Rising cost of electricity generation

Big industry: Last year, the power generation industry spent RM15.1bil to generate 120,059 GWh for 8.45 million customers in Peninsular Malaysia.

This has raised questions whether tariff rebate of 1.52 sen kWh will be maintained

THE power generation industry in Peninsular Malaysia spent more than RM15bil per annum to meet the demand for electricity and this amount could spike this year due to high prices of fuel and coal.

This has raised questions whether the tariff rebate of 1.52 sen kWh announced by the government will be maintained as fuel costs soar.

Kenanga Research notes that the once fast-rising coal fuel prices have stabilised over the past three months and is now hovering around US$80 per tonne-level after skyrocketing to above US$100 a tonne in the second half of last year.

“As such, the higher cost could be reflected in first half of 2017, which could lead to lower tariff rebate in second half of 2017 in the next review window in June this year,” it says.

The price of coal has increased substantially in 2016 with Australia’s Newcastle coal more than doubled last year to almost US$110 per tonne in November, before slipping to about US$80 this month. It is currently trading at about US$81 per tonne.

Similarly, Indonesian thermal coal increased for seven consecutive months to a record US$101.69 per tonne in December 2016.

Kenanga says that the power utilities sector has been underperforming the FBM KLCI, especially the sector heavyweight Tenaga Nasional Bhd (TNB) albeit its resilient earnings quality.

“We believe the market is anticipating weaker results ahead for TNB, given the rising coal prices coupled with the weakening of ringgit. In our opinion, any earnings weakness is only a short-term phenomenon as the higher cost will be eventually passed through in the coming June review window,” Kenanga says.

It adds that ringgit has also stabilised against the US dollar at around RM4.40-RM4.50 levels which reduce the shock to overall coal-fuel cost in ringgit term.

Last year, the power generation industry spent RM15.1bil to generate 120,059 Gigawatt hours (GWh) of electricity for 8.45 million customers in Peninsular Malaysia.

For the financial period ended Aug 31, 2016, TNB average coal price stood at US$55.7 per tonne. The power giant consumed 25.4 million tonnes of coal last year to generate electricity.

According to TNB, import of coal for power generation was 20.8 million tonnes in 2013, 19.3 million tonnes in 2014 and 22.2 million tons in 2015.

In 2007, gas was the dominant fuel, representing some 68% of the electricity generation fuel mix in the country. However, the role of natural gas has been taken over by coal mainly due to the higher cost of gas.

In 2011, TNB had to generate electricity from expensive oil and distillates, which costs five to seven times more than gas when it was plagued by gas supply problems.

Currently, coal and gas constitute 50.8% and 45.2%, respectively, of the total power generation mix in Peninsular Malaysia while the rest is from hydro. The cost gas and liquefied natural gas stood at RM8.8bil for the generation of 54,235 GWh of energy, representing 45% of the total energy produced.

Meanwhile, the cost of coal were RM6.1bil to generate 61,028 GWh or generating about 51% of total energy in Peninsular while oil and distillates cost RM220mil for the generation of 540 GWh.

Is the 1.52 sen per kWh tariff rebate is here to stay?

“We believe maybe not as the piped gas price was scheduled to increase to RM21.20 per million metric British thermal units (mmBTU) in first half of 2017 and expected to increase another RM1.50 per mmbtu in second half of 2017 to RM22.70, which indicates that overall fuel costs are set to rise higher assuming other non-gas fuel costs remain unchanged,” Kenanga says.

Additionally, the government’s decision to maintain the tariff rebate at 1.52 sen per kWh in first half of 2017 probably due to the actual cost incurred in second half of 2016, which was partly hedged, was lower than the spot price, which was already up substantially.

Kenanga says these changes are earnings neutral to TNB on a lagged basis under the imbalance cost pass-through framework as fuel cost will be passed through to end-user eventually.

Meanwhile, one of the measures implemented by TNB is to build more efficient power plants such as Jimah East Power Plant in Port Dickson which cost RM12bil.

TNB owns 70% of the project through the acquisition of Edra Global Energy Bhd’s stake in Jimah East from 1Malaysia Development Bhd (1MDB) in July 2015.

The remaining 30% stake in Jimah East is equally owned by TNB’s strategic partner, Japanese conglomerate Mitsui and Co Ltd and one of the Japanese biggest regional power utilities, Chugoku Electric Power.

Two coal-fired units with 1,000 MW capacity each are being constructed at the site, which is strategically located and is crucial to the security of power supply in Peninsular Malaysia. The plant will generate additional 2,000 MW and will increase the capacity of the country to 26,940 MW by end-2020 from 22,748 MW currently.

According to TNB, demand is expected to increase in tandem with the country’s gross domestic product growth of between 4% and 5%. Electricity demand growth was at 4% in the financial period ended Aug 31, 2016.