Fuel prices put pressure on electricity generation


THE electricity generation sector around the world is under pressure due to rising fuel costs that drive power station turbines. The same situation is happening in Malaysia.

The price of coal, which is one of the main materials used by Tenaga Nasional Bhd (TNB) to generate electricity, has increased significantly. More than 80% of the electricity generated in Malaysia uses coal and gas. As a result, the utility company is facing constant cost pressures to ensure that the country continues to have adequate supply and the company’s cashflow remains healthy.

By the end of last year, the price of coal had jumped to US$200 (RM846) per tonne from about US$50 per tonne by mid-2020. At the end of May 2022, coal prices continued to soar to US$434 per tonne, exacerbating TNB’s cost for generating electricity.

According to the trend, coal prices are currently up 600% compared to May two years ago.

The increase in coal prices is due to the high demand for various minerals globally, including oil and gas, in line with the opening of the economy post-pandemic.

Oil and natural gas prices themselves have increased exponentially, putting pressure on all industries. The increase in oil prices also affected the price of coal, causing it to rise.

In Britain, which relies on gas to generate electricity, the authorities were forced to raise electricity tariffs by 54% in April. The Indonesian government also announced an increase in electricity tariffs for non-household customers starting July. The move is to address the sharp rise in costs.

In Malaysia, the implementation of the Imbalanced Cost Pass-Through (ICPT) mechanism helps TNB to be viable and able to coordinate the effects of rising fuel prices and electricity generation, as well as ensure no disruption to generation operations.

Through the ICPT, if there is a reduction in the cost of fuel and generation, then the saving is returned to the people as a rebate. If the opposite holds true, the excess cost will be channeled to the people as an ICPT surcharge.

Following this framework, generation cost pressures due to rising fuel prices were successfully managed in a more orderly manner, allowing fuel-related costs to be reviewed every six months.

According to a study, the increase in coal prices has caused the cost of electricity generation to rise more than 4.5 times, as coal and natural gas are used as fuel to generate almost 93% of the electricity supply in Peninsular Malaysia.

Based on the division, the cost of generation, including fuel, makes up more than 65% of the basic electricity tariff. The utility company also has to spend billions of ringgit to manage the electricity supply system for nearly 10 million customers.

TNB emphasised that the ICPT enables it to adjust prices flexibly, contribute to development and reinvestment, as well as build a competitive and efficient industry.

The utility said the rise in fuel prices is a global phenomenon driven by increased demand for supply to support post-pandemic economic growth and supply rationing issues in major producing countries due to supply constraints at the domestic level, including weather factors affecting fuel production.

At a media briefing recently, TNB affirmed that Malaysia enjoys the lowest electricity tariffs in the region following the implementation of the ICPT, which was introduced to promote cost efficiency and ensure financial sustainability in electricity generation.

TNB affirms that Malaysia enjoys the lowest electricity tariffs in the region following the implementation of the ICPT, which was introduced to promote cost efficiency and ensure financial sustainability in electricity generation (pic: MUHD AMIN NAHARUL/TMR)

Since the introduction of ICPT between 2015 and 2022 under the Incentive-Based Regulation, the mechanism has provided rebates to consumers amounting to RM8.6 billion and surcharges of RM5.3 billion.

The surcharge to cover the increase in fuel costs alone amounted to RM1.67 billion under the ICPT for the first six months of this year (1H22). TNB said the 3.7 sen/kWh surcharge imposed on commercial and industrial (C&I) consumers under the ICPT mechanism was to cover the increase in fuel prices amounting to RM1.67 billion from July to December 2021.

Analysts are of the opinion that there should be a tariff surcharge for the 1H22 as TNB has taken into account the cost of “under-recovery” fuel amounting to RM1.3 billion for the third quarter of its financial year 2021 (3QFY21).

Fuel costs have also exceeded the reference rate as stated in the Regulatory Period 2 (RP2) Extension. Under the RP2, the rates for coal and gas were set at US$67.45 per tonne and RM27.20/mmbtu respectively. Today, the price of coal is approaching US$400 a tonne.

Through ICPT, rebates or surcharges are given every six months, even though cost estimates are done every three months. An analyst said there is a liquidity gap between the differing periods of these two calculations and this would put pressure on TNB’s cashflow.

The latest ICPT adjustment for the period of Feb 1 to June 30, 2022, allows domestic consumers in the peninsula to enjoy a rebate of two sen/kWh, while a minimum surcharge of 3.70 sen/kWh is imposed on C&I users.

The pressure on TNB was seen in its 1QFY22 report where net profit fell 6.84% to RM893.1 million compared to RM958.7 million a year ago. Operating costs jumped 46.9% to RM13.43 billion from RM9.15 billion previously, due to the increase in fuel prices offset through ICPT.

Hong Leong Investment Bank Bhd (HLIB) in a note said TNB’s “receivables” jumped to RM14.1 billion in the 1Q22 from RM10.5 billion in the 4Q21, due to the impact of the time gap for ICPT approval of RM1.7 billion in the 1H22 compared to RM4.5 billion previously, driven by fuel cost imbalances taken into account for the 2H21.

HLIB expects TNB’s cashflow to be affected by the inconsistencies between the pass-through fuel costs in the near future.

“However, we expect the government to continue to respect the RP3-ICPT mechanism,” the market research agency said.