Global perspective for utility regulation


  • Nation
  • Tuesday, 25 Jun 2019

The main objective of incentive-based regulation is to deliver efficient and reliable electricity supply at an efficient cost and reasonable tariff for its people.

THE Malaysian electricity industry has seen only a small increase in price over the past few years and that too has been limited to the industrial or commercial sector.

The electricity price is based on a number of key factors such as usage or consumption (effects of climate change), demand and cost-to-serve. Yet the cost of electricity in Malaysia is still among the lowest in the world.

By analysing the recent price changes in the Malaysian electricity sector and the price determining mechanism, then comparing the revenue in contrast to the per unit price on an international average, there would be a far clearer under­standing of the larger energy tariff landscape globally.

The intent behind the implementation of incentive-based regulation (IBR) that has been practised globally is to incentivise power utility companies to improve efficiency, create stability in the electricity supply industry, increase transparency and offer competitively-priced tariffs.

It is a mechanism used across a number of countries across the world including the UK, Canada and Denmark. Closer to home, one of the pioneers to introduce this was the Philippines.

Since 2014, Malaysia has put IBR mechanism in place as part of enhancing the electricity supply industry, making way for a more structured, transparent and informed way of tariff setting.

This also takes into cognisance the huge requirement for capital expenditure (capex) and operational expenditure (opex) by the utilities for upgradation and modernisation in order to maintain the reliability and quality of electricity supply, even with growing demand.

Let us approach each of these objectives one by one.

Reasonable tariff

Before embarking on meeting the objective of transparency and competitively priced tariffs, let us understand – so how do we set the price of electricity?

The main objective of the IBR is to deliver efficient and reliable electricity supply at an efficient cost and reasonable tariff for its people.

Tariff revision is carried out periodically and consistently by the Energy Commission, which has been mandated to do by the Government. In fact, the IBR also determines the revenue allowable for TNB for providing electricity.

There are two components to the price for customers – a base tariff (the fixed amount) which is set at the beginning of each three-year regulatory period and has not increased since 2014, and the ICPT (Imbalance Cost Pass Through) which is a variable cost.

An important component or element in tariff setting is the flexibility of ICPT.

This mechanism allows power producers to reflect the actual prices of fuel in the global market, creating a more flexible power market while enabling the recovery of actual fuel-related and other generation specific costs.

 

 

The ICPT is determined every six months based on fuel prices trends.

When prices are lower, the savings coming from lower coal and LNG prices, alongside efficient coal-fired power, doesn’t just stop with producers. Instead, it is passed through to customers in the form of ICPT rebates.

The actual ICPT component part of the electricity price is passed onto customers in the form of a surcharge or rebate depending on the fuel trend going upwards or down.

Throughout the implementation of IBR from March 2015 to June 2018, electricity customers have enjoyed ICPT rebates amounting to RM6.3bil.

By following this mechanism, the economy is saved from possible instability of constantly changing commodity (fuel prices).

IBR transformation

IBR is a bold transformation for Malaysia’s energy sector. This is model aims to ensure that the nation can pay for its needs of the future, rather than being held back by the costs of the past.

It provides a framework for power companies to quickly adapt to the changing global energy marketplace – streamlining regulatory burdens, encouraging innovation and incentivising progression towards maintaining reliability and quality of power supply not just for the present but also for the future.

Locally, TNB is operating in a tougher environment, amid moderating electricity sales growth, as the country’s electricity consumption – which used to be 1.1% of gross domestic product (GDP) – has been declining since Malaysia’s gradual move away from being a wholly industrial nation to a larger service sector.

IBR, unbeknown to many, has been in place in the Malaysian power sector for over five years.

Under IBR, and the Government’s programme to reform and liberalise the power industry, investment returns on TNB’s two core businesses in distribution and transmission have been regulated and are on a declining scale.

TNB has been allowed to earn 7.3% from its regulated assets from 2018 to 2020, down from the 7.5% allowable in the 2015-2017 period.

Despite a lower allowable return on its assets and potentially experiencing slower sales growth, TNB remains committed to powering the nation and making lives better and brighter for Malaysia and Malaysians, by allocating RM18.8bil in capital expenditure for its transmission and distribution grid for 2018 to 2020 against RM15.08bil for 2015 to 2017.

Initially only implemented with TNB, the framework was then subsequently rolled out to Gas Malaysia Berhad, and other energy stakeholders.

A positive view of the framework is upheld by some significant successes to date.

In welcoming change, this new model puts to rest long-held perceptions of cost inefficiencies, unclear tariffs, and confusion over power purchase agreements.

In Asean, Malaysia was among the first countries to embrace this framework, after the Philippines.

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