Electricity industry not spared from domino effect of skyrocketing fuel price

  • Energy
  • Tuesday, 05 Apr 2022

KUALA LUMPUR: Fossil fuel comprising coal, natural gas and petroleum remains a vital role in the electricity industry globally and with skyrocketing fuel prices, Malaysia and elsewhere are feeling the brunt of rising cost of generation.

With the growing consumption seemingly failing to keep up with the rising costs, higher power billing for the end users seems inevitable.

Why Fuel Price Matter

Coal prices are influenced by the movements of the oil market, hence, the present rally in the energy markets presents a challenge to power operators.

This is especially when oil prices are expected to remain elevated not just because of the Russia-Ukraine conflict but also due to volatility in the supply and demand.

Although the geopolitical shock has somewhat subsided and so have oil prices, the potential loss of three million barrels per day of Russian crude and refined products starting in April following sanctions, appears to be among reasons for a higher price again soon.

The oil prices already topped US$139 per barrel early this month, and are pushing up the coal market in a way that would impact other sectors, entrepreneurs and individuals too.

To recap, the coal prices have been skyrocketing since late 2020 from buoyant demand and further supported by economic recovery in 2021, as well as shrinking production in key producer markets like Europe and China, propelling the prices for the mineral to its record high recently.

The benchmark Newcastle futures breached US$440 a tonne on March 2 following Russia's invasion of Ukraine, which began on Feb 24.

How Malaysia Cope with the Impact

At present, rising costs have been absorbed by the government by utilising funds from Kumpulan Wang Industri Elektrik (KWIE) to maintain the current rebate of two sen per kilowatt hour (kWh) for domestic and targeted users but electricity cannot generate power on its own.

At home, power plant generation and fuel make up nearly 70 per cent of the cost, and at the current coal prices trend, the additional cost for the next Imbalance Cost Pass-Through (ICPT) will be significantly more.

Against this backdrop, the government has announced no change in customer tariff schedule from Jan 1, 2022 to Dec 31, 2024.

The ICPT is reviewed every six months.

Between July and December 2021, a total of RM1.67 billion had been spent based on an average coal price of US$105 per tonne for fuel purchases.

In addition, about RM715 million has been allocated from KWIE to cover generation cost during the period.

However, an electricity tariff surcharge of 3.7 sen per kWh is imposed for non-domestic users from the commercial and industrial sectors for the period of February-June 2022 following a rally in coal prices.

In Thailand, Singapore and the Philippines, domestic users were slapped with a much higher domestic tariff compared to Malaysians.

In Thailand, Fuel Tariff (Ft) is used to calculate electricity bills, and derived from the Automatic Tariff Adjustment Mechanism formula.

Ft is reviewed every four months and for the January-April 2021 period, Ft rate is 1.39 satang/unit or an average of 3.78 baht per kWh, an increase of 4.6 per cent.

The country has to import additional liquefied natural gas (LNG) due to the shortage of natural gas supply in the Gulf of Thailand.

Natural gas makes up almost 60 per cent of fuels used to produce electricity in the country, and following the rise in global oil prices, electricity tariff is expected to rise to 23.37 satang per unit or about four baht per kilowatt hour from May to August this year.

Satang is a subdivision of currency, equal to one hundredth of a Thai baht.

Similarly, Singapore relied heavily on the imports of natural gas and the rise in its electricity prices casting a shadow over the economy, and eroded the ability of business to survive amid the pandemic crisis.

The power tariff for households was recently raised to 27.22 cents per kWh for the first quarter 2022 period versus 25.8 cents per kWh in the preceding quarter.

Concurrently, the gas tariff for households was revised upwards to 21.62 cents per kWh from 20.37 cents per kWh over the same period.

That means, the tariff has been raised by 22.6 per cent in January, while the gas tariff increased by 17.3 per cent on a year-on-year basis.

Surcharge Has Never Been Imposed on Domestic Users

The Incentive-based Regulation (IBR) is a framework based around predicting future production costs and tariff reference.

It is widely used across the utilities sector to determine tariff and adopted by countries like the United Kingdom, Australia, Japan, Singapore and New Zealand, among others.

In Malaysia, the current tariff had been implemented since 2014, where the IBR was introduced to ensure a transparent tariff is set, while the ICPT is a mechanism under the framework.

The ICPT is determined based on actual fuel price movement, allowing government to determine the appropriate steps in responding to price fluctuations in the global market.

This allows Tenaga Nasional Bhd (TNB) as the utility operator to reflect changes -- either increase or reduction in fuel and other generation-related costs in the electricity tariff every six months in the form of rebate or surcharge.

Through KWIE funding support, the electricity industry managed to cushion fuel prices impacts in the Regulatory Period 1 and 2, allowing a total rebate of RM8.6 billion to be given to the people compared to a surcharge imposed of RM3.7 billion since 2015.

Still, it is up to the government to decide whether to raise surcharge or maintain rebates and households may have to brace themselves for any possibility in the near future.

Therefore, households are encouraged to adopt energy efficiency initiatives and reduce unnecessary usage of electricity to minimise the impact of any surcharge that may be imposed.

Historically, surcharge has never been imposed on households. - Bernama

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Electricity , Coal , Russia-Ukraine , TNB , IBR , KWIE , ICPT


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