TNB to Review Malaysia Electricity Tariff

TENAGA Nasional Berhad (TNB) has dropped a hint that the electricity tariff in Malaysia in likely to be revised next year, citing the higher cost of fuel in recent years.

The recent statement by TNB’s president and chief executive officer suggests that the company is looking into increasing the power tariff while stressing that it will not burden households.

TNB’s electricity generation uses natural gas, coal, hydropower and renewable energy. Coal provides 40 per cent of the power-generation mix and is purchased at market prices from countries such as Australia and Indonesia.

Natural gas, which accounts for about 50 per cent of the power-generation fuel mix in Peninsular Malaysia, however, is sold to the power sector by Petronas at a subsidised rate of RM13.70 per MMBtu although the market price of natural gas is RM40 per MMBtu.

Higher prices of natural gas in electricity generation have squeezed government coffers significantly, especially when TNB has had to import liquid natural gas from Australia to cover natural gas shortages domestically. The problem has been exacerbated with the weakening of ringgit against the US dollar in recent months.

The subsidy in this sector costs the government RM8 billion to RM12 billion per year, depending on the market rate of the input fuel price.

If the government does not do anything to reduce the subsidies, the subsidy bill will be unmanageable in the future and this will become a welfare loss to society in terms of development.

However, it is highly likely that once the subsidy is removed, the electricity tariff will increase and that decision will not be good for the government.

It is estimated that if the subsidy is removed, the true cost of power will exceed 40 sen per kilowatt-hour (kwh) compared with the current rate of 33. 54 sen/kwh.

The subsidy rationalisation exercise conducted by the Performance Management and Delivery Unit in 2010 suggested that the incentive-based regulation tariff framework be introduced and integrated in the business model of TNB. This framework sets more efficient tariffs by rewarding those who are inclined to energy savings. This can be done through the setting up of lower rate for lower usage of electricity.

One of the mechanisms suggested in the framework is Fuel Cost Pass Through Mechanism (FCPT). FPCT is a system that allows TNB to review the cost of electricity production every six months.

The cost of production because of the fluctuations in fuel prices will then be passed through to the end user.

The aim of the mechanism is to ease pressure on the government budget, while ensuring that the rise in fuel costs will encourage efficiency and energy savings.

In this situation, if the fuel price increases, then TNB is allowed to increase the tariff. Conversely, any reduction in fuel prices will mean that the tariff will be lower.

However, for the mechanism to succeed, the incentive-based regulation tariff framework will need to be implemented.

Under the framework, TNB’s transmission and distribution network’s yearly performance will be benchmarked against a set of performance targets monitored by the Energy Commission.

The electricity tariff, and hence, TNB’s returns, will be adjusted based on achieving those performance targets.

As this article is being written, TNB and the Energy Commission are working to complete the pilot studies to iron out any discrepancies and issues in the framework.