The price of energy

DURING the British Prime Minister’s question time in the British House of Commons last Wednesday, the British Prime Minister David Cameron and the Opposition Leader Ed Miliband had a heated debate over energy prices in Britain. This debate is not something new in Britain as for the past few months, British political parties have been coming up with ideas to try to bring down energy prices. In fact, rising energy prices is a global 
phenomenon due to the soaring global fuel prices and the same is true for us here in Malaysia.

But why do the global fuel prices affect our electricity bills? This a valid thought, but it might be worthwhile reflecting deeper on how this connection works. It all comes down to how electricity is produced. 

In Malaysia electricity is produced through four main sources - liquified natural gas (LNG), coal, petroleum, and hydro power. The most recent estimates put LNG at around 46 percent of the generation mix while coal and oil make up 52 percent, and the remainder being hydro. This means that almost all the power produced in the country is subject to the prices of LNG, oil or coal, since these are the primary energy sources.

The prices for these three commodities are set in the global markets. As LNG is a major component of our production mix, the price of LNG will have a significant bearing on the costs of power production. We often hear that LNG is cheap, but this is far from the truth. 

The US Federal Energy Regulatory Commission reports that the landed price of LNG in Asia is far higher than that in Europe or the US. For example, in October 2013, it is estimated to be USD 14.95 (RM47.84 per million BTUs) in China compared to USD 9.94 (RM31) in the UK and USD 3.20 (RM10.24) in the US. This wide disparity in landed prices makes the use of LNG in power production in our region an expensive endeavour. But this is also the price of having clean and environmentally friendly power production.

In a similar fashion, the price of oil will dictate the costs of oil-fired power production. The only consolation we can see is that coal prices are declining as China’s demand for the commodity has begun to slow. But the real silver lining in the cloud is that better technologies and new power plant designs can reduce the pollution that has been attributed to old coal-fired stations. Thus as the generation mix shifts towards more of the new technology-based coal-fired stations, the cost of power production may decline somewhat. But all this is predicated on there being no major political crisis or wars in the oil and natural gas producing parts of the world. If there is a shortage of oil or gas because of such a crisis, prices of all energy commodities will rise including that of coal since there may well be demand switching between the different sources. 

So whether we like it or not, electricity costs are heavily dependent on the prices of gas and coal on the international markets. We can ameliorate some of these effects by changing our power production mix. Indeed this is the plan. By the end of this decade we will switch to more power being produced by clean coal and hopefully that will reduce the costs of power production. The feed through effects of lower fuel costs can be significant 
enough to be noticeable in the average household electricity bill.

While this is a possible scenario, it must be remembered that power production is a capital and resource-intensive exercise. Long-term contracts have to be in place to make them viable. So it sometimes may not be possible to enjoy the effects of lower global energy prices when you are already locked into a long-term fixed price contract. We must therefore understand that the benefits of short-term price declines in the global market may not always translate into gains for the householder. As much as we wish to have cheaper electricity supply in the nearest future, this is not possible as we switch from LNG to coal in our power production plants. In the long run, however, we will have more to gain in terms of the price we pay for electricity supply, both financially and environmentally. 

Keep that in mind when you read your next electricity bill.

> The views expressed are entirely the writer's own.
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