The rising cost of living makes keeping up with our bill payments more burdensome than before, so we tend to play the blame game and concoct wild ideas of money-hungry power companies and government officials cheating the everyday people out of their hard-earned money. If you’re here, chances are you clicked on this article to get right into the scintillating details behind your monthly electricity bill. But it turns out, our anger at electricity prices is quite misplaced. Energy Watch has taken a peek at how electricity prices in Malaysia is calculated, and how various measures are put into place to ensure we receive a stable and affordable supply of electricity.

1. A Framework for Competitiveness and Effectiveness

A few years ago, the Malaysian government put together a framework to stimulate the country’s energy sector. Called Incentive-Based Regulation (IBR), this framework was designed to let power companies adapt to the changing global energy market.

IBR was introduced to increase transparency and efficiency in the energy sector

It was also meant to increase transparency and push efficiency for the whole energy industry. This involved breaking up the process of supplying electricity into separate components, for example: differentiating the process of generating electricity (generation) from the process of transmitting that electricity to users (transmission). This allows the country’s regulatory body, the Energy Commission (EC), to break up our electricity tariff into multiple components that together, can more accurately reflect the costs of supplying electricity.

2. Flexible Tariff Calculation to Respond to Global Factors

So, under IBR, the majority of our electricity tariff is made up of the base tariff. This base tariff includes all fixed overhead costs and operational costs, and costs associated with purchasing fuel and generating electricity from that fuel. This base tariff is reviewed every 3 years, and is set based on past electricity supply costs, and predictions of future electricity supply costs. However, one component of the base tariff involves costs that are constantly fluctuating. In the global energy market, the cost of various fuels used to generate electricity is known to change unpredictably. But that means that our base tariff would not always reflect the market price of electricity! Either consumers pay more than they should, or utilities have to run at a loss, which will negatively affect our electricity supply in the long run.

ICPT allows our electricity industry to respond to fluctuating fuel prices

That situation would be far from ideal, but don’t worry about it. That’s exactly the problem we are avoiding ever since the government implemented the Imbalance Cost Pass Through (ICPT) mechanism. ICPT is a mechanism under IBR that ensures our electricity industry is able to respond to fluctuating fuel prices. How does this work? Firstly, the government and regulatory bodies analyse the energy landscape and set a base tariff that consumers pay for their electricity. If fuel prices dip lower than the forecasted amount, utilities will spend less money supplying electricity to users.

The savings that utilities enjoy will be passed on to consumers through an ICPT rebate, lowering everyone’s electricity bills for a period of time (from March 2015 to June 2018, electricity customers enjoyed ICPT rebates amounting to RM6.3 billion). Conversely, if fuel prices spike, those additional costs can be passed on to users through an ICPT surcharge.

3. What’s KWIE’s Role?

We have seen now how IBR and ICPT have been put in place to ensure Malaysia’s electricity supply remains as stable, secure and affordable as possible. But despite these measures, times where fuel prices experience a spike will lead to a heavier burden for electricity consumers around the country. As balanced as these mechanisms might be, some parts of the country are home to citizens who simply cannot afford to take on the additional toll to their electricity bill. Keeping these people in mind, the Malaysian government established Kumpulan Wang Industry Elektrik (KWIE). KWIE is a fund controlled by our Energy Commission, and was set up with the goal of managing and controlling the impact of electricity tariffs on consumers.

The IBR framework and ICPT tariff mechanism are designed to push cost and operational efficiencies, and occasionally, these efficiencies are successful in generating monetary savings. All savings from costs associated with supplying electricity is kept in this fund, which is then used to offset the impact of surcharges on residential consumers.

KWIE can help buffer electricity prices in times of financial crisis

Recently, our fuel and generation costs were higher than expected, resulting in an extra cost being passed on to consumers through ICPT surcharges. To ease this burden, the Malaysian government has approved the RM308 million cost for residential consumers to be funded by KWIE. This means users consuming electricity at a residential level will enjoy surcharge-free tariffs for the rest of this quarter. While commercial and industrial users will still receive an ICPT surcharge, this surcharge amount has been reduced from 2.55 sen/kWh to 2.00 sen/kWh.

Not only that, KWIE can also function as a way to buffer electricity prices at times of financial crisis. The current global COVID-19 pandemic has impacted citizens and businesses from almost all sectors across Malaysia. Taking that into account, the government recently announced a 2% discount on electricity bills for commercial, industrial, agricultural sectors, as well as domestic consumers from 1 April until 30 September 2020. This discount is made possible by KWIE, and will ease an estimated RM500 million from our electricity bills.

Now, we have a better understanding of the various initiatives put in place to ensure stable, affordable and secure electricity to Malaysians. KWIE was established to ensure our electricity supply is affordable, especially for the most vulnerable citizens. But the fund contains a finite amount of money, and consumers cannot rely on KWIE to buffer electricity costs indefinitely. The government is hard at work developing different ways for us to keep this fund alive and available for citizens who need it most. Reforms such as the recently announced MESI 2.0 are targeted to contribute for a more sustainable and affordable energy landscape. While these wheels are in motion to ensure we continue receiving the best service utilities can provide, we can at least rest assured that KWIE will be there to support us when we need it.