It would be difficult to overestimate the degree of changes that will impact utilities in the coming decades – given they have the most challenging role to play in the energy transition. The challenges and opportunities discussed in our previous article will impact utilities in different ways, depending on diverse contexts as well as their capacity and capabilities.
For some electric utilities, energy transition goals already closely align with their corporate and financial objectives. But others require a major departure from standard operations. However, in all cases, utilities cannot navigate the shifting energy sector landscape alone. As they double down on decarbonisation goals, they will need urgent help.
Building sustainable utilities for the future will require concerted efforts from policymakers, regulators, development financiers, and the utilities themselves.
Driving a conducive ecosystem for green investments
The massive investments required to decarbonise electricity generation while maintaining affordable and reliable service quality will make utilities much more capital intensive. As such, utilities will be more exposed to certain performance risks – with access to sufficient and affordable private financing being one of the major challenges.
By providing stable, predictable, and transparent laws and policies, governments can help improve investors’ perception of sector-level (industry-specific) risks, thus minimising any barriers for utilities to acquire private capital. Moreover, effective public-private partnerships (PPP) could effectively spread large infrastructure investments between government, utilities, and investors.
Here in Malaysia, the government’s forward-looking strategy laid out by the National Energy Policy 2022-2040, supported by the New Industrial Master Plan (NIMP) 2030 and the National Energy Transition Roadmap (NETR), have positioned the nation as a prime destination for green and renewable investments.
The NETR is forecasted to boost the nation’s GDP value from RM25 billion in 2023 to RM220 billion while generating 310,000 jobs in 2050. A large contribution is expected to come from the implementation of flagship catalyst projects led by key industry players like Tenaga Nasional Berhad (TNB), Energy Commission (EC), Khazanah Nasional Berhad, SEDA and Malakoff, among others.
Indeed, Malaysia experienced a 326 percent year-on-year surge in green investments to US$1.03 billion last year – a strong sign of market confidence in the nation’s green potential. Going forward, ensuring that utilities can recover reasonable costs through tariffs to remain financially sustainable will be of critical importance in delivering world-class service.
Expanding renewables ventures, growing cross-border interconnection, as well as implementing third-party access (TPA) are all necessary investments to be undertaken by utilities to maintain a stable and resilient transmission for a future-ready grid that is secure, affordable and accessible for everyone, regardless of background or location.
Given the greater capital costs for utilities to finance transition infrastructure, regulators need to explore options for dynamic tariff-setting mechanisms that are more responsive to external shocks. These innovations in tariff design must efficiently and fairly allocate additional transition costs between utilities and their customers.
Which is why TNB, as Malaysia’s leading power utility, is actively engaging the Energy Commission (EC) to discuss investment allocations for the fourth regulatory period (RP4) between 2025-2027. In this critical juncture, all parties will work towards developing an effective and balanced investment strategy either directly to the system or through the utilities via the Incentive Based Regulation (IBR) mechanism.
For Malaysia, a strong strategy will determine investors’ confidence in its capabilities at the same time ensuring its consumers, especially the vulnerable communities, stay protected through the transition.
For Malaysia, a strong strategy will determine investors’ confidence in its capabilities at the same time ensuring its consumers, especially the vulnerable communities, stay protected through the transition. As for TNB, it enables the implementation of necessary system upgrades for it to continue delivering best-in-class service and meeting evolving consumer demands, while guaranteeing financial stability that brings fair returns to its shareholders.
Building trust and credibility with sustainability governance
While good policies and regulations create the foundation for a sustainable energy transition, utilities themselves must also play their part. Poor operational and financial performance makes utilities a riskier target for private investment, raising utilities’ costs of capital or deterring private capital altogether.
Twenty-seven utilities tracked by the World Bank report could achieve cost recovery by improving their collections and reducing their system losses to below benchmark levels. It will ultimately be up to utilities to determine to what extent they are able to turn a favourable operating environment into long-term financial sustainability.
This will require improvements in infrastructure and service delivery, billing and payments collection, workforce management, and so much more. Nonetheless, the opportunities presented by the evolving energy landscape will not materialise on their own but must be proactively sought out and developed by utilities themselves.
In Malaysia, TNB recognises that a strong sustainability governance and leadership structure is vital to spearhead the sustainability agenda and maintain trust with customers and financiers. Hence TNB reformed its sustainability governance framework in 2022 by forming a Sustainability and Energy Transition Committee (SETC).
As the utility looks to invest over RM90 billion over the next six years until 2030 to futureproof the national grid, the SETC is tasked with overseeing TNB’s Energy Transition Plan – including the overall transition direction and decisions on climate-related matters to ensure its sustainability agenda can be materialised through informative and comprehensive decision-making.
Even if governments, regulators, and utilities all play their part, achieving the energy transition while ensuring universal access will create incremental costs for utilities. Modeling by the World Bank suggests that a typical utility would need a 1.2 percentage point decrease in its cost of capital to offset incremental costs of decarbonising power supply.
Here is where development financiers can play a key role by offsetting these costs to keep the energy transition and universal access to electricity affordable for everyone. Development finance institutions can scale up concessional capital that offers longer tenures or lower interest rates compared to traditional commercial financing.
At the same time, development financiers need to ensure that any concessional financing is linked to progress by utilities in improving their sustainability performance. Dedicated capacity building by development finance institutions can guide utilities, governments, and regulators in adapting to new energy market realities.
This support can include strategies for integrating renewable energy sources into existing grids, balancing investments in distributed and grid-scale renewables, and establishing fair and transparent support mechanisms for new renewable technologies.
Collaborating today to address tomorrow’s shared energy challenges
The world has already made great progress in bringing down the costs of clean energy, as well as increasing penetration of the most important clean technologies, but we need to dramatically accelerate that pace. A zero-carbon electric utility sector is fundamental – but to decarbonise the entire energy system, utilities also need active partners and facilitators.
What’s more, the opportunities for shared progress and common ground are now in abundance. From meeting increased electricity demand, to ensuring customer affordability, to even mitigating extreme weather events – there are plenty of areas ripe for collaboration between diverse stakeholders in the energy ecosystem.
The time to act is now, urgently, and the best way to do it is together. Only with concerted efforts can utilities ensure their own financial sustainability – and continue to provide clean, affordable, and reliable electricity to a growing consumer base in the new energy future.