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Exploring ICPT and IBR in Malaysia’s Electricity Ecosystem

The recent announcement made by Minister of Energy, Science, Technology, Environment and Climate Change, Yeo Bee Yin, has set out the electricity surcharge conditions for the first six months of 2020. These conditions are made under the imbalance cost pass-through (ICPT) mechanism, a key regulatory framework designed to let Malaysia’s electricity ecosystem remain flexible and sustainable, in an evolving electricity generation landscape.

According to her latest updates, the surcharge on electricity tariffs for commercial and industrial users will be reduced for the next ICPT regulatory period, from January till June 2020, while there will be no surcharge for residential users.

ICPT is a fundamental element of the incentive-based regulation (IBR) operating model, which underlines Malaysia’s electricity ecosystem. This regulatory system is one built on improving efficiency, enhancing service levels, and incentivising efficiency. It’s an operating model which provides power providers with a predetermined budget – thus encouraging them to act with improved financial prudence while at the same time encouraging greater transparency in the system.

Breaking Down Malaysia’s Electricity Tariff

Fuel and generation costs account for around 70% of the total tariff cost paid by consumers, with the remaining 30% largely comprised of operational and maintenance costs. This makes electricity tariffs extremely vulnerable to fluctuations in global fuel prices, such as those for coal and natural gas.

ICPT is designed to provide a flexible pricing mechanism that is assessed and adjusted every six months, allowing power producers to adapt to the fluctuating costs of generation. The average base tariff is 39.45 sen/kWh and is fixed until 31 December 2020. However, the fuel and generation component of the tariff is uncontrollable and is subject to ICPT review every six months.

Generation costs account for around 70% of the total tariff cost paid by consumers

“Any difference in actual cost [between] the price assumption [and] the base tariff will be adjusted every six months under the ICPT mechanism either in the form of a rebate or surcharge, depending on fuel costs and other costs generated during the period,” said Minister Yeo Bee Yin, “Through this mechanism, base tariffs are determined by the average price of coal and gas fuels during the regulatory period.

This ability to adapt is vital in ensuring that Malaysia’s electricity supply industry effectively balances the on-going challenges of the energy trilemma, which poses the question of how operators ensure secure access to electricity while also maintaining affordability and operating in a sustainable manner.

Forecasted Fuel Prices and Real-Time Charges Explained

ICPT provides the element of flexibility within ‘regulatory periods’, which are three-year cycles in which the base electricity tariff is set by Malaysia’s Energy Commission. The first regulatory period (RP1) ended in 2017, with the second regulatory period (RP2) under IBR covering the period from 2018 to 2020. The Energy Commission uses a forecasting model to assess projected fuel costs over upcoming regulatory periods, providing a level of pricing certainty to power producers and consumers. This helps power suppliers to plan and prepare for future generation costs, and budget operations accordingly.

ICPT provides a buffer against the volatility of global fuel prices

With base tariffs remaining the same over a three-year period, ICPT offers a mechanism through which Malaysia’s electricity ecosystem can appropriately respond to changing fuel costs within that same period. This ensures that utilities aren’t suddenly hit by an unsustainable economic loss due to sudden changes in global fuel prices. This mechanism to adapt to changing generation costs is exercised every six months. For regulators and industry operators, that is an essential part of a sustainable and incentivised electricity ecosystem that keeps Malaysia’s lights on.

The End Goal of ICPT

While fuel costs are of course the most prominent part of fluctuating generation costs, they are themselves impacted by a wide range of factors. Changing global demand for fuel can have a notable knock-on effect on costs, as changes in demand have an impact on the cost of supply in a competitive market. Currency volatility is another major factor which affects affordability in this global marketplace, as the changing ringgit value can impact the costs of procuring fuel which priced in alternative currencies. Both these factors are ultimately impacted by wider geopolitical stability, with market prices vulnerable to global shocks such as disruptions in major fuel exporting countries.

Ultimately, ICPT is designed to provide a necessary element of flexibility to buffer against such volatility. That allows power producers to meet growing electricity demand, while ensuring they can continue generating and supplying electricity in an economically sustainable way. When it comes to powering a nation, those mechanisms are critical to maintaining the security, affordability, and sustainability of the country’s electricity supply.

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