The Rebate or Surcharge Poser for July

The electricity bill that was just put in your mailbox is the outcome of elaborate policy thinking. You may have heard of the Incentive Based Regulation (IBR) which, as a policy framework, dramatically changed and improved the electricity billing process.

Fairness is the ultimate factor

It started with the “unbundling” of the accounts of entities within Tenaga Nasional Bhd (TNB) to establish a transparent and accountable process. The groundbreaker in the exercise was the setting up of a “ring-fenced” Single Buyer structure within TNB. It is known as “ring-fenced” because it is a unique mechanism carved out of TNB to prevent potential conflict of interest and perceived favouritism, especially in developing the dispatch schedule of generators.

Single Buyer is a procurement body that buys electricity from TNB and independent power producers (IPPs) on the basis of least-cost dispatch scheduling. This effectively means Single Buyer maintains a hierarchy of costs, with the cheapest at the top.

Fairness is the ultimate factor, therefore ensuring that consumers get to enjoy cheaper electricity tariffs. The evolved Malaysian Electricity Supply Industry (MESI) to a Single Buyer model is a big change from the traditional, vertically-integrated monopoly.

The Single Buyer model under the IBR framework involved unbundling TNB management into five business entities, namely TNB Generation (TNBG), TNB Transmission (TNBT), Single Buyer (SB), Grid System Operator (GSO), and Customer Service (CS).

Each entity keeps its own regulatory account. This allows the regulator to break up components in the tariff. Your electricity rates are derived from a “bundled tariff” comprising sum of transmission, system operator, single buyer and customer service tariff.

ICPT was designed to capture variations in fuel costs

The IBR features the Imbalance Cost Pass Through (ICPT), a mechanism that allows adjustments to be made in consumers’ electricity bills every six months. The adjustments will produce varying rates of a rebate or surcharge to reflect changes in prices of fuel for electricity generation. Five cycles were declared from the period of March 2015 to June 2017, involving rebates of 2.25 sen/kWh in 2015, and 1.52 sen/kWh in 2016 and the first half of 2017.

All consumers are affected by the ICPT mechanism except domestic consumers who use less than 300kWh of electricity monthly, equivalent to RM77. ICPT was introduced by the Energy Commission in January 2014 under the IBR framework for the regulatory period January 2015 to December 2017.

IBR – known as Performance Based Regulation (PBR) in some countries – provides a systematic way to incentivise or penalise power utilities based on a set of performance indicators. The implementation of IBR in Malaysia is driven by the need:

• Of consumers to have electricity prices on par with the standard and quality of service they receive;
• For TNB to ensure a fair rate of return; and
• For the Government to develop a transparent economic regulation for TNB, as well as to promote efficiency.

As fuel costs contribute more than 50% to the electricity tariff, the ICPT was designed to capture variations in fuel costs and other specific costs in the generation tariff component of the Single Buyer entity. The adjustment is made with respect to the uncontrollable cost (business expenses that the manager does not have direct power over), i.e. change in fuel and purchasing costs from a base tariff.

The new base tariff of 38.53 sen/kWh effective on Jan 1, 2014, was derived using a fuel price assumption of US$87.50 (RM337.3)/tonne for coal, RM41.68/mmBtu for LNG and RM15.20/mmBtu for domestic gas. The difference between cost assumptions in the base tariff and the actual cost of procuring electricity is the adjustment that will be passed on to consumers in the next six months. The adjustment proposed by TNB, however, is subject to government approval.

Electricity demand in Malaysia is expected to increase to meet the remarkable growth of industries and business needs of the nation. There has been an increase in the cost of generating electricity, driven chiefly by four factors: fluctuation of fuel prices coupled with its depletion; the implementation of innovative technologies such as the smart grid and smart metering system being tried out in Melaka and Putrajaya; the Government’s subsidy rationalisation plan for domestic gas prices; and the advent of more expensive renewable energy.

The electricity cost may go higher, pushing up the price. Although the base tariff is fixed for the regulatory period of three years, the actual rates paid by consumers will vary under the mechanism. The rebate is therefore not in any way permanent. Similarly, should a surcharge kick in to compensate for changes in fuel cost, this too could be adjusted in the next review.

The next regulatory period will cover January 2018 to December 2020. Also, consumers should expect an announcement on the six-monthly ICPT review before the current term ends on June 30. That is when we find out if we will continue to enjoy rebates, or if a surcharge will be imposed instead.

If the surcharge is indeed a possibility, how should affected consumers react to the likely increase in their electricity bill?

Consumers are still in the six-month rebate period; but there is a distinct possibility that the rebate structure will be replaced with a surcharge owing to increases in coal price with the strengthening of the US dollar vis-a-vis the ringgit. If the surcharge is indeed a possibility, how should affected consumers react to the likely increase in their electricity bill?

Ultimately, under the current MESI scenario, the only area where consumers can contribute is the efficient use of energy. Unlike other commodities, electricity has a very low price elasticity. This indicates that the electricity consumption behaviour of consumers is less sensitive to changes in electricity prices. People need electricity regardless of price.

Furthermore, a relatively low price of electricity and primary energy in Malaysia, particularly gas that is heavily subsidised by the Government, has hampered the implementation of energy-efficient technology. Consumers should participate actively under the competitive electricity framework.

In this regard, consumers need knowledge and awareness of the concept of energy efficiency and its commercial benefits before they can effectively engage in energy-saving activities.

Dr Nofri Yenita Dahlan is a senior lecturer from the Faculty of Electrical Engineering, Universiti Teknologi Mara (UiTM) Shah Alam, specialising in energy economics. Her research focus is on power generation investment in a liberalised electricity market, power systems, energy policy, clean energy technology, and energy savings and efficiency.