Singapore remains oil-fuelled economy despite renewables push

SINGAPORE (Aug 20): The Muffinry in Telok Ayer, a café run by local F&B business Bakery & Bar, has a little framed certificate on a shelf facing the cash register. It points out that the café is a customer of Sun Electric, a local solar energy retailer. The move to use solar power, since the liberalisation of the electricity market earlier this year, has been smooth and also helped the café save on its electricity bill, staff say.

Importantly, according to Mark Mottram, a shareholder and director of Bakery & Bar, the use of solar energy is a key aspect of how the company wants to be viewed.

“This is the most ecological power we can find, and it really fits the ethos of our business, such as moving to cardboard instead of plastic,” says Mottram. “This sits with our goals and moves away from things that harm the environment.”

Globally, businesses and consumers alike are waking up to that reality, whether by choice or incentive. At the state level, 195 governments have signed up to the Paris Agreement on climate change, with a commitment to cut carbon emissions.

Iceland, for instance, generates almost all of its energy from renewable sources — geo­thermal and hydroelectric power. China, currently considered the world’s worst polluter, is also the world’s biggest investor in renewable energy and lays claim to being home to the largest wind-turbine manufacturer and some of the world’s largest solar module manufacturers.

Singapore, also party to the climate change accord, has pledged to reduce emissions by more than a third from 2005 levels, by 2030. Yet, at least from the power generation standpoint, it has some way to go. Fossil fuels still make up the majority of the electricity generated. Natural gas is the main energy source. As at March 2017, energy sources other than fossil fuels, including solar energy, made up only 2.9% of all electricity generated in Singapore.

That should be changing, however, particularly as more businesses see the value and sign up to renewable energy resources. German chemical and consumer goods company Henkel has switched to 100% solar energy from retailer Sunseap Group for its operations here. The company aims to save 102 tonnes of carbon dioxide emissions annually, or the equivalent of carbon emissions from 45 round-trip flights between Singapore and Shanghai. It aims to use renewable energy for all of its global operations by 2030. “Henkel is pursuing the vision to become climate-positive in our operations and driving significant progress in other relevant areas of our value chain,” says Thomas Holenia, president of Henkel Singapore.

Nevertheless, solar power providers continue to experience challenges in growing their business. Sunseap co-founder and CEO Frank Phuan says he has had trouble securing locations for its solar project in Singapore, owing to the scarcity of land. In addition, Phuan says the government has been clear that it will not subsidise renewable energy, and electricity prices will have to be market-driven.

Energy-driven economy

Singapore has counted on the oil and gas (O&G) sector as a major economic driver. In 2016, the energy and chemicals sector accounted for $68.7 billion in economic output, with a value-add of $14.6 billion. The sector also employed more than 25,000 people. The chemicals industry accounted for $1.3 billion in fixed asset investment for 2016, with an expected direct contribution to Singapore’s GDP of $400 million, according to the Economic Development Board of Singapore.

At the same time, O&G majors such as ExxonMobil and Royal Dutch Shell have continued to expand their operations here. In 2017, ExxonMobil opened the Jurong Synthetic Lubricants and Grease Plant, the largest and only plant to produce its flagship Mobil 1 synthetic engine oil. Shell opened the world’s third-largest lubricants plant here. Chemicals led fixed asset investments in 2015 with $3.6 billion, yielding an $800 million contribution to Singapore’s GDP. Separately, O&G equipment services generated $5.13 billion, or 7%, of Singapore’s manufacturing output in 2015.

“In 2015, the energy and chemical sector contributed $81 billion to Singapore’s total output, or about a third of Singapore’s total manufacturing output,” observes Sanjeev Gupta, EY’s Asia-Pacific O&G leader.

KPMG head of tax Chiu Wu Hong notes that Singapore is a leading O&G trading hub in Asia and is among the top five global oil refining centres. “The O&G and petrochemical sectors are therefore a significant part of the economy. In aggregate, along with the O&G services, equipment and vessel/rig construction industries, the entire industry is close to 5% of Singapore’s GDP,” says Chiu.

“Singapore still has a reasonable reliance on the oil and petrochemical industries. As for its energy requirements, there is no material alternative for O&G at the moment, so there’s arguably a national interest to keep hold of the industry.”

Ming Teck Kong, partner and managing director at BCG Singapore, says: “The energy and chemicals sector will remain an integral component of Singapore’s GDP and has been earmarked as one of the five key manufacturing industries.”

Meanwhile, petroleum is one of four products, apart from tobacco, liquor and motor vehicles that attract excise taxes. Fuel excise taxes, which amounted to $844 million last year, accounted for about 1% of the government’s total revenues. The taxes have been increasing; KPMG’s Chiu estimates that this year, fuel excise taxes are expected to come up to $856.3 million, or 1.35% of total tax revenue. “Though not very significant in the overall operating revenue, it is a key component to Singapore’s customs and excise taxes, comprising about a quarter of the customs and excise tax collection,” says Chiu.

BCG’s Kong observes that while the taxes contribute to the state’s coffers, it could also work to drive a switch to clean energy. “Singapore has made progressive steps towards environmental reforms and signalled its commitment towards the Paris Agreement when it passed the Carbon Pricing Bill in March 2018,” Kong says. “In this regard, the fuel excise tax can be a lever by which to influence the environmental impact of transportation.”

Still, the government has also diversified the economy into other industries, such as services “that have higher growth prospects and are less cost-sensitive”, says EY’s Gupta.

Becoming clean and green

Indeed, even as O&G continues to play a big role in Singapore’s economy, it will become increasingly necessary to secure energy, as well as industry, away from hydrocarbons, if only to fulfil commitments to cut carbon emissions.

Singapore still has time to diversify its economy to compensate for the future loss of contribution to GDP from the O&G sector, says EY’s Gupta. “The most optimistic scenario envisions that 50% of the electricity grid will be sourced from renewables, with the balance coming from fossil fuels (largely O&G).

“It is safe to say that it will take at least 50 years for the world to get to a fossil fuel-free world; Singapore has more than enough time to diversify to compensate for the loss of contribution to its GDP from the O&G sector.”

BCG’s Kong notes that there is still time for a “smooth” transition from fossil fuels to alternative energy sources. “When nations consider the introduction of non-fossil technologies such as solar or wind or electric vehicles, the timescales are in years and decades to allow for ‘smooth’ energy transitions,” he says.

To be sure, the government has been proactive in encouraging the take-up of solar energy. Sunseap has won government tenders, including SolarNova1, the project to install solar panels on top of more than 800 HDB blocks.

CEO Phuan says the company makes sure its operations are cost-competitive, and that the “incentive-free” model works to help ensure the industry is sustainable. The company has grown, since its start in 2011, hitting 200 MegaWatt-peak of projects, which equates to the size of 200 football fields, from just 2mwp in 2011. “We are working towards the government’s target of deploying 1 GigaWatt-peak of solar systems beyond 2020,” Phuan says. “We are looking at innovative ways to work around the issue of land scarcity. One way is to deploy solar systems on unused water bodies, such as the Tengeh Reservoir testbed project, which we participated in.”

“We are also in the [process] of looking at R&D to increase the deployability and flexibility of solar systems. These include mobile solar systems that can be easily relocated when solar systems on land or rooftops of buildings need to be reassigned for other purposes,” Phuan adds.

That these efforts are taking place on the subsidy-free initiative of the private sector should only bode well for Singapore’s prospects of a cleaner and green future.

 

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