A power crunch in the early-1990s in Malaysia, when the country’s economy was booming, has taught local policy makers an important lesson: the need to continuously plan for energy security to ensure sustainable economic development.
Energy is the foundation that supports and spurs the socio-economic development of a country, as Energy, Green Technology and Water Minister Datuk Seri Peter Chin puts it.
In his recent blog posting, he explains: “Development is not possible without energy, and sustainable development is not possible without sustainable energy”.
While Malaysia’s electricity supply challenges in the 1990s have since been overcome by the opening up of the industry to allow private sector participation in electricity generation, the nation’s power industry continues to face major challenges as the country enters its next phase of growth towards a high-income economy.
These challenges, which are global in nature, come in the form of tightness in fuel supply, depleting fossil fuel resources, increasingly volatile fuel prices, and the need to reduce carbon emissions to alleviate global warming.
Rising energy demand in the country, driven by its robust economic activities, only serves to exacerbate the challenges already faced by the energy sector.
Industry experts reckon that unless Malaysia restructures its power sector, meeting the rising energy demand will be tough job as the country advances up the value chain.
“Malaysia is currently undergoing rapid economic development; all these ongoing economic activities need to be powered by sufficient and stable energy supply,” an industry player tells StarBizWeek.
“The country cannot afford to keep its energy sector status quo. Reform initiatives are essential to keep up with the changing times and to deal with the global challenges, so as to ensure that the power sector’s supply chain remains healthy enough to support the country’s economic growth,” he explains.
Changing landscape
To the comfort of industry observers, Malaysia has already embarked on a programme to strengthen its energy sector.
MyPower Corp, a special purpose unit parked underthe ministry, has initiated several key reform initiatives for the Malaysian Electricity Supply Industry, or MESI, to support the country’s growing economy.
Essentially, the initiatives, which will involve the entire supply chain of the industry from generation to transmission and distribution, are aimed at resolving issues related to industry governance, government and regulatory policy, tariff, fuel supply and security as well as industry structure.
According to MyPower, the end objective of the MESI transformation agenda is ensure reliability, transparency, efficiency and sustainability of operations and delivery of electricity in the country. These efforts will be a continual process to be implemented over the next five years.
“The MESI transformation programme is a step in the right direction to make the country’s power sector more competitive, which will then translate to efficiency gains for the benefit of economy and consumers as a whole,” Etiqa Insurance and Takaful Bhd’s head of research and investment management division Chris Eng says.
In general, industry observers are positive that the MESI transformation agenda will continue to gain traction over the medium term, as the foundation for reforms has already been laid through various initiatives.
Already, there have been some positive developments in Malaysia’s power sector. A notable change is the recent introduction of international competitive bidding process for the construction of a new gas-fired power plant of 1,000 megawatt (MW) to 1,400MW capacity in Prai as well as the calling for a competitive restricted bidding exercise among the first-generation independent power producers (IPPs) and Tenaga Nasional Bhd’s (TNB) ageing plants.
The move towards a competitive bidding process, says industry regulators, is necessary to ensure transparency and efficiency in procuring future power-generation capacity as well as the best value for the sector.
MyPower has also developed ring-fencing rules, under which TNB’s role has been clearly defined as a single buyer and as a system operator, to allow the industry to be managed in a transparent manner.
Another change that Malaysians will soon see is the unbundling of their monthly TNB’s bills to reflect charges related to generation, transmission and distribution.
The move to segregate the costs of generation, transmission and distribution in consumers’ monthly bills is to further improve transparency in electricity pricing, and enable consumers to better understand the cost elements of the electricity that they have consumed. In Asean, such system is already in place in Thailand and the Philippines.
Sustainable supply
At present, the peak demand for electricity in Peninsular Malaysia stands at 15,826MW, as recorded on June 20, 2012.
By 2020, the peak electricity demand will likely exceed 20,000MW based on an expected growth rate of 3.5 per cent, or 550MW to 600MW, per year.
Projects to boost power-generation capacity are already in place to meet the growing power demand and a number of projects have already been awarded to players.
These include the 1,000MW coal-fired power plant in Janamanjung to TNB, and another 1,000MW coal-fired power plant in Tanjung Bin toMMC Corp Bhd. And of another 4,500MW gas-fired capacity that will rolled out over the next two years, up to 1,400MW (identified as the Prai power plant) has already been up for competitive bid.
Malaysia’s energy mix at present remains heavily reliant on fossil fuels, which contribute to more than 90 per cent of the industry’s generation fuel mix.
According to TNB’s latest report, the industry’s generation mix for the financial year (FY) Aug 31, 2011, comprised 45.1 per cent gas, 44 per cent coal, 2.5 per cent distillate, 2.6 per cent oil and 5.8 per cent hydro. In FY 2010, the industry’s generation fuel mix was composed of 54.2 per cent gas, 40.2 per cent coal, 0.2 per cent distillate, 0.3 per cent oil and 5.1 per cent hydro.
Industry observers believe coal will become an increasingly more dominant fuel supply to Malaysia’s energy sector in the years to come, given the commodity’s relatively stable and abundant supply.
It is noted that fuel availability to the energy sector has been challenged by the tightness in gas supply in recent years.
This is mainly attributable to the prevailing price distortion as a result of gas subsidies.
Gas prices sold to the energy sector have been kept low for many years as part of a subsidy programme to ensure affordable electricity prices to end users in the country. At present, gas sold to the energy is fixed at RM13.7 per million metric British thermal units (mmbtu).
The price has not been revised since the last revision in June 2011, even though the market prices of gas have soared to around RM49 per mmbtu presently.
Such price distortion has over the years discouraged investments in gas infrastructure, which could have enhanced production.
It also made no economic sense for oil companies to sell gas to the country’s energy sector, given the significantly depressed prices, when they could sell their gas at higher prices elsewhere.
Hence, the pressure has been building in recent years for prices of gas sold to the energy sector to be raised to market level.
A higher gas price will lead to an increase electricity tariff. But any change in this aspect is unlikely for the time being, at least not until the country’s general election is over.
According to industry observers, a power tariff hike in Malaysia is an eventuality and simply inevitable, as the prices of all fossil fuels have increased, and will likely remain on a rising trend in the years to come.
“We cannot maintain the model that we’ve had for the past two decades - of high cost (of power generation) and low prices (of electricity); it’s simply unsustainable,” one industry observer explains.
In the MESI transformation programme, a stabilisation fund has been proposed as a buffer to any major upheaval in the pricing of fuel to protect low-income users.
While industry observers believe that the stabilisation fund is a good idea to help stabilise electricity prices, details of the plan remain scant at this juncture.
For instance, the question remains as to which party will the one financing the fund.
“It definitely doesn’t make sense for consumers to bear the burden of financing the stabilisation fund, as that will not be any different from raising tariff,” an industry observer argues.
The energy sector will continue to be an interesting space to watch, as it goes through a transformation process that will see the Government striving to find the optimal balance between the conflicting demands of economic pressures (stemming from rising commodity prices and the need to rationalise subsidies to restore fiscal balance) and socio-political interests to ensure affordable electricity tariffs to users.
