Sembcorp Industries (SCI) and Keppel Corp experienced significant volatility in prices during the week starting June 19.
On June 16, the Energy Market Authority (EMA) announced it is introducing the Temporary Price Cap (TPC) mechanism to mitigate extreme price volatility in the Singapore Wholesale Electricity Market (SWEM).
EMA has also introduced the market-clearing price, referred to as the Uniform Singapore Energy Price (USEP). This is set based on the marginal energy offer price. If the marginal energy offer price is at or above the TPC, the USEP will be capped at the TPC.
“The TPC mechanism is intended to act as a short-term measure to stop the vicious cycle of volatility and risk aversion, and allow time to identify and address the cause of the extreme price volatility, by temporarily capping the USEP at a level lower than the existing Energy Price Cap, which is at $4,500/MWh in the SWEM,” says EMA. The TPC mechanism will take effect from July 1.
A DBS report dated June 20 says that the TPC should reduce huge swings in wholesale power prices, but the impact on the average power price is likely to be marginal.
“Average USEP can potentially drop by 7-8% assuming 4% activation of TPC,” the DBS report explains. The DBS report is suggesting that investors take advantage of the wide swings in price to buy SCI and Keppel because the impact from TPC is likely to be limited, in particular for Keppel which has “only a 1% exposure to the wholesale market”.
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Keppel’s exposure is through Keppel Merlimau Cogen, 51% owned by Keppel Infrastructure Trust A7RU and 49% held by Keppel. SCI owns SembCorp Cogen.
SCI has locked in at least two-thirds of capacity under longer-term contracts including an 18-year power purchase agreement (PPA) with Micron of up to 450MW and a 10- year PPA with Singtel (estimated at 60MW–80MW), leaving only onethird to benefit from market volatility during the expected tight power market, DBS says. In addition, SCI also has leeway to sell gas instead of using it to generate power, if that has higher margins, the report adds.
Before the volatility set in, SCI’s share price had been up by more than 60% this year, and one of the market’s best performers. The market has been anticipating positive catalysts, including new renewable growth targets, divestments and potential inclusion into the MSCI Index in August or November.
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Keppel is transforming into an alternative asset investment manager, with a focus on fees, AUM, and an asset-light model. Against this, its earnings are likely to be very diversified.
Technically, the likelihood of SCI’s share price rebounding and gaining strength is probably higher and more likely as prices are in a primary uptrend. Against this background, retreats — though deep at times — are likely to be followed by a resumption of the uptrend. Hence, SCI is more likely to make a new high this year than Keppel.
Keppel’s share price movement reflects investors’ uncertainty over its new business model of focusing on AUM. While this ensures lower writedowns and stabilised cash flows, Keppel may, at times, as a sponsor, need to support its units where the assets are parked, such as Keppel Infrastructure Trust, Keppel REIT, Keppel DC REIT, and possibly its unlisted funds which may at times need to be recapitalised during black swan events.
