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Sailing through the Pricing Challenges of a Global Energy System in Flux

Malaysia stands at the cusp of a transformative journey towards a sustainable energy future. However, this journey is not without its challenges. An exponential rise in global energy demand, coupled with geopolitical tensions, have resulted in fluctuating energy prices not only for the nation but everywhere around the world.

What’s more, unpredictable weather events due to climate change are placing upward pressure on energy demands, further straining both wallets and energy grids. This highly volatile global energy landscape is impacting electricity prices both directly and indirectly, especially for countries that are highly reliant on fossil fuels.

Halfway into 2024, Energy Watch takes a closer look at how the global energy landscape is evolving, and how Malaysia plans to navigate the journey ahead.

 What causes electricity prices to fluctuate?

Electricity prices generally reflect the cost to build, finance, maintain, and operate power plants and the electricity grid. These costs can fluctuate based on various factors including demand, the price of fossil fuels, supply limitations due to severe weather as well as regulatory changes.

Germany provided a dramatic example in 2021 when electricity prices became six times higher than in the previous year. Closer to home, influenced by global developments, Singapore’s electricity prices are majorly affected due to the country’s reliance on imported natural gas, making up 95 percent of their electricity supply.  The Philippines has also been experiencing a surge in electricity prices due to increasing costs of imported fuels, with wholesale prices averaging 35.8 percent higher in March 2024 compared to the previous month.

Given that Malaysia too imports a significant portion of energy resources, namely coal, changes in global fuel prices directly affect the cost of electricity generation locally. Especially since fuel and generation costs contribute up to 70% of the electricity tariff with the remaining 30% largely comprised of operational and maintenance costs. Supply-demand dynamics within the country also play a key role, as peak consumption seasons can strain the grid and push electricity prices upward.

Meanwhile, outages caused by extreme weather events can indirectly trigger increases in wholesale electricity prices. Regulatory policies can also influence price stability indirectly – since the energy market is highly regulated, policies can sometimes lead to unintended price fluctuations by distorting market signals or creating inefficiencies.

The impact of fluctuating electricity prices 

Therefore, managing electricity prices is not just an energy sector issue but a critical economic concern. In this regard, the government has implemented innovative policies and regulatory mechanisms to keep energy prices stable for citizens over the past few years, even as the rest of the world grappled with an extremely volatile landscape.

Pricing mechanisms to secure energy stability

Throughout the years, Malaysian energy consumers have enjoyed relatively low domestic energy tariffs, with its government offering some of the lowest electricity prices in Southeast Asia.

Malaysia’s relatively low energy tariffs are made possible by the country’s Imbalance Cost Pass-Through (ICPT) mechanism under the Incentive-Based Regulation (IBR) framework, which splits the tariff into two components: the base tariff and ICPT – enabling the energy industry to effectively adapt to a changing global energy market.

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. But since the global energy market is in constant flux, these predicted costs are often at odds with the set tariff.

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.

However, the current economic landscape presents a much harsher reality pushing countries, including Malaysia, to relook into their pricing strategies. To manage all sides of the issue, Malaysia has shifted from broad ‘untargeted’ subsidies to vulnerability-based targeted support protecting the 90% consumers who need it most. In the recent ICPT announcement made in June 2024, the government has announced that it will be maintaining electricity tariffs for all users, with a slight reduction by 1 sen/kWh for commercial and industrial users.

Continuing its effort to maintain the effectiveness of these mechanisms, the government has also announced an undertaking in studying to reform Malaysia’s electricity tariff structure. Aimed at determining the appropriate structure to better reflect the actual cost of electricity supply, the new structure is anticipated to be implemented in 2025, concurrent with the fourth regulatory period of IBR covering 2025 to 2027.

Balancing energy affordability with sustainability

Balancing electricity pricing mechanisms with sustainability goals will be a critical challenge going forward. As Malaysia charts a path towards net-zero by 2050, there is a need to ensure that prices remain reflective of true generation costs but continue to be affordable to avoid undue economic burden from the transition.

Fortunately, clean energy technologies are already more cost competitive over their lifespans than those reliant on conventional fuels like coal – which means savings achieved from growing shares of renewables would eventually filter down to consumers. However, realising these gains hinges on higher levels of upfront investment today.

Which is why Malaysia has embarked on several key projects to build the nation’s future energy infrastructure. The Large-Scale Solar (LSS) scheme is one such example, enabling prosumers to self-generate solar power, thereby reducing their exposure to fluctuating prices as well as providing opportunities to earn income by selling to the national grid.

Additionally, the Malaysia Renewable Energy Roadmap (MyRER) outlines targets for increasing the share of renewables in the capacity mix. These initiatives not only contribute to price stability by diversifying energy sources but also align with Malaysia’s commitment to reducing greenhouse gas emissions.

Ultimately, navigating fluctuating electricity prices is a complex yet essential task, requiring collaborative efforts and innovative solutions. By investing in clean energy and a modernised grid, leveraging regulatory frameworks, promoting energy efficiency, Malaysia can achieve a balance that supports both sustainability and economic growth.

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