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IBR Incentives for a Better Energy Landscape

After decades of development within the power industry in Malaysia, the nation’s energy landscape is now experiencing the next phases of progress. To meet the country’s growing energy demand, the Malaysian Government has continuously introduced reform initiatives to ensure the long-term success of the nation’s power sector.

These reforms aim to drive efficiency, reduce energy costs, and improve the service levels of the power sector. These ambitious steps will form the foundation of an energy landscape which is sustainable far into the future. A key part of that transformation is the introduction of the Incentive-Based Regulation (IBR) scheme which we have seen success globally.

IBR as a game-changer

Incentive Based Regulation is a bold transformation for Malaysia’s energy sector. This is a model which aims to ensure a nation can pay for its needs of the future, rather than being held back by the costs of the past. IBR provides a framework for power companies to quickly adapt to a changing global energy marketplace – streamlining regulatory burdens, encouraging innovation and incentivising success.

IBR provides a framework for power companies to quickly adapt

Malaysia’s power industry is clearly welcoming this change. This new model puts to rest the long-held perceptions of cost inefficiencies, unclear tariffs, and confusion over power purchase agreements. In ASEAN, Malaysia was amongst the first countries to embrace this framework, after the Philippines.

IBR has been in place in Malaysia’s power sector for over four years. Initially implemented with Tenaga Nasional Berhad (TNB), this framework was subsequently rolled out to Gas Malaysia Berhad; other energy stakeholders have also shown a keen interest. That positive view is upheld by some significant successes to date.

Recognising success in IBR 

(1) ICPT savings of RM6.3 billion

An important part of IBR is the flexibility of Imbalance Cost Pass-Through (ICPT). This mechanism allows power producers to reflect the actual prices of fuel, creating a more flexible power market. These savings come from lower coal and LNG prices alongside efficient coal-fired power. It doesn’t just stop with producers, but are passed through to customers in the form of ICPT rebates.

Throughout the implementation of the IBR from March 2015 to June 2018, electricity customers have enjoyed ICPT rebates amounting to RM6.3 billion. What this means to a residential customer is that those with an average bill of RM200 per month would save roughly RM300 over the period.

(2) Better performance and higher customer satisfaction

IBR is not just about direct financial savings, but building a more sustainable ecosystem. That means encouraging a positive customer attitude is an equally important indicator of success. Customer satisfaction in the Malaysian power system has consistently increased over recent years. In 2017, TNB recorded a customer satisfaction index (CSI) score of 8.1 out of 10. This is a direct result of significant performance improvements that see Peninsular Malaysia enjoying one of the most reliable energy networks – comparing favourably with other advanced countries.

(3) Prudent spending by the utility

Equally important is the stability of the power producers that form the backbone of the energy landscape. IBR provides a predetermined budget that ensures utility companies act prudently with their financial resources. That also provides an incentive for innovation and efficiency that benefits customers by continuing to find better ways of working and driving costs down. This is evident in the recent KETTHA announcement that electricity tariff in the Peninsular to remain unchanged despite more advanced infrastructure development investments are to be implemented.

(4) Earnings stability

The financial prudence built into IBR ensures the sustainability of utility companies. IBR and ICPT work together to ensure long-term earnings stability that can respond to a fluctuating global environment. That financial confidence is reflected in the share price of national utility provider TNB, which has enjoyed stable growth since the introduction of IBR. That stability reflects positively not only on the company and industry but also on the wider economy. The recent record dividend paid out by TNB not only benefits the institutional investors at the heart of the financial system but the heart of the nation in the Rakyat itself.

IBR is about building on success and tackling challenges

(1) Challenges in forecasting

IBR is not without its challenges. This system is founded on a forward-looking regulation, forecasting electricity demand and predicting future costs. Ensuring accuracy in those predictions over a three year period is a difficult proposition. The spike in electricity demand from the El Niño phenomena in the year 2016 gives just one example of that difficulty.

(2) Economic conditions

Equally challenging is the fast-moving nature of the modern global economy. Fluctuating global conditions impact all nations, and the unpredictability of this landscape means currency prices, in particular, are subject to change. The Malaysian ringgit has suffered from these challenges in recent years, showing a direct impact on fuel prices and vital parts for the energy industry.

(3) Technology disruptions

One of the greatest opportunities for the energy industry throws up another challenge. Technology is fast-moving, and disruption in this space is tough to predict. Evolving technologies such as battery storage, alongside accelerating adoption of renewable energy, continues to impact the landscape. The UK’s RIIO model (Revenue=Incentives + Innovation + Outputs) shows just one-way regulation can continue to adapt to meet these changing conditions.

IBR is a framework that adapts

Despite the challenges, IBR is a framework that is designed to adapt. Its ability to meet the challenges of a changing landscape is part of its strength. Understanding the right way to manage that evolution is an on-going learning process undertaken by both operators and the regulator.

The Energy Commission and Malaysian Government have laid out a roadmap for the future of this framework. That roadmap helps maintain focus on the benefits, and ultimate goals of IBR. Much like IBR itself, that framework is ready to adapt to deliver the best possible outcome.

IBR provides a framework that continues to drive efficiency in the power sector. That efficiency isn’t just a benefit to industry but reflects back to each citizen of Malaysia, every time they flick a switch in confidence that their light will turn on.

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