What the Cost of Fuel Means to You

What the Cost of Fuel Means to You

THIS ARTICLE WAS WRITTEN BY | 28.05.19 | 6:17 PM

Electricity has to start somewhere. Whether that’s ingenious technology converting the power of the sun, or the energy released from gas firing up a turbine, electricity all begins with fuel.

When it comes to Malaysia’s electricity supply, the question of fuel is also one of economics. As the cost of fuel changes, the cost of electricity production will change as a result. So what does Malaysia’s landscape look like, and how do these fuel price changes impact it?

Exploring energy and fuel costs in Malaysia

According to the Energy Commission’s 2017 Malaysia Energy Statistics Handbook, Malaysia produced over 150,000 gigawatt hours of energy in 2016, more than triple the amount produced just 20 years before. That just goes to show that growth really does spark a demand for electricity. Gas and coal accounted for 84% of the electricity generated, with a roughly equal share of importance in the country’s fuel mix.

When the price of coal and gas rises, the cost of producing electricity is certain to increase. But how much does it matter? In Malaysia today, fuel accounts for as much as 70% of the generation costs. That means when you turn on a light or watch Netflix on your TV, 70% of the cost of electricity you use is directly linked back to the price paid for generating power.

The role of ICPT

The Imbalance Cost Pass Through (ICPT) is a system designed to provide a sustainable and resilient energy landscape in Malaysia. It is a mechanism that allows tariffs to adapt to the changing price of fuel on global energy markets.

If it suddenly costs twice as much for the fishing industry to fish, you’d expect the price of fish to go up in the market. What ICPT does is provide the framework for the energy industry to adapt to shifting costs in the same way you would expect traders to do so in your local market. It’s about a responsive ecosystem that can adapt to change.

What ICPT does is provide the framework for the energy industry to adapt to shifting costs

ICPT was introduced in 2014, enabling power producers to reflect the price of fuel in the electricity tariffs charged to consumers. It’s an essential part of incentive-based regulation that forms the foundation of a sustainable electricity ecosystem. Between March 2015 and June 2018, consumers in Malaysia enjoyed more than RM6.3 billion in total rebate under the ICPT scheme. The most recent change to ICPT was announced in December of 2018, with an ICPT surcharge to be introduced for qualifying industrial and commercial customers from 1 March to 30 June 2019.

With planning currently underway for expanded market liberalisation under the emerging MESI 2.0 reforms, the role of ICPT in Malaysia’s ecosystem could well form part of this review. But the continued support for an incentive-based ecosystem ensures that a sustainable framework will be at the core of Malaysia’s energy future.

What impacts fuel prices?

The problem with fuels like coal and gas is they don’t come for free. The cost of these vital resources is linked to a global market system, where commodity prices fluctuate depending on the complex nature of supply and demand. So what are the major factors impacting fuel prices around the world? Here’s a simplified explanation of some key factors.

  • Production volume: The less of a commodity is available, the higher the price is likely to be. That means when major producing nations cut production, commodity prices increase. A recent example is the global price of crude oil rising in response to major producers such as Saudi Arabia and Russia scaling back production. The US’ shale gas boom showcases the other angle of this story, with huge production growth contributing to lower natural gas prices within the country over the last decade.
  • Changing demand: Demand is the other side of the supply-demand equation. With strong global economic growth, demand for energy increases. That means prices of commodities will rise. A slowing global economy will have the opposite effect. So with demand for the likes of gas, coal, and oil falling, the prices will also fall.
  • Geopolitical stability: Commodities are truly a global industry. That means global geopolitical factors can have a strong impact on the cost of fuel. Recent tensions between major oil producer Iran and the US Government not only limit supplies from a major oil producing nation, but also impact potential supplies along a key maritime highway in the Strait of Hormuz, through which around 20% of the world’s oil supply travels.
  • Evolving regulation: Changing regulations can impact both local and global prices. Recent regulations in China leading to increased customs checks on Australian thermal coal are one example, driving down global prices for this commodity, but driving up rival coal from Indonesia.

The international nature of the energy industry has resulted in an increasingly global outlook with national energy policy. That need to build resilience has led to many nation’s around the world adopting their own versions of incentive-based regulation in order to build resilience against global price changes.

What’s next for fuel prices?

While the price of oil fluctuates in an uncertain global market, it’s coal and gas which offer the most important insight into Malaysia’s energy costs. Recent price changes have been broadly positive for coal and gas, with falling prices painting a positive picture for Malaysia’s electricity industry.

It’s important to understand that those changing prices are also reflected in the projections made by power producers. Decisions about electricity tariffs aren’t just based on costs at a specific time, but how price shifts are assessed as part of the changing landscape we explored in this article. That means it’s not just cost at the point of purchase, but the question of what power producers expected that cost to be, and what they expect it to be tomorrow.

Whichever way these fuel prices change, with flexible mechanisms like ICPT, we have the framework to ensure a sustainable electricity ecosystem, whatever changing global conditions might bring.

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