How to save RM4bil in subsidies

 

At the end of last year natural resources, environment and climate change minister Nik Nazmi Nik Ahmad saved the rakyat RM5.4 billion through adjustments to the Imbalance Cost Pass-Through (ICPT) mechanism, which controls electricity tariffs.

This is one of the quickest and most efficient ways of using incentive based regulation and tiered prices to target subsidies and reduce the overall subsidy bill.

Under the scheme the ICPT implementation period for January to June 2023 was fixed and all customers receive discounts on the full electricity charge of 27 sen/kWh without any drawback for households as well as micro, small and medium enterprises (MSMEs).

Large non-domestic ICPT rates rose to 20 sen/kWh with a RM1.93 billion subsidy to relieve customers of the full surcharge of 27 sen/kWh.

As we approach the end of the current control period the minister can save even more with some small, targeted adjustments for the rest of the year.

For example, removing the tariff relief for large non-domestic users would save the government RM1.93 billion and still exempt 97.4% of them, mainly MSMEs.

Removing the tariff relief for households that use over 600 kWh per month could save the government around RM1.96 billion. This would only affect the top 11.5% of users who are mainly in the high income groups.

Currently the top 3% of customers using above 1,000 kWh receive an average subsidy of RM612 per month compared to the average of RM39 per month for the bottom 50% of users.

Together these would save RM3.89 billion and reduce the subsidy bill to RM6.87 billion compared to RM16.5 billion in 2022.

These savings can be well spent. Exempting the 127,000 lowest income households under the e-Kasih scheme from all electricity charges below the 200 kWh monthly lifeline band would cost only RM66 million.

A small number of large low-income families might be affected but can easily be exempted by applying directly for the relief. Alternatively, the RM3.89 billion saving is equivalent to RM1,300 per year for 2.91 million B40 households if the Sumbangan Tunai Rahmah (STR) was reformed into a universal basic income.

It would also be an incentive for high electricity users to be more energy efficient. Power companies such as TNB have long-term plans to address and reduce higher fuel cost including scaling-up renewable energy (RE) and improving efficiency in existing power-plants. They also try to negotiate lower prices for fuel and improve efficiency to reduce operational costs of generation facilities.

On the demand side TNB has various energy efficiency (EE) initiatives to promote electricity savings, audit energy consumption, install net energy metering and encourage installation of RE alternatives such as solar electricity generation.

The new Green Electricity Tariff (GET) launched in February this year helps consumers reduce electricity consumption and their carbon footprint through RE certificates.

In one recent case EE initiatives in partnership with TNB saved one company RM19 million over 20 years. So for high electricity users these initiatives can be very worthwhile.

The problem for everyone else is that while electricity prices remain low the net benefits of changing behaviour or technology to save energy are too low compared to the costs.

Over time the transition costs to EE alternatives are falling but the best option to encourage large users to switch to EE is still to increase the price of conventional electricity.

So the argument for subsidy reform to reduce exemptions for high-users is compelling. It will save almost RM4 billion, provide resources to reduce bills for the most vulnerable and encourage faster transition to greener behaviour and energy efficiency.

It is also one of the simplest ways to target subsidies quickly. - FMT

The views expressed are those of the writer and do not necessarily reflect those of MMKtT.