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Malaysia Needs a Flexible System to Deal with Rising Energy Costs, Climate Action

The Far-Reaching Impact of Climate Change

Toward the north of Peninsular Malaysia, scorching heat in states like Kelantan and Penang have claimed lives, prompting authorities to consider limiting outdoor activities during these intense, sweltering waves. While in the south, some 30,000 people have been displaced by the floods that began in February 2023, which are unseasonal as they are ferocious.

The disjointed disasters point to the singular fact: that climate change cannot be underestimated. In the last ten years, global temperatures have continued to rise, and scientists have observed more frequent extreme weather events such as hurricanes, floods, and heat waves.

In the same vein, the physical impacts of these events, such as widespread damage to infrastructure and property, demonstrate the rising financial cost of climate change. Battling climate change is expensive; the economic costs of natural disasters have been estimated to be in the hundreds of billions of dollars annually, ranging from biodiversity loss to healthcare costs.

Energy Market Pressures

Adding to these concerns is the real threat of a global energy crisis. As the weather hits extreme heat or freezing temperatures, more and more people will turn to indoor temperature control mechanisms like air-conditioners or radiators to manage their immediate climate. Higher temperatures equal higher energy demands, and higher demands mean higher costs and higher bills.

All the while, the supply of fuel across the world is dwindling or facing value chain challenges caused by geopolitical tensions. Last year, electricity bills in many parts of Europe skyrocketed due to high fuel prices, causing a near-crisis for residents. It’s a vicious cycle – you turn on your air-conditioner in the 40°C weather; chances are, your air-conditioner is powered by fossil-fuel energy; which while generating energy, burns and releases greenhouse gases, which in turn worsens climate change.

These pressures – climate change and market volatility – have prompted government and corporate entities to improve the resilience and security of domestic markets, whilst catalysing clean energy growth across the region. New strategies, like reviewing current tariff structures and energy portfolio investments, are proving necessary for the power industry to cope.


Building Resilience with ICPT in a Volatile Market

In Malaysia, the impacts of the crisis have been thankfully weathered by a flexible pricing mechanism and regulatory system, through which, government subsidies were able to be injected to protect consumers. Under a mechanism called the Incentive-Based Regulation (IBR) framework, the base tariff is reviewed by the government every three years based on the estimated price of coal and gas fuels during the regulatory period. Within this framework is a specific mechanism called the Imbalance Cost Pass Through (ICPT) that allows the tariff to be adjusted every six months (January – June and July – December) based on the actual generation costs and reflect the differences to consumers.

The ICPT mechanism allows regulators to plan and calculate costs ahead of time, and more importantly, calculate what residents and consumers should pay based on these costs. The benefit of this system is that it provides consumers with pricing certainty and stability, at least for six months. Fuel prices like coal and gas fluctuate on the market daily; translating those changes in pricing to consumer bills will make for extremely unpredictable house bills and business costs.

Instead, the tallying up of the industry’s costs versus consumers’ tariffs happens at the end of the six months. Averages are calculated, and an announcement is made on whether consumers should receive rebates (thanks to cost savings) or be hit with surcharges (due to fuel price hikes). Since ICPT was implemented in 2014, the government has funnelled billions of dollars worth of subsidies to cover the fallout of costs.

Targeted Subsidisation the Best Approach

Since January 2023 however, in an attempt at subsidy rationalisation, the government announced it was removing subsidies for non-domestic users or medium and high-voltage commercial and industrial users, resulting in a higher tariff surcharge of 20 sen per kilowatt hour (kWh). In the upcoming June cycle, high-volume domestic users may be targeted next.

In order to improve the efficiency of the subsidy system, the Natural Resources, Environment, and Climate Change Minister, Nik Nazmi Nik Ahmad announced in May 2023 that the ministry will be introducing a new system called Pengkalan Data Utama (PADU) . The integrated socio-economic database system, which is expected to be ready by year-end, will serve as the main database to administer the distribution of subsidies to qualified groups, beginning with the adjustment for domestic consumers under the T20 category.

The government’s natural progression of removing blanket subsidies is a welcome move. For many years, Malaysians have enjoyed wanton access to subsidised electricity, shielded from market reality. While protecting citizens is the singular job of the government, continuous handouts for needless groups is plain bad economics. Subsidies may prove futile, or worse – reckless – if its action obstructs a larger sense of environmental awareness and capacity for behavioural change.

The government’s decision will stir the ever-long debate of protectionism versus market liberalisation. Many will shout foul at the new price hikes, but the fact remains that prices have remained so low because of government intervention.

Can we truly say we are building a more inclusive, collective future, if those decisions are not tackled collectively?

For energy corporations, tackling climate change requires decarbonising our power sources. It’s a simple end goal that requires many trade-offs, including continued access to cheaply sourced fossil fuels. Transitioning to sustainable energy will not be easy – long-term investments and diversification of our energy portfolio will require upfront capital and new engagement strategies.

While our nation continues to rely on fuel to power on, it’s crucial that citizens comprehend its cost – not just from a monetary perspective, but from an environmental and humanitarian one. Can we truly say we are building a more inclusive, collective future, if those decisions are not tackled collectively? It is time to shift the responsibility to those who can carry it so that those who cannot, need not at the expense of their survival.

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