A stronger economic recovery is expected to drive electricity consumption higher in the coming months. Analysts say that if indications from players in the manufacturing sector are true, the market could see industrial demand turn positive.
The interest in electricity tariff is two-fold. Firstly, there is the expected rise in consumption. Secondly, the next tariff review is due on Jan 1 next year.
Second Finance Minister Datuk Seri Ahmad Husni Hanadzlah recently announced that the Government was studying the current tariffs for utilities such as water and electricity in relation to competitiveness and cost of doing business.
Husni was quoted as saying that the Government was looking at the possibility of reducing electricity tariff for all consumers, not just for industries.
Separately, Energy, Green Technology and Water Minister Datuk Seri Peter Chin said the Government would review electricity tariffs in January next year. Tariffs may rise or fall depending on cost of fuels such as coal and gas, he said.
The decision is awaited with much anticipation. AmResearch points out that currently, natural gas prices – even after the recent decline – are at a premium of 12% above the subsidised tariff of RM10.70 per million British thermal units for the power industry.
As such, reducing the power industry’s cost of gas could mean raising Petronas’ natural gas subsidies, which amounted to RM20bil as of year ended March 31, along with opportunity costs amounting to RM97bil since 1997.
“It is unlikely that the Government will increase fuel subsidies given the national budget deficit. Also, this would be inconsistent with the Government’s longer term policy to move natural gas prices towards a market-based mechanism. But we estimate a 10% decrease in natural gas costs could be offset by a 1% decrease in electricity tariff,” says AmResearch.
Whatever the decision may be come January, what is certain is that electricity sales should be picking up in the months ahead.
Says Citigroup: “Our economist sees the current pullback as a temporary breather rather than a fundamental shift in the recovery’s trajectory. A cyclical recovery will continue as final demand from developed economies stabilises.
“We expect full-year demand to grow 4.3% on economic recovery. Our economist sees the economy recovering to 5.2% gross domestic product growth next year from a contraction of 2% this year.”
Generally, electricity demand tends to be weakest towards the end of the year and during festivities, especially around the Chinese New Year period.
Therefore, it is not surprising that electricity sales in Peninsular Malaysia contracted 4.6% year-on-year in October, following a 1.3% year-on-year growth in September. Collectively, September and October saw a contraction of 1.6% in sales.
On a month-on-month basis, sales fell 6.4%. Electricity sales to all major consumer groups contracted with industrial customers recording 4.5% lower sales, commercial sales was down 3.8% while domestic fell 6.3%.
Analysing the data, demand from the domestic sector in October experienced the steepest month-on-month decline of 10.9%, as many were away from home for the festivities. Similar observations were made during the preceding Hari Raya period.
Domestic demand aside, on a commercial basis, Kenanga Research believes businesses are also keeping tabs of their energy consumption as commercial electricity rates are higher than any other utilities comparatively.
“Meter readings for consumption demand usually lags actual power consumption by a month. As such, demand in October was dampened 6.4% by the Hari Raya holidays which fell in mid-September this year,” AmResearch says.
For instance in 2008, the Hari Raya holidays fell in early October. This partly caused power demand in November 2008 to decline 7.7% on a monthly basis.
AmResearch expects power consumption in the first quarter of next year to be weaker than the fourth quarter of this year.
Looking ahead, it expects Tenaga Nasional Bhd’s electricty demand to grow 4% for financial year ending Aug 31, 2010 (FY10), 5% for FY11 and 6% for FY12.
AmResearch is of the view that power demand, (which will be partly offset by coal consumption) will not have as much impact as a power tariff adjustment, or changes in coal prices.
It says TNB’s management has guided that coal costs for FY10 may come in at US$88 per tonne based on its rolling average costs.
But as spot prices for TNB’s blended coal requirements currently trade at US$66 per tonne, all-in coal costs for the group could still be below US$80 per tonne.
The current weakness in coal prices is positive for TNB, which imports all of its coal from international markets and currently has little price hedging in place.
By Macquarie’s estimates, a US$1 per tonne reduction in coal prices would add 1% to TNB’s FY10 core (ex-forex) profit estimates. Macquarie has a RM4.23bil FY10 profit estimate for TNB.
AmResearch estimates that a US$5 per tonne reduction in coal costs could improve TNB’s FY10 net profit by 9%, while Kenanga sees TNB’s FY10 recurring net profit maintained at RM2.5bil.
“Although October demand appears weak, we believe it is not representative, given that most segments are on a recovery trend,” says Kenanga in a note.
The research house estimates 2.4% Peninsular Malaysia growth in FY10, with a likelihood for more upside. “We expect TNB to benefit from FY09’s low base effect, stabilised coal cost and potential base tariff revisions in January 2010,” it says.