ICPT to balance efficient, sufficient energy for a sustainable future

Pic By BERNAMA

The downward movement of international coal and gas prices in recent months has ignited some discussion on electricity tariffs. Some have argued that the developments should lead to lower tariffs.

Taking a step back, it is perhaps a good time to review the entire tariff setting process and how fuel prices affect this.

This brings us to the imbalance cost pass-through (ICPT) mechanism that has been adopted by many other countries to maintain stability in domestic markets and protect them from international volatility.

Usually, the adoption of an ICPT mechanism is the first step towards liberalisation of the utility market, as mentioned by industry observers.

Via the incentive-based regulation (IBR) framework under the Energy Commission, the government fixes the tariff for a period of three years at a time — known as a regulatory period — in order to ensure market stability.

However, as fuel comprises a major part of the tariff, fluctuations in international markets need to be built into the tariff.

As per the ICPT mechanism, the government reviews the actual fuel prices every six months and makes the necessary adjustment to reflect this.

Changes in the fuel prices are reflected as rebates or surcharges, depending on the decrease or increase of fuel prices compared to the budgeted fuel prices set by the government, which is passed onto consumers.

The ICPT mechanism is meant to be fair, transparent and in line with global standards, said energy industry proponents.

From March 2015, consumers had enjoyed a rebate of more than RM6.3 billion until mid-2018.

In the current regulatory period known as RP2, the “budgeted” price for coal is set at US$75 (RM306) per tonne.

However, last year, when the surcharge was fixed, coal prices had risen. Coal prices have fallen by a quarter to below US$90 per tonne since the middle of last year.

Given that there is usually a lag of six months for the adjustment to actual fuel prices, there is a high likelihood that there will be a lower surcharge for the next ICPT period from July to December 2019.

The tariff through the IBR framework has and continues to keep the interests of the people in mind, given that the tariff for domestic or residential customers has already been capped and the surcharge is being
subsidised by the government.

Indeed, research has shown that electricity is a small driver of the cost of living; it comprises only 2.7% of the overall Consumer Price Index (CPI) basket, according to the 2018 CPI report from the Department of Statistics Malaysia.

This means the small increase in electricity prices alone should only have a negligible impact on the overall business costs and cost of living.

It may also be an opportune time to view the situation through a different lens, one that takes into account long-term sustainability and the Malaysian economy — a perspective that is often referred to by economists.

Presently, Malaysia enjoys one of the lowest electricity tariffs in the world.

However, much of this is due to the subsidies on natural gas that the government has provided.

While reducing the cost burden on the rakyat, some quarters argue that subsidies can also negatively impact the economy in the long run.

According to them, money that could be spent on other public amenities is being used to artificially hold down the price of natural gas.

Consequently, it is important to note that the subsidy cannot last forever, and calls for a more efficient mechanism for subsidies to be more targeted.

This is one of the reasons why the government has implemented a subsidy rationalisation plan.

Its aim is to reduce the allocation on subsidies in order to enable efficient spending on development programmes.

It is also perhaps time for Malaysians to take control and adopt more energy-efficient practices to reduce energy consumption and, therefore, rising bills.

The example has been set by a federal government minister with a proposal to make government buildings energy efficient and attain savings of RM47 billion by 2030.