Based on World Bank data, Malaysia's average annual increase in Gross Domestic Product (GDP) between 2004 and 2011 was 4.88 percent. According to National Energy Balance 2011, average annual increase in primary energy demand is 4.1 percent and the average annual electricity demand increase between 2004 and 2011 was 4.88 percent.
This evidently shows that Malaysia's GDP growth is heavily dependent on energy and that it is not a very sustainable and healthy growth.
The government has been neglecting energy efficiency for decades. In the 10th Malaysia Plan, the government pledged to increase its commitment to energy efficiency and stronger governance of the electricity industry to increase productivity as well as efficiency.
Three years has passed and we have observed the opposite being implemented.
The Association of Water and Energy Research Malaysia (AWER) has noticed many contradicting statements on subsidies and the power generation industry from the government agencies.
Based on our research and studies, consultations with MyPower Corporation and Energy Commission and considering the actual implementation that should be carried out to address our growing energy demand, AWER is raising these issues:
Point 1: Where do the savings from subsidy removal go?
According to media statements by Petronas president and CEO Shamsul Azhar Abbas, the 'discounted' natural gas price is the foregone revenue of the national oil and gas corporation.
Therefore, increasing the price of the natural gas, a process usually referred to as ‘subsidy removal', will definitely increase revenue for Petronas.
Petronas has also made its commitments known, via the mass media, that it will increase its capital expenditure (Capex) spending to develop its businesses and subsequently, its operational expenditure (Opex) will also increase.
It is commonly known that a company will pay tax and dividend based on its profit. Now, how much will the government receive as income from Petronas after deducting the Capex and Opex?
The government promised to use this additional 'income' from Petronas for social and infrastructure benefits during the June 2011 tariff increase, when the government raised the natural gas price by RM3 per mmBTU (million metric British Thermal Units).
How many schools or roads or bridges have been built additionally from this income? What is the actual accounting of the spending?
When the price of natural gas price is increased, it increases revenue for Petronas, directly. Now, who do you think will benefit from the forthcoming electricity tariff increase? Tenaga Nasional Bhd (TNB), Petronas, the government or the people?
Therefore, in the coming natural gas price adjustment, the government must make public the projected income it will make from this ‘subsidy removal' and detail out how this income will be used.
Point 2: What is the cost structure in the electricity industry?
There are three main costs in electricity tariff: generation, transmission and distribution. Based on our consultations with MyPower Corporation, electricity generation will make up 74 percent of the total cost; transmission (seven percent) and distribution (19 percent). The generation cost is further broken down to fuel cost (68 percent) and capacity charges cost (32 percent).
The capacity charges cost is for both Independent Power Producers (IPPs) and TNB plants. It is also estimated that more than 70 percent of the capacity charges go to IPPs because of the lopsided Power Purchase Agreements (PPAs) the government signed.
There is a good probability of reducing the overall cost impact on the tariff by more than eight percent if the capacity charges of the IPPs are renegotiated and corrected.
Based on the cost structure of the electricity tariff, increase in the cost of fuel will make the biggest impact on the tariff. Unfortunately, generation cost is neither regulated nor made to be efficient by MyPower Corporation and the government.
MyPower Corporation is only regulating the transmission and distribution cost, which amounts to 26 percent of the total cost of electricity tariff through Incentive-based Regulation. This contradicts with the government's pledge in the 10th Malaysia Plan.
For example, the new Perai power plant that was approved via a competitive bidding process has 60 percent generation efficiency. This means that if 100 units of natural gas are supplied, only 60 percent of the natural gas will be converted into energy.
Due to its delay in renegotiating first generation Power Purchase Agreements (PPAs), the government staged a so-called 'successful open bidding' process for the expiring IPPs and claimed it to be a 'renegotiation' step to 'substantially reduce' the capacity charges of the IPPs.
These plants should have retired from operation by the year 2017, but now, their contracts will be extended for another 10 years. The average efficiency of these plants is 40 percent. If 100 units of natural gas are supplied to these plants, only 40 percent will be converted to a useful form of energy.
However, consumers and businesses will still pay for the same 100 units of natural gas. Is this the efficiency government is talking about as its ‘Fuel Cost Pass Through' (FCPT), when inefficiency in fuel usage is passed to the tariff consumers have to pay?
The, construction of a new and efficient power plant takes three to five years. MyPower Corporation and the government had all the time to build more efficient power plants, but they resorted to extending the contracts of a few first generation IPPs.
The government's argument of 'insufficient time' to build power plants is totally unacceptable as the renegotiation with first generation IPPs began in the year 2007.
Is it fair for consumers and businesses to bear the inefficiency cost of the IPPs?
Point 3: What is the true cost of fuel?
Based on information received from MyPower Corporation, government corporation 1MDB is planning to be the next entity to bring in coal for power generation, presumably by buying coal mines overseas. In return, 1MDB pledges to supply coal to Malaysia at a cheaper price.
This is the justification to increase the electricity generation capacity using coal. Will this ensure that we will get cheaper coal? Unfortunately, the example shown by Petronas in the natural gas price has been the opposite. Eventually, market prices will be imposed.
Based on discussions, the gas price quoted at RM42 to RM44 per mmBTU is the cost for liquefied natural gas (LNG) that includes the cost of converting natural gas to liquid form, transportation cost from port to port, re-gasification cost and distribution cost.
Petronas CEO Shamsul (left) has announced that the national oil and gas company will welcome any entity that brings in LNG at a cheaper rate. Unfortunately, both the industrial and power generation sectors have been complaining that there is no cost breakdown shown for re-gasification cost and the cost of using the Petronas pipeline.
Without these costs, no one will dare to bring in their own LNG. Moreover, there is natural gas flowing directly from offshore locations to the gas pipelines of Petronas in the peninsula. MyPower Corporation has also raised similar issues with AWER and said its hands are tied. Now, is government passing the true cost of the fuel to both consumers and businesses?
Point 4: Why no transparent tariff setting mechanism from MyPower Corporation?
During AWER's discussions with MyPower Corporation, it was more than willing to carry out transparent tariff setting as per our suggestion. But, MyPower Corporation was also quick to point out that its hands were tied on this issue.
AWER's suggestion on transparent tariff setting was for the government to reveal the proposed tariff adjustments to the people, with a detailed cost structure, to carry out public consultations and gather feedback on the proposal before making a final announcement on the tariff structure.
Calling only few NGOs for a briefing session is not public consultation. AWER has successfully pushed for such a tariff mechanism for the water services sector with Suruhanjaya Perkhidmatan Air Negara.
Now, will the Ministry of Energy, Green Technology and Water allow transparent tariff setting for the electricity and gas sectors in the coming tariff increase?
Point 5: What is the estimated tariff increase?
Based on information gathered from meetings with MyPower Corporation, Petronas will be imposing a two-tier pricing for natural gas. The power generation sector uses around 1,300mmscfd (million standard cubic feet per day) of natural gas for electricity generation and the first 1,000mmscfd will be at the regulated or ‘subsidy' price.
The remaining 300mmscfd and above will be sold to the power generation sector at RM44 per mmBTU (the market price). AWER estimates the tariff increase components at:
If the government allows the first 1,000mmscfd to be increased by RM 1.50 per mmBTU, the electricity tariff increase will be between 15 percent and 17 percent, to 38.57 sen/kWh and 39.24 sen/kWh respectively.
If the government allows the first 1,000mmscfd to increase by RM3 per mm BTU, the tariff increase will be between 17 percent and 19 percent, to 39.24 sen/kWh and 39.91 sen/kWh respectively.
If we refer to government's previous plan to increase gas price at a flat RM3 per mmBTU for all 1,300mmscfd of natural gas used, the average tariff increase can be capped between seven and nine percent to 35.89 sen/kWh and 36.56 sen/kWh respectively.
In addition, if a flat RM6 per mmBTU increase is imposed for all 1,300mmscfd of natural gas used, the tariff increase still can be capped at between 12 and 14 percent to 37.56 sen/kWh and 38.24 sen/kWh respectively.
All these estimates include TNB's base tariff increase and coal price pass-through. Based on the data above, it is evident that the increase in natural gas price will cause a high impact on the electricity tariff increase, especially under the two-tier pricing mechanism.
This is the main reason why AWER, for the past three years, has been wanting the government to be transparent in setting the electricity tariffs.
Now, it is time for government to publish the breakdown of each cost component for the tariff increase, including the fuel cost breakdown, so that the people understand what they are paying for and businesses can forecast their future expenditure as a result of the electricity tariff increase.
This will also assist potential investors to evaluate their investment strategies in Malaysia. All in all, shouldn't this be a win-win situation for all parties?
This evidently shows that Malaysia's GDP growth is heavily dependent on energy and that it is not a very sustainable and healthy growth.
The government has been neglecting energy efficiency for decades. In the 10th Malaysia Plan, the government pledged to increase its commitment to energy efficiency and stronger governance of the electricity industry to increase productivity as well as efficiency.
Three years has passed and we have observed the opposite being implemented.
The Association of Water and Energy Research Malaysia (AWER) has noticed many contradicting statements on subsidies and the power generation industry from the government agencies.
Based on our research and studies, consultations with MyPower Corporation and Energy Commission and considering the actual implementation that should be carried out to address our growing energy demand, AWER is raising these issues:
Point 1: Where do the savings from subsidy removal go?
According to media statements by Petronas president and CEO Shamsul Azhar Abbas, the 'discounted' natural gas price is the foregone revenue of the national oil and gas corporation.
Therefore, increasing the price of the natural gas, a process usually referred to as ‘subsidy removal', will definitely increase revenue for Petronas.
Petronas has also made its commitments known, via the mass media, that it will increase its capital expenditure (Capex) spending to develop its businesses and subsequently, its operational expenditure (Opex) will also increase.
It is commonly known that a company will pay tax and dividend based on its profit. Now, how much will the government receive as income from Petronas after deducting the Capex and Opex?
The government promised to use this additional 'income' from Petronas for social and infrastructure benefits during the June 2011 tariff increase, when the government raised the natural gas price by RM3 per mmBTU (million metric British Thermal Units).
How many schools or roads or bridges have been built additionally from this income? What is the actual accounting of the spending?
When the price of natural gas price is increased, it increases revenue for Petronas, directly. Now, who do you think will benefit from the forthcoming electricity tariff increase? Tenaga Nasional Bhd (TNB), Petronas, the government or the people? Therefore, in the coming natural gas price adjustment, the government must make public the projected income it will make from this ‘subsidy removal' and detail out how this income will be used.
Point 2: What is the cost structure in the electricity industry?
There are three main costs in electricity tariff: generation, transmission and distribution. Based on our consultations with MyPower Corporation, electricity generation will make up 74 percent of the total cost; transmission (seven percent) and distribution (19 percent). The generation cost is further broken down to fuel cost (68 percent) and capacity charges cost (32 percent).
The capacity charges cost is for both Independent Power Producers (IPPs) and TNB plants. It is also estimated that more than 70 percent of the capacity charges go to IPPs because of the lopsided Power Purchase Agreements (PPAs) the government signed.
There is a good probability of reducing the overall cost impact on the tariff by more than eight percent if the capacity charges of the IPPs are renegotiated and corrected.
Based on the cost structure of the electricity tariff, increase in the cost of fuel will make the biggest impact on the tariff. Unfortunately, generation cost is neither regulated nor made to be efficient by MyPower Corporation and the government.
MyPower Corporation is only regulating the transmission and distribution cost, which amounts to 26 percent of the total cost of electricity tariff through Incentive-based Regulation. This contradicts with the government's pledge in the 10th Malaysia Plan.For example, the new Perai power plant that was approved via a competitive bidding process has 60 percent generation efficiency. This means that if 100 units of natural gas are supplied, only 60 percent of the natural gas will be converted into energy.
Due to its delay in renegotiating first generation Power Purchase Agreements (PPAs), the government staged a so-called 'successful open bidding' process for the expiring IPPs and claimed it to be a 'renegotiation' step to 'substantially reduce' the capacity charges of the IPPs.
These plants should have retired from operation by the year 2017, but now, their contracts will be extended for another 10 years. The average efficiency of these plants is 40 percent. If 100 units of natural gas are supplied to these plants, only 40 percent will be converted to a useful form of energy.
However, consumers and businesses will still pay for the same 100 units of natural gas. Is this the efficiency government is talking about as its ‘Fuel Cost Pass Through' (FCPT), when inefficiency in fuel usage is passed to the tariff consumers have to pay?
The, construction of a new and efficient power plant takes three to five years. MyPower Corporation and the government had all the time to build more efficient power plants, but they resorted to extending the contracts of a few first generation IPPs.
The government's argument of 'insufficient time' to build power plants is totally unacceptable as the renegotiation with first generation IPPs began in the year 2007.
Is it fair for consumers and businesses to bear the inefficiency cost of the IPPs?
Point 3: What is the true cost of fuel?
Based on information received from MyPower Corporation, government corporation 1MDB is planning to be the next entity to bring in coal for power generation, presumably by buying coal mines overseas. In return, 1MDB pledges to supply coal to Malaysia at a cheaper price.
This is the justification to increase the electricity generation capacity using coal. Will this ensure that we will get cheaper coal? Unfortunately, the example shown by Petronas in the natural gas price has been the opposite. Eventually, market prices will be imposed.
Based on discussions, the gas price quoted at RM42 to RM44 per mmBTU is the cost for liquefied natural gas (LNG) that includes the cost of converting natural gas to liquid form, transportation cost from port to port, re-gasification cost and distribution cost.
Petronas CEO Shamsul (left) has announced that the national oil and gas company will welcome any entity that brings in LNG at a cheaper rate. Unfortunately, both the industrial and power generation sectors have been complaining that there is no cost breakdown shown for re-gasification cost and the cost of using the Petronas pipeline. Without these costs, no one will dare to bring in their own LNG. Moreover, there is natural gas flowing directly from offshore locations to the gas pipelines of Petronas in the peninsula. MyPower Corporation has also raised similar issues with AWER and said its hands are tied. Now, is government passing the true cost of the fuel to both consumers and businesses?
Point 4: Why no transparent tariff setting mechanism from MyPower Corporation?
During AWER's discussions with MyPower Corporation, it was more than willing to carry out transparent tariff setting as per our suggestion. But, MyPower Corporation was also quick to point out that its hands were tied on this issue.
AWER's suggestion on transparent tariff setting was for the government to reveal the proposed tariff adjustments to the people, with a detailed cost structure, to carry out public consultations and gather feedback on the proposal before making a final announcement on the tariff structure.
Calling only few NGOs for a briefing session is not public consultation. AWER has successfully pushed for such a tariff mechanism for the water services sector with Suruhanjaya Perkhidmatan Air Negara.
Now, will the Ministry of Energy, Green Technology and Water allow transparent tariff setting for the electricity and gas sectors in the coming tariff increase?
Point 5: What is the estimated tariff increase?
Based on information gathered from meetings with MyPower Corporation, Petronas will be imposing a two-tier pricing for natural gas. The power generation sector uses around 1,300mmscfd (million standard cubic feet per day) of natural gas for electricity generation and the first 1,000mmscfd will be at the regulated or ‘subsidy' price.
The remaining 300mmscfd and above will be sold to the power generation sector at RM44 per mmBTU (the market price). AWER estimates the tariff increase components at:
If the government allows the first 1,000mmscfd to be increased by RM 1.50 per mmBTU, the electricity tariff increase will be between 15 percent and 17 percent, to 38.57 sen/kWh and 39.24 sen/kWh respectively.
If the government allows the first 1,000mmscfd to increase by RM3 per mm BTU, the tariff increase will be between 17 percent and 19 percent, to 39.24 sen/kWh and 39.91 sen/kWh respectively.
If we refer to government's previous plan to increase gas price at a flat RM3 per mmBTU for all 1,300mmscfd of natural gas used, the average tariff increase can be capped between seven and nine percent to 35.89 sen/kWh and 36.56 sen/kWh respectively.
In addition, if a flat RM6 per mmBTU increase is imposed for all 1,300mmscfd of natural gas used, the tariff increase still can be capped at between 12 and 14 percent to 37.56 sen/kWh and 38.24 sen/kWh respectively.
All these estimates include TNB's base tariff increase and coal price pass-through. Based on the data above, it is evident that the increase in natural gas price will cause a high impact on the electricity tariff increase, especially under the two-tier pricing mechanism.
This is the main reason why AWER, for the past three years, has been wanting the government to be transparent in setting the electricity tariffs.
Now, it is time for government to publish the breakdown of each cost component for the tariff increase, including the fuel cost breakdown, so that the people understand what they are paying for and businesses can forecast their future expenditure as a result of the electricity tariff increase.
This will also assist potential investors to evaluate their investment strategies in Malaysia. All in all, shouldn't this be a win-win situation for all parties?
S PIARAPAKARAN is president of the Association of Water and Energy Research Malaysia (AWER).
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