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Explaining Malaysia’s Energy Tariff – Is a Tariff Surcharge on the Horizon?

Energy consumption hit historic lows during the pandemic, driving fuel prices down and forcing fuel suppliers to limit production. When easing COVID-19 restrictions resulted in an exponential increase in economic activity across the globe in 2021, energy markets began to tighten. Low fuel supply at this stage, combined with high demand from post-pandemic economic recovery, sent fuel prices on an upward trajectory. Compounding this were weather events such as Britain’s windless summer and Europe’s unusually cold winter, and Russia’s invasion of Ukraine, which left nations fighting for existing oil and gas supplies.

The energy crunch and soaring prices left many dealing with immense consequences. Energy bills across the world have long been hitting record highs, and experts are warning consumers to prepare for this trend to continue. From London to Los Angeles, the western world has begun preparing its citizens for rolling blackouts and energy shortages. In neighbouring Singapore, which has a liberalised energy market, only recently in October the country is seeing a slight decrease in electricity tariff after a constant rise since April 2021 to reflect the real increases in the cost of generating electricity. Over in Australia, where current energy prices are more than triple the prices seen in 2021, citizens have been warned that energy prices are expected to remain high for years to come.

Malaysia Navigating Through the Ongoing Global Energy Crisis

Despite the volatile global energy market, one country seems to have cushioned energy consumers from the worst of the energy crisis. Malaysia’s energy tariff, which has long been among the lowest in the region, is managed by the Incentive Based Regulation (IBR).

The IBR is an electricity tariff framework introduced in 2014 to enhance and reward efficiency in generating and transmitting electricity. Under IBR sits the Imbalance Cost Pass-Through (ICPT), a mechanism that allows utilities to pass-through extra costs or savings to end consumers. This system results in an energy tariff that is reflective of the true cost of generating and transmitting that energy, but that, by design, cushions citizens against the volatility of the global energy market.

Since the start of the pandemic, when consumers began seeing higher monthly energy bills due to stay-at-home measures, the Malaysian government rolled out electricity bill rebates and discounts to ease the burden on everyday citizens. Despite the cost of generating electricity increasing by up to 45%, the government retained energy tariff rebates for domestic consumers, and completely waived the electricity bills for victims of 2021’s disastrous flash flood. While these measures have been widely welcomed by consumers, holding back the true cost of generating and supplying electricity will have harsh implications if not addressed soon.

First, let’s take a look at how Malaysia’s energy system has been able to protect consumers from the throes of an unstable global energy system, when so many countries around the world have experienced tougher circumstances. Under IBR, Malaysia’s electricity tariff consists of two components

a) The base tariff

b) Imbalance Cost Pass-Through (ICPT)

The base tariff consists of fixed overhead and operational costs, as well as fuel and generation costs. This tariff is reviewed by the country’s Energy Commission (EC) every three years. However, with the inherent volatility of the global energy market, fuel and generation costs change much more frequently than this tariff review period allows. Here is where the ICPT component comes in.

Breaking Down Malaysia’s Tariff Structure

Every six months, the true cost of generating electricity is analysed against the projected costs which initially informed the base tariff. Any cost increases or savings met during the previous 6-month period is “passed-through” to end consumers as an ICPT rebate or surcharge. This transparent system allows consumers to pay tariffs closer to the true cost of electricity, but more importantly, places a buffer between consumers and a historically unstable global energy market. To date, Malaysian consumers have enjoyed RM9.35 billion worth of rebates. However, when fuel prices experience a spike, an ICPT surcharge is likely.

To manage the impact of ICPT surcharges on consumers, the Malaysian government established Kumpulan Wang Industri Elektrik (KWIE). This is a fund controlled by the Energy Commission and receives all cost savings from operational efficiencies. When surcharges are likely or when electricity bills are unexpectedly high (such as was seen during the pandemic), KWIE is tapped on to ease the burden on consumers, especially at the domestic level. However, the past few years of continuous rebates and subsidies for domestic and commercial and industrial consumers means KWIE’s funds are depleting. With soaring fuel costs placing pressure on the price of electricity, relief measures can’t go on forever.

A system that does not accurately reflect the reality of generating and supplying electricity also restricts the grid to improve and grow towards a sustainable future, leaving us vulnerable to unexpected changes in the global energy system. Recent trends of electricity theft, particularly fuelled by the crypto boom, are further stressing the energy grid’s ability to provide secure, reliable electricity to consumers. These compounding factors considered, Malaysians should brace for the impacts with energy saving practices on the upcoming ICPT review period. This is to prepare should an ICPT surcharge be implemented to reflect the true cost of electricity. While relief measures are expected to continue, any rebates or subsidies will be reexamined to benefit mainly the lowest-income groups across the country as recently announced by the newly appointed Prime Minister of Malaysia, Dato’ Seri Anwar Ibrahim.

Facing Reality

A robust and stable energy ecosystem is pivotal towards a country’s progress and development.

A robust and stable energy ecosystem is pivotal towards a country’s progress and development. To enable that, investments must be made by governments, utilities, and even everyday citizens to enhance and expand the grid and lay the foundation for a sustainable energy future.

With soaring fuel prices unlikely to drop to pre-pandemic levels anytime soon, Malaysia must come to terms with the reality of the global energy system or face long-term consequences. Looking at how hard the energy crisis is hitting countries around the world – even the most developed nations – an ICPT surcharge is a small cost to bear in exchange for protection against the harsh global energy ecosystem.

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