Under the newly announced Malaysia Electricity Supply Industry (MESI) 2.0 reforms, independent power producers (IPPs) in the country will be empowered to source fuel on an open market for the first time. With fuel costs accounting for roughly 40% of the electricity tariff and nearly 70% of power generation costs, this represents an important opportunity to reduce costs in electricity generation and drive down tariffs for consumers.

Prior to these reforms, IPPs sourced coal solely from the primary supplier, TNB Fuel Services, and gas from PETRONAS, the nation’s oil & gas company. New rules for fuel sourcing will allow power generators to obtain fuel sources, such as natural gas and coal, from other sources. The plans are expected to be approved by the nation’s Energy Commission (ST) by the end of 2020, and a pilot program expected to precede full rollout in early 2021.

the ability to source fuel competitively is a positive move for energy players

Approved by Malaysia’s Cabinet in September, MESI 2.0 sets out a roadmap to further liberalise the nation’s electricity ecosystem. Covering a wide range of reforms, it also includes the introduction of new market mechanisms, changes to the regulatory market structure and a pathway to a liberalised retail market. Competitive fuel sourcing is another element under those reforms.

“The most important thing is fuel procurement, if we want to have cost efficiency across the value chain. Fuel is more than half the tariff structure, because there are also fuel procurement elements under power generation,” said Energy, Technology, Science, Climate Change and Environment Minister Yeo Bee Yin, speaking to The Edge about the MESI 2.0 reforms.

The rollout of MESI 2.0 will be overseen by MyPower, an independent company established by the government specifically to deliver its reform programs. MyPower will consult with IPPs until the third quarter of 2020, to help the Energy Commission establish rules and incentive mechanisms for competitive fuel procurement.

Presently, the ability to source fuel competitively can be helpful for energy players, particularly during a time of fluctuating global fuel prices. Energy Commission figures reveal that over the last four years, the Applicable Coal Price (the periodically determined price of coal for electricity generation in Peninsular Malaysia) has risen from a low of RM10 per one million British thermal units (mmBtu) to over RM20/mmBtu. This is especially so when key fuel sources such as coal and gas account for 84% of electricity generated in Malaysia.

such fixed prices would lead to an unsustainable long-term policy

Comparing the effects of regulated and competitive natural gas prices offers us further insight. In 1997, legislation to regulate the cost of gas for the power sector was introduced, creating an effective subsidy. By 2008, it was recognised that such fixed prices would lead to an unsustainable long-term policy, and efforts began to balance regulated gas prices against true market value of the commodity.

Under the Gas Supply (Amendment) Act 2016, the cost of regulated natural gas was set to increase by RM1.5 every 6 months until a reference market price was reached. Once this reference market price – which is a price assessed against Malaysia’s liquid natural gas (LNG) export price – is reached, this escalating price model will be discontinued. Under this act, the price of regulated piped natural gas for the power sector increased from RM15.2/mmBtu in January 2014 to RM28.7/mmBtu by July 2019, and is set to continue increasing at the current RM1.5 rate every 6 months. Yet, at the same time regulated piped gas prices have risen in Malaysia, LNG indexed unregulated piped gas prices – which apply to any new purchase contracts – have been falling.

The opening up of gas markets to enable cheaper fuel sourcing in power is already having an impact on power producers. Tenaga Nasional Berhad (TNB) entered a deal earlier this year to source gas from global giant Shell, buying at an open market price lower than the regulated price of gas in Malaysia. The pilot batch of gas is expected to be firing up Malaysia’s power stations by the end of 2019. Under the deal, TNB Fuel is set to deliver 3.5 trillion British thermal units (TBtu) of gas to TNB’s Tuanku Jaafar Power Station in Port Dickson and TNB Connaught Bridge Power Station in Klang.

This deal highlights how a move to leverage competitive market pricing can provide significant savings to power producers. If an IPP operating a gas-fired power station identifies a value saving from a sudden fall in gas prices, they are able to react and purchase that fuel to leverage cost savings for their business. With fuel accounting for 40% of the electricity tariff, those savings could have a significant impact for consumers.

In a dynamic marketplace, flexibility can be used to leverage significant value for operators. With IPPs able to benefit from more competitive fuel prices in open market conditions, they are better positioned to reduce the costs involved in producing the electricity that keeps Malaysia’s lights on. Consumers who rely on that electricity to keep their homes powered are themselves positioned to potentially benefit from cheaper tariffs.

Leveraging competitive market pricing can provide savings to power producers

Flexibility is equally essential for energy security. If IPPs are able to purchase fuel more flexibly, and at lower costs, then the industry as a whole benefits from a more competitive and sustainable landscape. Open market fuel sourcing is an important step in Malaysia’s electricity market liberalisation. It provides access to competitive pricing for IPPs, unlocking the opportunity of a more competitive tariff for consumers.