HOW NOW NAJIB? Now that petrol & diesel are cheaper, will Putrajaya cut electricity tariffs

Petrol and diesel prices were lowered in the new year because of falling world oil prices, but that does not mean electricity tariffs will follow suit as the fuel used to generate power is priced differently, pointing to the issue of transparency in the way Putrajaya fixes gas subsidies for power producers.

Most of the natural gas that is used by Tenaga Nasional Bhd and independent power producers (IPPs) to generate electricity is sold to them at below market rates.

Politicians and energy industry experts explained that although consumers expect electricity tariff prices to fall like RON95 and diesel, the electricity sector is more complicated.

And although the price of coal – the other main fuel used in power plants – may have dropped, this might also not make a difference.

To know if there will be an actual drop in the cost of producing electricity, energy expert S. Piarapakaran said, Malaysians will have to wait till July, when the next tariff revision is due, to see if there will be a drop in tariffs.

Fuel already subsidised

Piarapakaran, who is president of the Association of Water and Energy Research (AWER), said that the entire electricity generation sector used around 1,300 mmscfd (million standard cubic feet per day) of natural gas.

The first 1,000 units of that total are piped natural gas sold at a fixed price of RM15.20 mmBtu (million British Thermal Units) from national oil company Petronas.

The rest of the 300 units are sold as Liquefied Natural Gas (LNG) at the more expensive market price of RM46 per mmBtu.

So, a drop in the price of LNG may not affect power producers, if they only used piped gas for which the price is already fixed.

Piarapakaran said that for every ringgit of unit of electricity that the consumer pays, 41 sen is the cost of fuels such as gas and coal.

The rest of the breakdown sees 28 sen going to capacity charges from TNB and IPPs, 21 sen to distribution costs, while transmission costs come in at 9 sen.

“Even though the price of fuel drops there are still fixed costs such as the capacity charges, distribution and transmission.

“So if prices of LNG drop, we might not be able to see its affect in the next tariff revision in July.

“Mainly because the piped gas price that is fixed at RM 15.2 per mmBTU is said to be 'subsidised' pricing.”

Given the fixed costs, the cost of electricity production can only drop much lower if the government further reduced the price of piped gas to power producers, which is already low to begin with.

It ends up being a question of transparency, said Piarapakaran.

“It depends on how transparent the government is in determining piped gas prices. This is why AWER has been pushing the government to implement transparent tariff setting for electricity."

Wait till July

Even if the government were to reduce piped gas prices and the cost of power generation were to come down, Piarapakaran said consumers would only see tariffs drop in July this year.

This is since tariff revisions are done for every six month cycle – January to June and July to December. If the price of fuel changes, that cost is passed on in the next review cycle, he said.

“A six-month review mechanism is to prevent price shocks in tariff adjustments. Shocks must be prevented in our electricity pricing as it will impact our economy as manufacturing and the commercial sectors use almost 80% of electricity generated.

“When energy costs goes up, everything goes up; petrol and diesel price has reduced slightly last month, but we did not see a drop in the prices of goods and services.”

When the tariff was raised in January 2014, it was done when coal was priced at US$87.50 per tonne.

When coal dropped to about US$70 to US$75 per tonne in mid 2014, the savings were used to keep electricity prices at the same level even though there was supposed to be a tariff revision in July 2014.

The savings in lower coal prices also balanced out a rise in LNG prices to RM49 per mmBtu, he said.

“The drop to between US$70 and US$75 per tonne has already been reflected in the two deferred tariff adjustments of July 2014 and January 2015,” said Piarapakaran.

Pandan MP Rafizi Ramli, however, believes that in principle, electricity tariffs should go down as prices of crude oil have tumbled.

“If crude oil prices tumble, naturally gas prices should also come down. But with electricity, it’s a lot more complicated than that,” said Rafizi, who has wide experience in the oil and gas sector.

Rafizi admits that even if natural gas prices were to go down, the cost structure of TNB to produce electricity does not change by much as the company uses the cheaper piped gas.

But he believes that if tariffs can be reduced, the government should not wait for the next six-month cycle.

“The six-month cycle assumes that tariffs will go up every six months. But now that prices are going down, any reduction should be done immediately.”

“Otherwise, as was shown in the price of petrol and diesel, artificially higher prices would just benefit TNB and the IPPs." – TMI