Rising fuel costs, escalating demand

As Malaysia and the world recover from the COVID-19 pandemic, industries and households are gearing back into full form. According to a recent analyst report, electricity demand for Peninsular Malaysia in the first quarter of 2022 charted a 4% increase year-on-year.  

On the back of rising demand, fuel prices such as natural gas and coal have also risen. Earlier in March, the Energy and Natural Resources Minister, Datuk Seri Takiyuddin Hassan announced that the rising coal prices had pushed the country’s electricity generation costs up by 45%. Given that coal makes up nearly two-thirds of the peninsular’s power generation fuel source, the spike in coal import prices have dealt a tough blow on the country’s utilities. 

Over the past year alone, countries like Singapore, Thailand, Hong Kong, Italy and Germany have started increasing their electricity prices or tariff to cope with the impact

The on-going Ukraine-Russia tensions have caused global gas supplies to be cut off, driving up electricity prices in many parts across the world. Over the past year alone, countries like Singapore, Thailand, Hong Kong, Italy and Germany have started increasing their electricity prices or tariff to cope with the impact. These added pressures have cast a question mark over Malaysia’s electricity prices, as power generation costs continue to spike within the year’s quarter.  

ICPT provides affordability and flexibility 

In Malaysia, the cost of power generation, which includes the cost to purchase fuels such as coal and gas, makes up more than 65% of the total electricity base tariff. Although Malaysia has been slowly moving towards its market liberalisation, much of the energy industry remains tightly controlled by government policy. 

Unlike Europe and other competitive power markets in the West, the base tariff review and setting fall solely under the purview of the Malaysian federal government. Earlier this year, it was announced that the base electricity tariff will be maintained throughout the current regulatory period from 1 February 2022 to 31 December 2024.  

Although market liberals may argue the system distorts market supply and demand, the policy has allowed consumers in Malaysia to benefit from price stability for decades. Hikes in fuel prices, like those seen in Britain, would not translate immediately to customers. Customers are instead buffered with a fixed electricity price for a period of time, the review of which is done every six months by regulators.  

This mechanism, which allows regulators to calculate, project, and plan for costs ahead of time, is called the Imbalance Cost Pass-Through (ICPT) mechanism. Implemented since 2014, the ICPT mechanism helps protect the industry against fluctuating fuel costs, by reviewing fuel prices and generation costs every six months.  

Following the period’s review, the government decides on a surcharge or rebate for customers for the six months, based on the projected fuel costs for that period. This future-planning aspect of the ICPT mechanism allows customers to enjoy fixed electricity prices for that period of time, before the next ICPT review is conducted.

Malaysians protected against shocks 

At the most recent ICPT regulatory period, which set the cost pass-through for February to June 2022, residential users in Peninsular Malaysia enjoyed a rebate of 2 sen for every kilowatt-hour (kWh), while industrial and commercial users paid a surcharge of 3.7 sen/kWh. 

The announcement was made despite higher fuel and generation costs for the previous six-month period, resulting in additional generation costs of RM1,672 million. To cushion the impact of these costs, the Government had decided to utilise available funding from Kumpulan Wang Industri Elektrik (“KWIE”) amounting to RM715 million. The current rebate for domestic customers of 2.00 sen/kWh was thus maintained, reflecting no changes to consumers’ monthly electricity bills.  

Since the introduction of the wider Incentive-Based Regulation (IBR) framework, RM8.6 billion of ICPT rebate and RM5.3 billion of ICPT surcharge have been passed through to the commercial and industrial consumers. The continuation of the nation’s ICPT mechanism, under the larger IBR framework, would allow for the safeguarding of the welfare of lower-income communities against sudden price hikes. 

While fuel costs may eventually be passed through to customers, the country’s ICPT mechanism affords consumers a level of stability through its six-month buffer period. Although the global energy crisis casts a shadow over future power prices for the nation, the maintenance of the ICPT mechanism will be seen as a crucial driver for protecting consumers against global uncertainties.

Despite the global crisis, consumers in Malaysia still enjoy subsidies and reduced prices thanks to protective mechanisms like ICPT.

Energy literacy needed to protect future

Despite the global crisis, consumers in Malaysia still enjoy subsidies and reduced prices thanks to protective mechanisms like ICPT. Rising fossil fuel prices and fuel shortages across the globe will however undoubtedly put pressure on the government’s coffers. 

TNB has recently announced a 10.5% drop in its profit after tax (PAT) for the First Quarter of Financial Year 2022 (1QFY2022) despite revenue increasing on the back of escalating electricity demand. The drop in profit was caused by rising prices of fossil fuels, which were not directly translated to customers during the first quarter. 

Although both federal regulators and power utility around the world have made strong moves to protect consumers against electricity price hikes, conscious action on the part of consumers must be equally promoted. Energy efficiency practices and habits must be cultivated to mitigate a subsidy-dependent mindset. While the government has put out a renewables roadmap to strengthen the country’s energy ecosystem, consumers must also play their role in helping manage the country’s energy supply.