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How Will Malaysia Navigate a Complex Energy Landscape?

In 2022, Malaysia’s energy sector faced significant challenges fueled by the global energy crisis and the escalating impact of climate change. Post-pandemic recovery kicked economic engines into full gear, increasing energy demands exponentially. Exacerbated by geopolitical volatility such as Russia’s invasion of Ukraine, these circumstances resulted in fluctuating fuel prices that threw countries into havoc as energy bills reached never-before-seen figures, while the price of consumer goods skyrocketed with economic inflation. Climate change added significantly to this, with unprecedented heatwaves and colder-than-normal placing upward pressure on energy demands, straining wallets as well as energy grids worldwide.

Malaysia, thanks to its Imbalance Cost Pass-Through (ICPT) mechanism, has managed to offer its residents stable energy prices over the past few years while the rest of the world grappled with an extremely volatile energy landscape. Halfway into 2023, Energy Watch takes a closer look at how the global energy situation has evolved, and how Malaysia plans to navigate the volatility and challenges of today’s energy landscape.

A Look at Global Electricity Prices and Market Risks for 2023

Going into 2023, the volatility that marred the global economy through the preceding years is still playing a role in electricity prices both directly and through a domino effect. Inflation has increased the costs of production, transportation and distribution leading to higher operating expenses for energy companies. Fluctuations in fuel prices are also more prevalent than ever – geopolitical tensions, changes in global supply and demand and supply chain disruptions are resulting in higher and more unpredictable energy prices, particularly for those reliant on oil and natural gas.

Regions that are heavily reliant on imported energy are facing the brunt of this, as seen in Europe, which relied largely on Russian gas – a supply that was heavily disrupted when sanctions were imposed on Russia for its invasion of Ukraine. Europe’s energy prices have seen a decrease throughout 2023 but have yet to reach pre-pandemic levels, and households and businesses still struggle with the cost of energy.

Across the world, that story has remained largely unchanged:

Mumbai: By order of the Maharashtra Electricity Regulatory Commission (MERC), 2024 power tariffs are set to hike between 11 – 23 % for up to 100 units of energy per month.

Bangladesh: One of the worst hit countries of the energy crisis – and repeatedly priced out of fossil fuel markets during the worst of the energy crisis in 2022 – Bangladesh increased bulk electricity prices by 19.92% last December. At the start of 2023, the Bangladesh Energy Regulatory Commission recommended raising consumer-level power prices by 15.43%.

Singapore: Despite having some of the highest energy tariffs in the region, Singapore’s energy consumers faced multiple, consecutive tariff hikes since April 2021, only catching a small break in the last quarter of 2022 when tariffs dipped 0.43 cent/kWh with another 2.7% drop at the beginning of 2023.

Thailand: By the end of 2022, Thailand energy consumers were paying record-high tariffs after an 18% price hike was approved by the Energy Regulatory Commission (ERC). Recently, due to higher domestic gas supplies and lower imported gas supplies, the ERC announced that tariffs are set to decline for the remainder of 2023.

Looking into Malaysia’s Electricity Prices

Throughout the years, Malaysia’s energy consumers have enjoyed relatively low domestic energy tariffs, with national utility Tenaga Nasional Berhad (TNB) offering some of the lowest electricity prices in the region. In fact, the rate for domestic consumers, RM0.218 for the first 200 kWh, has remained unchanged since 1997. The subsequent 100 kWh is priced at RM0.334, which results in the first 300 kWh costing RM77 – a rate which has remained since 2009.

This affordability has been a significant advantage for households and SME businesses, allowing for accelerated economic development and supporting a higher standard of living for residents, and the country’s commitment to ensuring reliable access to affordable electricity has played a significant role in driving industrial growth and attracting foreign investments.

Throughout the pandemic era of work-from-home orders, domestic energy bills rose significantly. To lessen the burden on consumers, the government introduced tiered energy tariff subsidies for those with monthly consumption levels of up to 900 kWh. A renewed subsidy package came into effect in July 2021, offering consumers discounts between 5% – 40% on their electricity bills, with a special 10% discount provided to six business sectors – hotel operators, theme parks, convention centres, shopping malls, local airline offices and travel and tour agencies.

Malaysia’s Electricity Landscape and Imbalance Cost Pass-Through (ICPT)

Malaysia’s relatively low energy tariffs and bill subsidies are made possible by the country’s Imbalance Cost Pass-Through (ICPT) mechanism under the Incentive-Based Regulation (IBR) framework. Initially established to ensure structured and transparent operations in Malaysia’s energy industry, the IBR framework allows the energy industry to effectively adapt to a changing global energy market. Under this framework, the country’s electricity tariff is split into two components – the base tariff and ICPT.

Every three years, the base tariff is reviewed and updated according to past electricity supply costs as well as predictions of future electricity supply and energy transition considerations. However, since the global energy market is in constant fluctuation, these predicted costs are often at odds with the set tariff. Ordinarily, this would mean customers are either paying more than they should, or utilities are forced to operate at a loss, impacting the energy sector in the long run.

This is where ICPT comes in – The transparent mechanism helps safeguard consumers by providing a six-month buffer against the wildly fluctuating fuel costs while for the industry, it protects by allowing the flexibility to determine the true cost of generating electricity at the end of each cycle. Any cost increases or savings met during the cycle period is “passed-through” to end consumers as an ICPT rebate or surcharge.

On top of this, a portion of the savings made through the IBR framework is also funneled into a separate fund called the Kumpulan Wang Industri Elektrik (KWIE). When supplying electricity comes at a higher cost than expected, this money in this fund – which is controlled by the Energy Commission – is used to offset the impact of ICPT surcharges, especially on residential consumers. Over the past few years, KWIE has contributed significantly towards the subsidies and energy bill discounts enjoyed by Malaysia’s energy consumers.

However, according to reports, these blanket subsidies have resulted in annual costs in the billions, and unfortunately, have been disproportionately benefitting high-volume domestic users and non-SMEs segments who have a much greater ability to absorb costs increases on their own. In response to this, the government has announced their plans to employ targeted subsidies that would primarily benefit low-income groups.

At the same time, economists are expressing that targeted subsidy is the best approach for Malaysia. Although the T20 income group is no longer a beneficiary of the subsidy, the group’s tariff rate increase might be minimal. This is due to the decrease of energy price in the second quarter of 2023 in comparison to the extreme hikes from the previous year.

Envisioning a Sustainable and Affordable Energy Future

Understanding the complexities of the energy industry is crucial in addressing the rising electricity prices faced by Malaysia and other countries. When electricity prices were compared across nine out of 10 ASEAN countries in September 2022, Malaysia’s household electricity stood out as the third cheapest after Myanmar and Laos. The ICPT mechanism ensures that vulnerable consumers are shielded from the extreme fluctuations experienced in the global energy market, at the same time, keeping the electricity prices stable for the industry.

Understanding the complexities of the energy industry is crucial in addressing the rising electricity prices faced by Malaysia and other countries.

Still, the energy crisis has only highlighted the shortcomings of the current global energy system that need to be addressed to ensure the sustainable and stable energy future we are dreaming of. This means investing heavily in our energy system, strengthening it and diversifying sources to protect against future market volatilities. A substantial amount of planning and investment is required, which can only be done if the energy system operates effectively, and utilities are financially secure.

The decision to redistribute more equitably allows those who consume larger quantities of electricity to bear a fair share of the costs and incentivises energy conservation and efficiency while supporting the financial stability of utility companies. Whatever changes may come with the upcoming ICPT review period, it is imperative to strike a balance between affordability, sustainability, and industry viability as Malaysia navigates the complexities of the ever-changing energy landscape.

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