Malaysia must take to ensure we can minimise cost impact due to global energy price spike
ON SEPT 29, the Association of Water and Energy Research Malaysia (Awer) sent a letter to the prime minister (PM) and his Cabinet on the possible energy crunch situation and the steps that Malaysia must take to ensure we can minimise the cost impact due to global energy price spike. The issues that we have raised and our suggestions to the PM and his Cabinet are as below.
Aggravating a Global Energy Crunch
Many factors will aggravate the demand-supply situation that will lead to a global energy crunch. Below are some of the dominant factors:
1. Winter and Russia
Napoleon War, World War II and annexation of Crimea have proven that winter was in Russia’s favour and it still does. Russia has continued to allow European Union (EU) to be dependent on its energy resources. Even after Russia annexed Crimea from Ukraine, EU was slow in its energy independence from Russia. The recently concluded Group of Seven (G-7) summit decided to cap the prices of energy resources from Russia so that it does not give huge returns to Russia to fund the war against Ukraine. On the other hand, Russia has responded that it will stop selling energy resources to countries that imposed price caps. Now, what if Russia shuts all energy supply to the EU just like what it had done before to reduce the liquefied natural gas (LNG) stockpile leading towards 2022 winter and its impact on 2023 winter preparation with reduced or no stockpile situation? If the war prolongs, the energy crunch in the 2023 winter will be far greater due to limited and insufficient LNG handling infrastructures in EU.
2. OPEC and OPEC+
In early September, OPEC and OPEC+ agreed to cut oil output from October 2022 so that crude oil prices can maintain at their desired price. This situation coupled with sanctions on Russia will only aggravate the winter energy crunch situation that will hit the global market due to EU’s own energy insecurity. An increase in crude oil price will impact the prices of natural gas and coal. Thus, creating a second wave of cost impacts.
3. Crude Oil, Natural Gas and Coal Combo
Crude oil price spike will push natural gas and coal prices to spike as well. This is a trend that we have observed since the rebalancing of electricity generation’s energ y mix post-2011 where coal thermal power generation plants up increased to rebalance cost impacts from natural gas thermal plants. At the moment, EU cannot immediately replace natural gas dependence with Russia as regasification infrastructures need time to be built in order to bring in more LNG from other nations. Even if EU starts to source more non-Russian energy resources, there must be sufficient infrastructures and at a palatable cost. Some EU nations are already stating that their neighbours may have to find their own heat during winter. At the moment, there is a possible severe energy crunch globally during the upcoming winter with the assumption that the coal productions are not logistically affected like what happened during the 2021 winter due to monsoon rains.
What Should Malaysia Do? Solution 1: Malaysia may take India’s and a few other nation’s positions on energy security
While sanctions have been imposed on Russia, EU is still relying on Russian energy and the recent G-7 meeting is also look- ing into arm-twisting Russia to reduce its energ y resources price via workable sanctions. This situation will only be favourable to EU if all nations bite the bullet of high energy prices globally and impose sanctions against Russia. The Non-Aligned Movement (NAM) had made its stand not to take sides during the cold war. Malaysia is a member country of NAM. Now, should Malaysia continue our NAM stand like India and other Asian and African nations? Malaysia’s main objective is must ensure we are able to continue to increase our energy security and reduce the cost input of energy resources as well as some downstream outputs like fertilisers. The arm-twisting done using sanctions are to protect the interest of EU’s citizen and its economy. Thus, Malaysia has the same right to protect our people and our economy.
Solution 2: Increase hydroelectric plant’s load factor
Previous experience has shown that during the rainy season, increased hydroelectric plant operation reduces fossil fuel utilisation and overall fuel cost for electricity generation. To make this a successful cost reduction solution, flood modelling must be done to ensure the increased operation of hydroelectric dams does not increase flood occurrence probability during rainy seasons. The reduction in fossil fuel consumption will reduce fuel cost input via the Imbalance Cost Pass-Through mechanism. On top of that, the government via Suruhanjaya Tenaga (ST) can impose a profit cap for the increased load factor for hydroelectric dams that is above the agreed or planned load factor so that more savings can be passed to the electricity tariff.
Solution 3: Wrongdoers must be punished for causing a high reserve margin
The projected reserve margin jumped from 32% in 2020 to 52% in2021andtobeat51%in2022 based on reports published by ST. The reserve margin is projected to be above 40% until 2027. Since 2014, when ST began a number of direct negotiations of power plant awards beginning with Track 4A (Pasir Gudang), Awer has warned high reserve margin situation back then. The last direct negotiation power plant project was awarded in 2019. A higher reserve margin will pass higher system costs to electricity tariffs. Moreover, based on ST’s report in 2013, Planning and Implementation Committee for Electricity Supply and Tariff’s criteria for reserve margin is Loss of Load Equivalent at <= 1 day. This is equivalent to a 22% reserve margin benchmark for developing economies. Thus, 52% is equivalent to 2.4 times the benchmark value.
High reserve margin situation for electricity supply in Peninsular Malaysia was due to the wrong implementation by the government agencies themselves. While the government is urging members of the public and businesses to share the burden of high energy prices globally, the government must also take action against the relevant officers over their failure in ensuring the reserve margin is at the optimal level which is 22%. Therefore, we urge the PM to be fair and take action against former ministers, officers and commissioners of ST and Energy Ministry that has caused this blunder. We have warned numerous times that direct negotiations on planting up new power plants ahead of the need will increase levelised cost and reserve margin. If people and businesses need to swallow this bitter pill due to inane steps by government officers, then these officers must be made responsible for their mistakes and severe actions must be taken immediately.
Solution 4: Impose strict irreversible foreign equity cap in energy and electricity sector
The government already has a 49% foreign equity cap policy for the electricity sector. The Russia-European Union energy dependence is a clear example of why we must protect our national strategic assets. ST and relevant ministries failed to do this a few years ago by allowing a foreign company to take over ownerships of a few power plants in Malaysia and this has breached the 49% foreign equity cap policy. Similarly, ST and relevant ministries have also allowed the sale of project awards to this foreign company. Project awards are not items that can be sold based on existing government policy. Thus, it is imperative that the government take action against ST and relevant ministries that caused energy insecurity. The government must also implement an irreversible foreign equity cap in energy and electricity sector as well as ban sales of project awards of national strategic assets such as power plants to prevent such incidents from repeating.
Solution 5: Postpone new plant up to prevent higher reserve margin
The last step that can be implemented is the postponement of the new plant-up. This option was implemented in the past to ensure the reserve margin is at optimal level. Thus, the government must also revisit all awarded power plant projects and negotiate with the respective companies to delay the financial close as well as the Commercial Operation Date.
On top of this, the volatile currency exchange situation will also impact the electricity sector due to the 100% coal import situation. We hope that the prime minister will act swiftly to ensure Malaysia’s energy security is secured and energy price cost escalations are minimised by implementing our suggestions.
- S Piarapakaran is Awer’s president.