indexed or follows closely the price of oil!

The Oil Markets And You

Sure, this isn’t the most exciting topic around but seeing that the oil market will determine how expensive or cheap your electricity bill is, let’s take a closer look!

Oil prices are set mainly by buyers and sellers in the market and are affected by a host of factors that includes supply and demand of the physical oil itself - if the world experiences or believes that there is a shortage of oil at any given moment, the price of oil will start to rise, reflecting the drop in supply.

Conversely, if there is a global economic slowdown and the demand for oil drops, the price of oil will also be lowered.

In 2005 when oil was around $55 a barrel, Singapore’s electricity tariff was 21.3 cents/kWh*

In 2012 when oil averaged around $110 a barrel, our national electricity tariff also saw an increase to 28.8 cents/kWh.*

Fast forward 4 years ahead in 2016 when the oil prices plunged down to near $53 a barrel, the electricity tariff fell right down to 21.5 cents/kWh.*

As fuel costs are a major factor to our electricity prices, the Singapore government has taken steps to secure our gas supply by importing a constant stream of gas and investing and developing our Liquified Natural Gas (LNG) infrastructure and supply.

That means it is highly unlikely we will ever get a big increase in electricity prices from an interrupted supply issue.

What We Can Do As Consumers

The important thing to know is that as consumers we won’t be able to control the price of oil and the best way to secure our electric bill would be to better understand the option plans we have in front of us.

There are two types of plans that we can choose from - Discount On Tariff (DOT) or Fixed Price.

Discount On Tariff (DOT) Plans

Most electricity retailers have a DOT plan available which just means your electricity bill will be tracking the oil prices that will affect the tariff prices.

When there is a rise in oil prices, the tariff prices (as well as your DOT price) will rise and you pay more, however under such a deal you will always pay less than the SP Tariff.

Conversely, if the oil prices fall, the tariff prices will also drop and you pay less on your electric bill.

While this leaves you exposed to the rise and fall of oil prices, many consumers choose this for simplicity without a need to monitor the oil prices to make a decision on fixing a price.

Fixed Price Plans

Fixed price plans will mean you have 100% certainty on what your electric bill will be at the end of the month regardless of whether the oil price rises of falls. This price is fixed for the whole period of your contract.

While this might mean you could lose out on savings when the price of oil drops, you are also protected should the oil price rise.

Fixed price plans are ideal if financial budgeting and cash flow planning are critical in your household.

*https://www.ema.gov.sg/cmsmedia/Publications_and_Statistics /Publications/ses/2016/downloads/Chapter_5.pdf

This article is brought to you by iSwitch and is not representative of the bank's view.

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