How will the government deal with rising energy prices?
WITH a review of power tariffs slated for the end of June, there have been rising concerns over what to do.
The imbalance cost pass-through (ICPT) mechanism would take into account the higher energy costs, namely, the price of coal, in pricing the new tariffs. This has the industry players jockeying over how to divvy the cost increase in the generation of power between the different stakeholders.
“The issue at hand is who will pay. Will it be the consumer, government or power companies?” asks an analyst.
Essentially a fuel price pass-through, the ICPT allows Tenaga Nasional Bhd (TNB) to reflect changes – either an increase or a reduction – in fuel and other generation-related costs in determining electricity tariffs.
The mechanism, which was introduced in 2014, has played a key role in electricity production and the price we pay to turn on the lights.
A system similar to the ICPT has been adopted by other countries such as Australia, the UK and closer to home in Singapore, Thailand and the Philippines.
Locally, tariffs are assessed and adjusted every six months to ensure that electricity prices can adapt to changing fuel prices.
Under this mechanism, consumers had enjoyed RM6.3bil in rebates as at end-December 2017 due to the low cost of coal, which makes up over 50% of the cost of generating electricity.
However, since 2017, rising coal and gas prices have impacted the ICPT adjustments. As a result, a surcharge for businesses was introduced in July 2018.
For the period of January-June 2019, the national utility company has been allowed to continue implementing the ICPT mechanism.
The average base-tariff remained unchanged at 39.45 sen/kWh, but an additional cost of RM948mil or 2.15 sen/kWh ICPT surcharge will be passed through.
Businesses will once again pay an additional surcharge, while the surcharge for domestic customers amounting to RM308mil will be funded by Kumpulan Wang Industri Elektrik (KWIE). This electricity fund was also set up in 2014 to finance the difference between the cost of supply and end-user tariffs.
The money in this stabilisation fund originated mainly from savings gained from power purchase agreement renegotiations.
With the balance in the fund fast depleting and rising fuel prices, there are concerns on the continuity of the ICPT and the effect that it will have on power consumers.
In July last year, it was announced by the Energy, Science, Technology, Environment and Climate Change Ministry that the fund available in KWIE was RM760mil.
Should fuel costs remain high, this fund would likely be exhausted by the first half of next year.
Accounting for over 50% of the cost of generating electricity, coal plays a big role in Malaysia’s energy scheme.
Gas accounts for the lion’s share of the remaining cost.
As coal is imported, the dynamics of its market price impact tariffs.
Gas accounts for about 40%, while the balance comes from other types of fuel such as oil and distillates and hydro.
TNB’s fuel cost has been on an uptrend in tandem with the rise in energy prices.
The average coal price delivered during the quarter was US$102.5 per tonne, but coal prices had gone on to touch a high of almost US$120 per tonne in the middle of last year.
At press time, it was trading at around US$95.65 per tonne, which is still well above the US$75-per-tonne reference price that was set by the government.
As for regulated gas, it is purchased from national oil company Petronas at RM27.2 per million British thermal units.
Back to the ICPT, the issue is who will shoulder the high fuel bill especially when the stabilisation fund, which is part of the tariff revision policy, is depleting?
Looking at the various stakeholders in electricity generation, there are a few options.
As a regulator, the government could assume all responsibilities and absorb the cost, say observers.
Chances of this happening are debatable, given the high fiscal deficit it is already running.
However, studies on whether it is best for the overall economy if the government foots the bill need to be conducted.
Alternatively, TNB as the only supplier of electricity, could be asked to bear the cost, but that would have a huge impact on its profitability. Its share price has been under pressure over the possibility that may become a reality.
Another option could be to review coal contracts, although the savings might not be substantial and might be insufficient to absorb the cost increase between the market price for coal and the reference price.
This is because coal prices are determined by market forces and not coal suppliers.
There have been suggestions that the second-generation power plants shoulder some of the burden by reducing the price they charge TNB for generating power.
Not unlike the first-generation independent power producers, they could be asked to lower their capacity payments, where some savings could be channelled back to the stabilisation fund.
According to statistics, some 1,600MW capacity is due for renewal in five to 10 years. While negotiations could lead to better pricing, the savings generated again may not be substantial, according to analysts.
The other stakeholder in the electricity-generation equation is Petroliam Nasional Bhd (Petronas), which supplies natural gas to power plants that make up nearly half the fuel cost.
Some believe that since gas is no longer the overwhelming energy source to generate power, Petronas may be in a position to keep gas prices at the current levels, which could generate the largest source of savings for the system.
“But this would mean foregoing some of its revenue and it will take government intervention to make it possible,” says an analyst.
To be fair, Malaysia is not the only country grappling with the changing cost of electricity generation.
Energy Watch noted that Singapore’s electricity prices recently saw an average 6.9% rise, while in the Philippines, its power company Meralco had imposed a series of price increases on consumers last year. The weakening peso was one challenge the company faced, as rising fuel prices and relative increases in costs pushed up generation costs.
But the fact remains that increasing the electricity price is not something that would go down well with the public, who are already struggling with the high cost of living.
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