The Energy Market Authority (EMA) has revised the formula for setting the electricity tariff for households after consulting key stakeholders in the energy industry and members of the public. The revised formula will be used to set the electricity tariff from July 2009 onwards.
With the new approach, the electricity tariff for the third quarter of 2009 (July to September 2009) will be based on the average of fuel oil prices in the preceding three months1. Specifically, the fuel oil price data from April 2009 to the middle of June 2009 will be used to calculate the fuel component of the tariff for the third quarter of the year. SP Services will then seek EMA’s approval of the tariff before announcing it by the end of June 2009.
The revised formula will allow the electricity tariff to be more reflective of the prevailing market price of fuel, since more recent fuel price data will be used in computing the tariff. In addition, the averaging of fuel oil prices over the three months will help to smoothen out any large swings in the fuel oil market within this period.
While the revised formula is an improvement over the existing one, it does not necessarily result in a lower tariff all the time. In fact, the average level of the tariff over the last five years was about the same under both approaches. However, there were differences from quarter to quarter. For example, the revised formula would have produced a lower tariff in the fourth quarter of 2008 and the first half of 2009 due to the recent decline in fuel oil prices, but it would have also contributed to an overall higher tariff for the first three quarters of 2008 due to the uptrend in fuel oil prices at that time (see Chart above). This is consistent with the shift towards a tariff formula that is more reflective of prevailing market conditions.