Today’s electric utilities are facing radical transformation in a new energy world that is becoming increasingly more complex, competitive, and challenging. Geopolitics are exacerbating cost pressures, while urgent decarbonisation goals are driving new digital technologies and changing consumer expectations.
Survival for utilities will depend on their ability to ensure reliable and affordable electricity, while simultaneously remaining efficient and financially sustainable. Nonetheless, a new report by the World Bank highlights that most electric utilities in developing countries are already struggling to deliver affordable and reliable power.
The energy transition will therefore create new challenges for utilities, but those that already perform well will be best positioned to navigate change and unlock new opportunities.
Emerging performance gap in electricity utilities
Titled “The Critical Link: Empowering Utilities for the Energy Transition
This situation is especially bleak for utilities in developing countries, where high supply costs and operational efficiencies often create persistent cycles of underperformance. More than half of the utilities tracked by The World Bank have outstanding customer payments that are equivalent to more than five months of revenue.
This explains why technical and commercial losses in power distribution hover between 12-15 percent for the average utility in lower income and middle-income countries. Utilities’ financial and operational challenges deter investors, making it more difficult for them to raise private capital affordably to invest in grid modernisation and upgrades.
As such, utilities in developing countries are more likely to rely on government subsidies, adding even more fiscal burden to the governments that can least afford to pay them. Indeed, the World Bank’s data presents a stark warning: many utilities are ill-equipped to fulfill their role in achieving the energy transition and ensuring universal access for all.
That said, the report does suggest that opportunities do exist to enhance utility performance – but only utilities that already perform well will be able to seize them.
Rethinking utilities to harness new energy opportunities
Policy choices and technological developments are driving changes to the global supply and demand of power, disrupting decades of business as usual for electric utilities. Maintaining service quality amid these dramatic shifts will require utilities to make massive new investments to futureproof their grids.
This includes investing in larger, more resilient transmission networks to integrate geographically dispersed renewable energy sources. Moreover, ensuring that everyone has access to reliable and affordable electricity will also require utilities to finance additional connections to support a growing grid.
Given the scale of investments required, utilities are expected to become much more capital intensive, thereby altering their exposure to certain performance risks in the short-term. Nonetheless, shifting away from fossil fuels also represents a significant opportunity to lower costs and improve resiliency for utilities in the long-term.
To understand why, we can see that utilities that struggle to cope with growing demand often resort to liquid fossil fuels (such as diesel) as an alternative power source. This power is typically obtained from the private sector on short-term contracts, which are quick to install and contract, but often come at a huge cost to utilities themselves.
Instead, by leveraging lower-cost renewable alternatives, coupled with appropriate system planning, utilities can significantly lower their operational costs. What’s more, having a larger share of renewables in a utility’s generation mix can also help to reduce the impacts of commodity price volatility.
To go further, decarbonising generation also offers an opportunity to realise greater gains from interconnection and cross-border power trade. Meanwhile, utilities can also draw on new digital tools and technologies for better managing demand and supply, thereby improving service reliability.
All this will empower new business models for utilities to expand their service offerings, thereby boosting their value propositions to potential consumers and investors.
Laying the foundations for stronger utilities in Malaysia
Insights from the World Bank report offer valuable guidance as Malaysia embarks on its own net-zero journey laid out by the National Energy Transition Roadmap (NETR). As the owner and operator of the national grid in Peninsular Malaysia, Tenaga Nasional Berhad (TNB) is seen as a critical enabler of the NETR’s goals and the nation’s broader RE commitments.
Which is why the national utility projects a higher investment allocation to implement the incentive-based regulation (IBR) mechanism for the upcoming fourth regulatory period (RP4) between 2025 – 2027 . In its recent financial announcement briefing, TNB forecasted a total capital expenditure (CAPEX) of up to RM13.8 billion which includes system improvements and initiatives to fast track its energy transition efforts.
The IBR framework was introduced in 2014 to promote efficiency in the nation’s electricity sector operations. The Imbalanced Cost-Pass Through (ICPT) mechanism under the IBR enables electricity tariffs to adapt to market forces, ensuring customers only pay for optimal costs for electricity – while determining a fair and reasonable return for TNB.
TNB has already started discussions for Regulatory Period 4 (RP4) with the Energy Commission (EC), which is the body responsible for regulating the nation’s energy sector. Ensuring fair returns under the RP4 will enable TNB to sustainably attract investments that are critical not only for the energy transition, but also to enable the delivery of world class service to Malaysians.
Backed by a strong track record, TNB aims to prioritise efficient infrastructure investments to create a robust grid that supports clean energy integration. Beyond paving the way for TNB to support the nation’s net-zero aspirations, the investments will also enable a world-class service to Malaysian consumers, contributing to the nation while bolstering the country for cross border power integration.
TNB is already working on initiatives to integrate distributed energy resources like rooftop solar panels into the existing grid, as well as adopting smart grid technologies to support new infrastructures for electric vehicles (EV), smart meters and advanced monitoring systems. Through its Smart Utility Programme, TNB is actively enhancing grid flexibility, positioning it for a future-driven role which will benefit the nation and rakyat
This includes pursuing a regional interconnection via the (APG) that will allow for a wider reallocation of renewable energy resources to decarbonise ASEAN’s power system, as well as strengthen the security of energy supply. Beyond commercial benefits, the APG will fast track the region’s transition by encouraging knowledge-sharing, capacity building and encourage private sector investments, catalysing ASEAN’s economy.
Empowering utilities to thrive in a new energy future
As guardians of the world’s power grids, utilities will be at the heart of efforts to decarbonise the world’s power supply and transmit more reliable electricity. The World Bank’s report highlights the challenges, as well as opportunities, facing utilities today against the backdrop of a complex and an evolving energy landscape.
Only well-managed and well-regulated utilities can provide clean, affordable electricity to a growing customer base, while ensuring financial sustainability to drive the economy. For Malaysia, TNB’s energy system investments have been critical in guaranteeing a secure and reliable power supply and bring in reasonable returns for the nation.
Going forward, successful implementation of RP4 with fair returns and investments in the energy system will be critical for TNB to continue doing what it does best – delivering world-class service reliability that is equitable for the rakyat while supporting Malaysia’s transition to a high-value green economy.