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Falling Surcharge: Thank You Fluctuating Fuel Prices

Commercial and industrial electricity consumers in Peninsular Malaysia are set to benefit from a drop in the current surcharge on electricity tariffs – which will fall by 0.55 sen/kWh for the first six months of 2020.

Commercial & industrial consumers will receive a lower tariff surcharge for 6 months

“For the commercial and industrial users’ category, a surcharge of 2.55 cents/kWh was imposed for the period July to December 2019…given the significant reduction in fuel costs over the last six months, the commercial and industrial consumer surcharge rates will be reduced by 0.55 sen/kWh from 2.55 sen/kWh to 2.00 sen/kWh,” said Minister Yeo Bee Yin. This is part of the Malaysian government’s measures to ensure that residential consumers enjoy the same surcharge-free tariffs they have been paying since July 2018.

These plans, a result of the latest adjustment in Malaysia’s imbalance cost pass-through (ICPT) mechanism, were recently announced by Minister of Energy, Science, Technology, Environment and Climate Change, Yeo Bee Yin.

How Surcharges are Impacted through IBR and ICPT

ICPT is an important part of Malaysia’s incentive-based regulation (IBR) framework, introduced in 2014 to help promote a more efficient electricity supply industry. Under IBR, Malaysia’s Energy Commission (ST) sets a base rate for electricity every three years, forecasting electricity costs to provide a guideline tariff for the coming regulatory period. ICPT is analysed every six months, providing a mechanism whereby a rebate or surcharge can be applied to adjust the electricity tariff according to the changes in generation costs.

The period from July to December 2019 saw average coal prices paid by power generators fall compared to the prices from the previous period. At the same time, gas prices used to generate electricity increased. The overall impact of this change was assessed by the Energy Commission, resulting in the recently announced adjustments to the ICPT surcharge.

ctors Affecting the Surcharge

Within Malaysia’s second regulatory period (RP2), from 2018 till 2020, fuel costs were budgeted at USD75.28/metric tonne (MT) for coal, RM27.20/one million British Thermal Units (MMBtu) for gas, and RM35/MMBtu for pipeline and liquefied natural gas (LNG). These budgeted costs are set based on forecasts for future electricity costs based on analysis of fluctuating market prices and the base amount needed for operational and maintenance costs associated with supplying electricity. However, the average prices paid for these resources were higher than that initial budgeted amount, standing at USD77.35/MT for coal.

Fuel costs since 2018 have been higher than the amount previously budgeted

Several factors contributed to these higher prices; these include a spike in the demand of LNG as a result of necessary maintenance for coal-fired power plants, which reduce their generation capacity. This increased LNG demand was reflected in prior industry analysis that projected the higher demand for coal and gas across Asia, but the relatively higher cost of LNG as compared to coal has resulted in higher generation costs.

The regulated price of gas used for electricity generation increased during the latest six-month period by RM1.50/mmBTU over the previous budgeted amount, resulting in an additional RM219 million in costs. These higher-than-budgeted prices create an economic challenge for power generators, and one which ICPT is purpose-built to help tackle.

Malaysia’s changing generation mix also contributed to shifting costs in 2019. The nation is on its path to achieving its goal of 20% renewable energy generation by 2025, but introducing new generation technologies comes with a cost, particularly during the earlier stages of their development. Power purchase agreements for renewable energy alone totalled RM84 million.

Despite escalating costs across certain elements of the industry, the Energy Commission recommendation, approved by Government, will reduce the ICPT surcharge attached to commercial electricity tariffs by 0.55 sen/kWh for six months from January 2020. This will reduce the ICPT surcharge for commercial consumers to 2.00 sen /kWh.

Surcharge-Free Domestic Tariff

Residential customers will once again avoid escalating tariffs over and above the average base electricity tariff of 39.45 sen/kWh, with RM62.95 million injected from the Electricity Industry Fund (KWIE) to eliminate any need for a residential surcharge. Kumpulan Wang Industri Elektrik (KWIE) is a fund controlled by Malaysia’s Energy Commission, designed to help manage and control the impact of electricity tariff changes on consumers. This fund has provided welcome relief for residential consumers in the face of tariff changes over recent years.

KWIE has, and will continue to play, an important role in ensuring electricity remains affordable for Malaysia’s residential consumers. But the fund has a finite investment pot with which to buffer costs, and cannot be relied on indefinitely. The upcoming reforms announced as part of Malaysia Electricity Supply Industry 2.0 (MESI) are targeted to contribute to a more sustainable and affordable future, with measures such as the ability for independent power producers to competitively source fuel providing new routes to more affordable electricity.


A Sustainable and Affordable Electricity Ecosystem

The latest changes to the ICPT surcharge represent positive steps for Malaysia’s electricity consumers. They highlight the benefits of putting efficiency at the heart of the electricity supply industry, and the importance of the principles driven by incentive-based regulation to ensure even greater efficiency in the future. The ultimate goal is to ensure that an efficient, liberal ecosystem is supported, in which electricity producers are empowered to remain competitive in an increasingly volatile global marketplace. Only through such an environment, argue regulators and industry players, can the ecosystem be enabled to deliver sustainable and affordable electricity for all.

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