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The Impact of Gas on Malaysia’s Electricity Tariff Structure

With fuel prices contributing up to 70% of Malaysia’s electricity tariff, it’s important to consider what that means when prices of natural gas and coal fluctuate. At present, the country relies on traditional fuel sources like coal and natural gas to generate electricity in its thermal power plants.

Currently, roughly 43% of the country’s electricity generation mix utilises coal, with 39% utilising natural gas. Other sources like diesel make up the remaining percentage, with renewable energy taking up 2% of the generation mix in 2018.

The country’s high reliance on coal and natural gas mean that its tariff pricing structures need to be flexible enough to adapt to changing market conditions, especially as it relates to the cost to procure coal and gas for the nation’s power stations. It’s evident from recent events that a rigid pricing structure runs a real risk of being unsustainable without an ability to adapt. Disruptions such as the COVID-19 pandemic, and the on-going situation around oil price volatility, offer key examples of why such a mechanism exists.

ICPT: A Mechanism for Flexible Fuel Prices

Malaysia’s Imbalance Cost Pass-Through (ICPT) mechanism was introduced in 2014, as a tool to absorb market shocks for the industry and deliver a more stable and sustainable tariff pricing for customers. It is a critical component of the Incentive-Based Regulation framework of Malaysia’s electricity supply industry.

Under this system, the Energy Commission (ST) assesses and applies the expected cost of electricity, setting what is known as a ‘base tariff’ to electricity tariffs for this term every three years.

The base tariff includes a projection of how much it would cost to generate and deliver electricity supply to customers across Peninsular Malaysia, considering various factors such as fuel prices, fuel subsidies, operational costs, and so forth. The average base tariff for the current regulatory period is set at 39.45 sen/kWh, and is fixed until 31 December 2020.

This future forecasting is an important part of industry planning. It allows ecosystem players from generation through to distribution to make strategic decisions on the vital supply of electricity. This ability to plan ahead is critical for an effective energy supply industry.

ICPT is then applied as a mechanism to assess the tariff structure every six months, in January and July every year. The ICPT formula balances the actual costs of electricity generation (fuel prices today, for example) against the projected costs that were defined at the beginning of the three-year regulatory period (projected costs calculated in 2018, for example).

As market prices for fuel changes, the cost of generating electricity can go up, or down. If prices go up, an ICPT adjustment can be applied to ensure that electricity tariffs reflect this. If the cost of fuel fall bellows the projected level, then rebates can be provided to customer. ICPT has so far resulted in RM6.3 billion total rebates to consumers.

The latest ICPT adjustment took place in July 2020, and resulted in the surcharge being reduced from 2 sen/kWh down to zero for domestic and non-domestic electricity users. This change reflected the falling price paid for coal and gas used for power generation between January and June 2020.

Reflecting on the Role of Gas

Gas plays a particularly crucial role in Malaysia’s overall energy security. It meets nearly 40% of Malaysia’s electricity demand, but also represents an important part of domestic energy reserves. Malaysia is one of the region’s largest gas suppliers, with an estimated five million barrels of oil equivalent estimated to be present in the nation’s oil and gas reserves. Natural gas dominates about three-quarters of those estimated reserves.

In Malaysia, national oil and gas company PETRONAS acts as custodian of the nation’s oil and natural gas resources. The company was established in 1974 as a responsible operator designed to leverage Malaysia’s natural energy resources for the benefit of the rakyat. With the contribution that natural gas makes to Malaysia’s electricity generation, that has an important impact on electricity tariffs, and ICPT itself.

natural gas meets nearly 40% of Malaysia’s electricity demand

Malaysia’s power sector is an essential part of society, and one equally designed to provide benefits for the people. The presence of Malaysia’s energy reserves provides a valuable opportunity in meeting that goal. Malaysia’s power sector had historically enjoyed reduced natural gas prices for purchases from PETRONAS under the Regulated Piped Gas Price. This is a special rate which applies to gas used to power the electricity sector. That price however has changed significantly in recent years, as a result of changes introduced in the Gas Supply (Amendment) Act 2016.

Under the Regulated Piped Gas Price agreement, the Energy Commission mandates a price which PETRONAS must sell gas to the power sector. In the period prior to the act prices were low, so for example the period from January 2014 through to July 2015 the power sector paid just RM15.20/mmBtu, compared to up to RM21.35 for some industrial customers.

The Gas Supply (Amendment) Act 2016 was designed to allow PETRONAS to sell gas to the power sector at a market rate which offers a sustainable model for its business. This act of legislation mandated that the Regulated Piped Gas Price would increase by RM1.5/mmBtu every six months until the ‘reference market price’ was reached. In simple terms that means the price would increase until it balances against the market price charged by a willing seller to a willing buyer.

In the period since the Gas Supply (Amendment) Act 2016 has been in operation, the Regulated Piped Gas Price has risen from RM15.20/mmBtu in June 2015 to RM31.70 by July 2020. Under the current agreement, PETRONAS supplies 1,000 million standard cubic feet per day of natural gas to TNB at a set price.

Volatility impacts natural gas prices, creating uncertainty over the future of Regulated Piped Gas

With natural gas prices facing downward pressures in recent months, this creates an uncertainty over the mandated future of the Regulated Piped Gas. National utility TNB entered into a deal in 2019 to buy a shipment of natural gas for power production through energy giant Shell, agreeing payment terms that delivered cost savings compared to the regulated prices. As volatility continues to impact natural gas prices, this pioneering agreement may be a trailblazer for a wider shift in fuel sourcing for electricity generation. This is particularly important when considered against the commitment by utility TNB to deliver the most efficient, cost-effective electricity tariffs under incentive-based regulation.

ICPT continues to play an important role in adjusting for those changes. If power generators are able to access cheaper fuels, those savings can be passed on through the ICPT mechanism. That provides a flexible ability to balance costs, that naturally feeds on down to consumers.

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