18 November 2010

Misgivings About Intelligent Energy System

A follow-up post on the Intelligent Energy System ("IES").

Estimated Cost Of The IES

Energy Market Authority ("EMA") probably has, by now, an idea of the cost of implementing the IES in its present form, in terms of initial capital cost (which includes the requisite infrastructure and installation costs, not just the smart meters), periodic replacement cost and operating cost.

EMA should share with us what this cost is, even if it is a rough estimate, because it will likely be borne by consumers eventually.

If the cost is $5 per household per month or 1 cent per kWh, for instance, how many consumers will be willing to foot the bill, irrespective of whether it is subsumed under the market support services fee and/or the grid charge in the future?  If the majority are not prepared to pay, why bother to continue with the project in its present form?

Will There Be Any Meaningful Shift In Consumption From Peak Period To Off-Peak Period?

EMA mentioned that its proof-of-concept trial of smart meters and variable pricing last year showed that consumers shifted their consumption from peak periods to off-peak periods, and enjoyed some savings in the process.  What was the magnitude of the shift?

The national peak period is from 8:30 am to 8:30 pm and the off-peak period is from 12:30 am to 7:30 am (the remainder are shoulder periods) on weekdays (reference: SP Services, the market support services licensee, quoted in Market Surveillance & Compliance Panel Annual Report 2009).  It seems unlikely that many households will shift much of their electricity usage to the 12:30 am to 7:30 am off-peak period.

Furthermore, households account for only 18 per cent of the national electricity consumption, so a 1 per cent shift in household consumption is a 0.18 per cent shift in the national electricity consumption.

Will There Be Any Savings?

Even assuming there is a meaningful or significant shift in consumption patterns when the IES is fully implemented, it is doubtful if this will result in savings for households in aggregate.

The electricity suppliers will try to protect their profit when switching from a flat-rate tariff to a peak and off-peak structure.  Unless there is a reduction in the cost structure of the generating companies in particular, they are unlikely to allow their revenues to fall.

If only some consumers shift some usage from the peak period to the off-peak period, they will pay less than if they had not shifted.  But if everyone shifts, the aggregate utilities bill may not change, and the average consumer may not pay less than if no one had shifted.

Consumers may know that they pay less if they shift their consumption from the peak period to the off-peak period than if they do not shift, but will they know whether they pay less than under the flat-rate tariff?

16 November 2010

Will A Stronger Yuan Not Benefit The U.S.?

Not everyone agrees that China's huge current account surplus with the U.S. this year supports the contention that China has been manipulating its currency, destroying jobs or limiting growth in the U.S.

China's trade surplus is due to its investing in the U.S.

China's trade surplus has led to its huge accumulation of foreign reserves, much of which it invests in U.S. government and other securities and commercial assets in the U.S.  These investments did not lead to China's trade surplus; instead, they resulted from it.


By investing its current account surplus in the U.S., China provides capital to American companies.  Does the U.S. prefer China to invest its current account surplus in Iran instead?

Americans have not been saving enough and American companies have not been investing enough, and China's investments in the U.S. have helped meet this savings deficit.  But the U.S. (or almost any other country, for that matter) would prefer to stand on its two feet, rather than having to rely on a Chinese crutch, especially if its current predicament is viewed as having stemmed at least partly from a very undervalued yuan.

The U.S. wants to increase its exports to, and lower its trade deficit with, China.  This will drive the U.S. economy, and in turn reduce its dependence on investments from China.

Getting the Chinese to make the yuan more expensive against the U.S. dollar will not make Chinese exports more expensive to American consumers.  This is because the cost of production (in yuan) will fall as the supply of yuan falls when the government engineers a yuan appreciation.

While the cost of imports (in yuan) will fall as the yuan appreciates, the cost of domestic production inputs (such as the wages of Chinese workers) will not fall unless there is a severe and prolonged recession or deflation in China.  A 20 per cent appreciation of the yuan will not result in a 20 per cent reduction in the domestic cost of production in China.

Revaluing the yuan will not solve the U.S.'s problems

The current cheap yuan contributes to, and exacerbates, the problems faced by the U.S.  If the Chinese government does not believe this, it would not have expressed concerns about the adverse impact of an appreciation of the yuan to a more realistic level on the Chinese economy.  It knows how a stronger yuan can hurt China.

The yuan may or may not be "manipulated", but the yuan exchange rate is clearly determined and guided by the Chinese government, rather than free market forces.

15 November 2010

The Plight Of Poor Students

The Straits Times School Pocket Money Fund is a community project with the objective of providing children from low-income families with pocket money to attend school.  The money can be used for the purchase of food at school, bus fares, books and stationery.

Primary school children receive $45 a month and secondary school children receive $80 a month.

Applicants must be citizens or permanent residents receiving full-time formal education; live in a four-room or smaller HDB flat; and belong to a household in which the gross monthly per capita income is $450 or less.

More than 12,400 children need $5 million in pocket money this year, according to a The Straits Times report.  This means each child receives just $400 a year, or $33.60 a month x 12 months or $10 a week x 40 school term weeks, depending on how the payouts are structured.  It is not clear why both numbers are lower than even the intended payout to primary school students.

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Notes:

National Council of Social Service

The Straits Times, 13 November 2010.

Will HDB Apartments Appreciate Forever?

It has often been said that HDB apartments are appreciating assets, especially if the Singapore economy continues to grow.

The HDB Resale Price Index was at its all-time high at 167.8 in Q3 2010.

However, the HDB Resale Price Index did not show an uninterrupted rise over time.  It fell from 136.9 in Q4 1996 to a low of 95.5 in Q1 2002, and did not surpass its previous high until Q3 2008, an anguishing almost 12 years later, when it was 137.5.

The HDB Resale Price Index is a composite index.  The weights are based on 12 quarters moving average transactions.

Finally, even if the HDB Resale Price Index is rising, the resale prices of HDB apartments in any given neighbourhood cannot keep rising forever.  An HDB apartment is "sold" with a 99-year lease starting from the date of the first lease.  As the years pass, the remaining lease becomes increasingly shorter.  Upgrading programmes may halt or even reverse the time-related decline, but the effect is temporary.  Sooner or later, age catches up.

13 November 2010

Should A School Recruit Foreign Scholars?

A secondary school (or high school) in Singapore reportedly sent its principal and a teacher or teachers overseas to recruit foreign scholars.

Why is it necessary for a school to recruit foreign scholars?

Is the school so enamoured with its ranking that it needs to supplement its local student population with foreign students?

As it is, foreign students take up places that would otherwise have been available to local students.  And there is no shortage of students who want to enrol at that school.

Furthermore, if those foreign students are given a financial incentive to enrol at the school, would it not have been better for the school to use such funds on its local students, whose parents pay taxes, with which the government uses to provide financial support to the school.

There is no need for a school to recruit foreign students, whether or not they are scholars.

Or, is the recruitment by the school part of a broader programme to give qualified foreign students a free or highly subsidised education in Singapore in the hope that they will stay on as permanent residents or citizens?

11 November 2010

Fuss Over New Citizens

Mr Ray Ferguson, Standard Chartered Bank's regional chief executive officer for Singapore and South-East Asia, gave up his British passport and became a Singapore citizen in October 2010 together with his wife Clare.

This was reported by both major newpapers, The Straits Times and TODAY.  Coincidence?

Why is this newsworthy?

While we welcome Mr and Mrs Ferguson and their children into the Singapore family, many of us don't really care whether it is a billionaire, a Nobel laureate, an Academy Award winner, or an Olympic Games medalist who wants to become a citizen of our country.

What is important is whether we who are already citizens regard Singapore as our home, a place where we and our children can find and enjoy the democracy, justice, equality, happiness, prosperity and progress that we desire.

If we are truly convinced that we want no home but Singapore, we don't need to adduce affirmation from newly naturalised citizens, whoever they may be.

10 November 2010

Reducing Speaking Time In Parliament

The Standing Orders Committee of the Singapore Parliament is recommending that the time allowed for speeches in parliament be reduced, according to media reports.

Under the recommendations:
  • A member of parliament will not be entitled to speak on any motion in Parliament for more than 20 minutes, down from 30 minutes presently.
  • A cabinet minister or a parliamentary secretary will not be entitled to speak on any motion in Parliament for more than 40 minutes, down from one hour presently.

The recommended changes are a balance between efficiency and how much time is needed.

Hopefully the balance is correctly struck.  Effectiveness of parliamentary debate is of paramount importance.  Efficiency is a bonus.

04 November 2010

Matching Results With Government Policies

In a recent opinion post, an economist postulated that a divided government in Washington would be good for the US economy.

By "divided government", he meant a situation in which not all the three political institutions — the White House, the senate and the house of representatives — are in the hands of a single political party.

He supported his claim with some statistics drawn from the past four decades.

Firstly, median GDP expanded 3.3 per cent per year when there was divided government, compared with 3 per cent (presumably, this means 3.0 per cent) per year when there was unified government.

Secondly, median unemployment was 5.7 per cent when there was divided government, compared to 6.1 per cent when there was unified government.

Thirdly, the equity markets (measured by the S&P 500 index) increased at a median rate of 13.5 per cent per year when there was divided government and 9 per cent (again presumably, this means 9.0 per cent) per year when there was unified government.

Do the data support his claim?

It is not clear whether the data were statistically significant; that is, they did not happen by mere coincidence.

Assuming there is some acceptable degree of statistical correlation, which is the cause and which is the effect?

Most importantly, there is a considerable time lag between formulating a policy, guiding it through possibly almost unending debate in the House and the Senate, where the bill may meet lengthy or obstructive delays, and passing of the bill (the passage is considerably less tortuous in the British parliamentary system).  Once the bill becomes law, it may still be challenged in the courts or frustrated by the states.

After overcoming these hurdles, much time is needed before any policy can halt and then reverse the momentum of the adverse economic situation, not to mention producing discernible results, by which time the political scene in Washington may have changed.  Ironically, the politicians in the new government may get to enjoy the benefit of the policies when these bear fruit eventually, even if they had, while they were part of the previous government, opposed those same policies strenuously, but the electorate has a short memory.

For example, the Democrats inherited an economy that was already heading into trouble in 2007-2008 (during which time the government was divided), but the unified government of 2009-2010 was unable to introduce enough changes quickly enough to be able to point to the fruit of their efforts (preventing the unemployment rate from getting much worse was just not good enough) before the 2010 mid-term Congressional elections, and the party in power was duly punished.

As for the stock market, it often behaves rather irrationally.  It may reflect current conditions (the result of past government policies) and/or perceptions of future conditions (the result of current government policies, as well as, past government policies).  It may reflect interest rates and money supply, both of which are the purview of the US Federal Reserve, an entity that operates independently of the government.

The claim that a divided government in Washington will be good for the US economy may be valid, but the data are inadequate to prove the point.

02 November 2010

Intelligent Energy System Should Be Re-Designed

Energy Market Authority recently announced a $30 million pilot project for the Intelligent Energy System (“IES”).  The IES is a step towards a smarter power grid, which will provide consumers with more information, choice and control over their electricity usage, thereby improving energy efficiency for the country as a whole.

The pilot project will involve around 4,500 residential, commercial and industrial consumers.

With its advanced metering infrastructure, or smart meters, the IES will provide the following potential benefits to households:
  • Choice of electricity retailer and pricing plan.
  • More information to monitor and manage energy usage.
  • Better control of major home appliances to reduce energy usage.

Many of us may be curious about our electricity consumption.  But for most of us, it is a one-time exercise — once we find out how much electricity each appliance uses, that's it.  Even now, we do not keep monitoring our electricity consumption real time; once every two months when our electricity meters are read is often enough.

Most, if not all, of us know how to reduce energy consumption.  The challenge is whether we are prepared to change how we use our electrical appliances.  If we want to change, it will not be because the smart meter tells us how many kilowatt-hours we can save by, for example, raising the air-conditioner temperature setting — we know we will use less energy the higher the setting; what matters is the setting we can accept.

Most of us cannot or will not substantially change our energy consumption pattern because it is tied to our lifestyle.  For those who use the air-conditioner when they go to bed or those who sun their laundry after washing, it means nothing if electricity is cheaper at other times of the day.

Having similar energy consumption patterns over the course of the day and having no bargaining power individually, the majority of households may find the electricity pricing plans not differentiated enough to offer meaningful choice.

Smart meters will help the power grid operator to detect localised outages quickly, but only fractionally faster than feedback from affected consumers.

Individual smart meters may be nice to have, but the reality is that consumers have to bear the cost eventually, directly or otherwise.  The pilot project costs $6,667 per consumer.  What is the estimated cost to each household to fully implement the IES?

Will the savings, if any, in household electricity billings ever be significant or meaningful enough to offset the capital and operating costs of the IES?

A more practical way may be to install a single smart meter for each group of households in a neighbourhood (for example, strata titled properties or blocks of HDB apartments).  The councils of the strata titled properties or the town councils of the HDB apartments can choose electricity retailers and pricing plans.  These bulk meters can provide the desired real-time feedback to the network operator, the electricity retailers and others.  It's far simpler and more cost effective.

01 November 2010

Raising The Retirement Age In Singapore

Earlier this year, people protested in a number of European countries when their governments raised the minimum retirement age and/or reformed the pension schemes.

What has Singapore's experience been in raising the minimum retirement age and/or reforming the pension scheme?

Minimum Retirement Age
Prior to 1 July 1993, Singapore did not have a statutory minimum retirement age.  People generally retired at age 55 years.

The minimum retirement age was set at 60 years in 1993.  It was raised to 62 years in 1999.

When the law on re-employment comes into effect in 2012, employers have to re-employ their older employees from the existing retirement age of 62 years to age 65 years, and later to age 67 years and beyond, on a mutually agreeable basis taking the needs of the employers and the older workers into account.

Central Provident Fund
Previously, a person could withdraw the entire balance in his account with Central Provident Fund ("CPF", the national social security savings plan) on reaching age 55 years.

Now, a CPF member can withdraw the balance in his CPF account on his 55th birthday after setting aside the Minimum Sum (to form his retirement funds) and the Medisave Required Amount.  He is allowed to withdraw a percentage of the balance even if it is less than the Minimum Sum, but this legacy concession will be phased out in 2013.

The Minimum Sum was first set at $30,000 in 1987. It is $123,000 now.  The target Minimum Sum is $120,000 (in 2003 dollars) by 2013 to ensure that CPF members set aside sufficient retirement funds for themselves.

Among active CPF members who reached age 55 years in 2009, 37.5 per cent met the Minimum Sum requirement; 62.5 per cent did not.  Active CPF members accounted for approximately 55 per cent of all residents in the 50-59 years age group in 2009 (the remainder were inactive CPF members or not CPF members).  Among CPF members brought into the Minimum Sum Scheme in 2009, 25.4 per cent had no Minimum Sum to set aside as they had small balances in their CPF accounts or were otherwise exempted.

The age at which a CPF member can start to draw down on his CPF retirement funds was raised to 62 years in 1999.  It will be raised to age 63 years in 2012, age 64 years in 2015 and age 65 years in 2018.

In the future, the drawdowns will take the form of monthy payouts from CPF LIFE, a national annuity plan that was introduced in 2009.  Participation in CPF LIFE is compulsory if a CPF member has in his CPF account (excluding his Medisave account) at least either $40,000 at age 55 years or $60,000 at age 65 years.

CPF LIFE will pay its members for as long as they live.  The quantum of the payouts is not guaranteed, but will be adjusted regularly, taking into account interest rates and mortality experience, to ensure solvency of the fund.  The payouts, which may stretch over 20 years to 30 years or longer, are not adjusted for inflation.

Prior to the introduction of CPF LIFE, only 1,140 CPF members used their retirement funds to buy annuities from insurance companies in 2008.

Medisave
Medisave was introduced in 1984.

The Medisave Required Amount is $22,500, and the target is $25,000 (in 2003 dollars) by 2013.

No withdrawal from a CPF member's Medisave account is allowed if the balance is less than the Medisave Minimum Sum, presently $34,500 (adjusted annually).

Minimum Retirement Age, CPF and Medisave
As a CPF member's social security plan and hospitalisation plan are self-funded, a higher minimum retirement age gives him the right but not the obligation to work longer.  This is useful if he does not have sufficient funds for his retirement (and that of his spouse, if she is not employed), or wishes to continue working for any other reason.

This may partly explain why there have been no protests in Singapore against the raising of the minimum retirement age.  Also, protests are usually futile.  And they may not be legal.

However, as the minimum retirement age is being raised, the age at which a CPF member can draw down on his own retirement funds is also raised.

Even without an increase in the minimum retirement age, the Minimum Sum and Medisave Required Amount have been raised over the years.  Although it was (and continues to be) done to address rising longevity and rising healthcare costs, it reduces the amount a CPF member can withdraw from his CPF account on reaching age 55 years.

Unless a person has sufficient retirement funds over and above his CPF savings, retiring at age 55 years is not an option.

The situation is best summarised by prime minister Lee Hsien Loong in 2007 who said "Singaporeans are living longer.  They must work longer.  They must draw down their CPF Minimum Sum later.  They must save more and must take care in case they live beyond 85."  [Central Provident Fund Board annual report 2007].

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Notes:

1. The above is a simplified description of the history of Singapore's minimum retirement age, and the national pension scheme.

2. Every working CPF member and his employer must make monthly contributions to his CPF account. The contributions remain in his account.

3. A CPF member is a citizen or permanent resident with a CPF account.  An active CPF member is one who had at least one employment contribution paid into his account for any of the latest four months.

4. The ratio of active CPF members to residents in the 50-59 years age group in 2009 is an approximation.  The number of active CPF members refers to those above age 50 years to age 60 years as at 31 December 2009.  The resident population data refer to those in the 50-59 years age group as at 30 June 2009.

5. A CPF member is exempted from setting aside a Minimum Sum if he is terminally ill, has withdrawn his CPF funds on medical grounds, has passed away, has his own annuity, has left Singapore permanently or is a pensioner in receipt of a monthly pension.

6. Medisave is the national savings scheme to help CPF members meet the hospitalisation expenses and approved medical insurance premiums, especially after retirement, of themselves and their dependants.  Every CPF member and his employer must make monthly contributions to his Medisave account.