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Modelling Electricity Industry Liberalisation in Southeast Asia

The global electricity industry has traditionally worked on a model of state-owned, vertically-integrated operations. These operators worked with a de facto monopoly, managing all elements of generation, transmission and distribution, as well as consumer electricity sales. Now, electricity market liberalisation is providing evolving operational frameworks which are increasingly replacing this legacy structure in markets around the world.

Electricity sector liberalisation aims to build a more resilient market

The goal of electricity sector liberalisation is to build a more resilient market that delivers improved efficiency and enhanced industry operations. This can include transformations to all three key areas — generation, transmission and distribution, and retail — with the aim of ensuring a more competitive, efficient, and cost-effective ecosystem.

Pioneering market liberalisation began in the early 1990s in Europe, with Singapore emerging as the first market in Southeast Asia to embrace this evolution in 1995. Since that date, market liberalisation efforts have also been implemented in markets such as Malaysia, Thailand, and Philippines. Understanding this journey of liberalisation provides a valuable model for markets which may follow.

Embedding Impartial Oversight

A persistent challenge in liberalisation efforts comes from the need for impartial operational oversight of liberalised markets. Liberalisation must exist in a framework of appropriate regulation, with objective oversight that ensures fair and competitive practice.

Liberalisation must come with appropriate regulation to ensure fair and competitive practice

This can be particularly challenging in the early stages of liberalisation, when experience within the industry is intrinsically linked to the vertically-integrated organisations already operating within the ecosystem. Existing expertise to inform industry operations is almost certainly tied to incumbent state-owned utility companies and operators.

Malaysia established its Energy Commission to ensure impartial regulatory oversight of key electricity and energy industries. Similar to Singapore’s Energy Market Authority (EMA), the Energy Commission was designed to provide essential market oversight to steer the liberalisation journey.

The gradual ring-fencing of existing talent to establish objective and impartial operators was key. Such efforts have evidenced positive change in Malaysia, where the Single Buyer market model was introduced to oversee electricity management and procurement. This organisation was created by ring-fencing existing assets within utility company TNB. A similar process applied to the role of Grid System Operator — the entity responsible for day-to-day operations of the energy grid and strategic demand planning. Further enhanced ring-fencing is due to be implemented under Malaysia’s MESI 2.0 initiative in 2021.

Establishing Effective Markets

The ultimate goal of liberalisation is to move towards free, competitive markets within the electricity industry. That will require developing a complex market system which can guarantee the three pillars of the energy ‘trilemma’ — secure, sustainable, affordable electricity.

In Malaysia’s progress towards a more liberalised market structure, the nation is working to develop a framework to ensure a Supplier of Last Resort (SoLR). This provides a safety net so that in the event the electricity market fails to meet demand, redundancy is in place to prevent disruption to the nation’s electricity supply. Such considerations are a key concern as nations transition from legacy models to nascent market operations.

Singapore’s Energy Market Company (EMC) – formed in 2001 – acts as an independent operator of the wholesale market, and reportedly played a pivotal role in introducing market mechanisms to enhance economic efficiency through competition in the industry. More recent steps towards liberalisation include the introduction of an Open Electricity Market (OEM) in 2018, providing comprehensive liberalised retail market activities for the first time.

In the arena of electricity generation, Malaysia is currently looking into establishing a capacity market model to transform its existing power purchase agreement framework, with a hybrid model set to operate from 2029. Such capacity market structures can offer reassurance to industry stakeholders that adequate capacity will be available to meet expected consumer demand. The introduction of Malaysia’s hybrid market will coincide with the expected transition to a price-based retail model.

Considering Consumers is Key

The role of consumers is critical to market transition. Competitive markets should ultimately work for the end-consumer, not simply reducing costs, but ensuring consumer protection is at the heart of market operations.

Engaging consumers is an essential part of evolving market conditions, and vital to the successful transformation towards liberalisation. This is particularly true in retail market liberalisation, where market transition can present an unfair burden to consumers used to traditional market models.

Complex tariff structures can be particularly challenging, as studies have shown with ‘Time-of-Use’ tariffs. These structures are designed so that consumers will be charged lower rates at times of low demand, shifting energy use and potentially reducing costs. A recent study undertaken in Australia showcases how such tariffs can negatively impact the most vulnerable citizens, where lack of consumer education and inflexible energy use can leave households exposed to higher electricity bills.

Consumer education must be central to the ongoing transition

Consumer education must be central to the ongoing transition. Not only does that ensure consumers are less vulnerable to pricing shifts, but it maintains focus on the key goal of improved consumer outcomes that the electricity industry should aspire to. Measures must also be put in place to ensure consumers are not left disadvantaged by complex retail markets. The UK market regulator recently introduced a default price cap on tariffs that is set to reduce bills for 15 million households — showing the need for continued adjustment, 30 years after the nation’s liberalisation journey began.

An Evolution, Not a Revolution

It may be a cliché, but energy market liberalisation should be considered an evolution, not a revolution. That’s particularly true in the context of a global energy landscape undergoing rapid transformation.

Renewable energy technologies are transforming the generation landscape

Renewable energy technologies are transforming the generation landscape. Digitalisation is creating powerful solutions to improved transmission and distribution networks. At the same time, electricity use and consumption trends are changing. The increasing focus on energy efficiency and growing electrification of things is transforming the way electricity is consumed.

Liberalisation efforts must include mechanisms by which an energy market can adapt to changing circumstances. They must embed systems whereby industry and regulators can work together to inform such change. A prime example of this is the Market Advisory Panel set up in Singapore in 2019 to provide a forum in which the electricity industry could inform strategy as it evolves.

Equally vital is understanding there is no one-size-fits-all approach to energy market evolution. While liberalisation can deliver competitive benefits that empower industry and cut costs for consumers, such liberalisation must evolve in response to local conditions. The demands of a nation-state like Singapore are far removed from the diverse needs of Indonesia’s 17,000 islands.

The potential of regional integration provides a further flexibility which could support this journey, particularly in the area of renewable energy. Europe’s use of interconnections to balance intermittent renewable energy generation across nation states offers an important example which ASEAN could follow. Doing so could enable a further flexibility to support liberalised energy markets.

Liberalisation in markets such as Singapore and Malaysia offer examples of this ongoing evolution. But wider regional liberalisation could unlock further benefits still. That journey will require informed and impartial oversight, effective and competitive markets, and customer understanding as the foundation. These should be the pillars upon which any liberalisation effort is established.

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