The Malaysian government has finally approved the increase in retail electricity tariffs sought by the majority stateowned Tenaga Nasional Berhad (TNB) for more than a year. But the increase formed part of an overall government package of fuel and energy price rises which left the integrated power utility little better off.
The increases are planned to come into effect on July 1, 2008 and at present apply only to peninsular, or western, Malaysia. New electricity tariff rates may, however, also be announced in the near future in the state of Sabah in eastern Malaysia.
But government officials from the state of Sarawak, also in eastern Malaysia, said on June 9 that they had not yet received a proposal for an increase in tariffs from the state-owned electricity company, Sesco. Power prices last rose in Sarawak in April 2007.
The national government said that not all customers in peninsular Malaysia will face an increase in the cost of their electricity supplies. Prime Minister Abdullah Ahmad Badawi said that more than 59% of residential consumers would still pay the rate applying before the tariff increase, providing that they do not increase their electricity usage.
Abdullah said in a statement that the “new tariff will not affect those who only use 200 kWh and below every month. Their estimated monthly bill should be less than MR43.60 [$13.5] a month.”
Residential consumers using less than the 200-kWh benchmark will pay only MR0.218/kWh. Household consumers in higher usage brackets will pay progressively more as their consumption increases, with the price reaching a maximum of MR0.46/kWh for all usage above 901 kWh a month
TNB reiterated the government’s stance, saying in a statement to the Bursa Malaysia that most household consumers would experience much lower increases than the high-end users. It noted that, as well as the 59.1% of households who use under 200 kWh a month, a further 26.7% of residential consumers use between 201 and 400 kWh.
These consumers are expected to see an increase of between 1% and 10% in their monthly bill, TNB said.
Abdullah said that the typical increase for commercial and industrial consumers would be 26%, but that low energy users in these sectors would pay a lower rate. “Shop owners, small restaurant operators and rural industry users who use less than 200 kWh a month will only see an 18% increase,” he said.
While welcoming the increased tariffs, TNB said that the government’s overall package of measures had not left it better off or even standing still. The utility, which last raised its retail electricity tariffs by an average of 12% in June 2006, noted that the new package also included a restructuring of fuel subsidies and an increase in gas prices which, together with higher, marketbased international coal prices, will more than offset the higher revenues projected from the increase in retail electricity tariffs.
TNB currently pays MR6.40/MMBtu to the state energy company Petroliam Nasional Berhad for natural gas supplies, which at present account for almost 70% of peninsular Malaysian power production. The price of MR6.40/MMBtu — which was originally set as far back as 1997 – will rise to MR14.31/MMBtu ($4.4/MMBtu) following the government package.
This will increase TNB’s annual gas bill by about MR4.2 billion, the utility said. It elaborated by noting that the figure would rise from MR3.3 billion to MR7.5 billion ($2.3 billion).
TNB also warned that its gas purchases remain highly subsidized.Petronas has in fact said that the market price is currently around MR40/MMBtu, or almost three times the rate pertaining after the proposed increase.
The utility added that, while its coal purchases are not subsidized, recent increases in the international thermal coal price had already added MR1.4 billion to the company’s bill for the fuel for 2008 compared with 2007. Coal now accounts for more than a quarter of the peninsular Malaysian generation mix.
Putting the increases in revenues and costs together, TNB President and Chief Executive Che Khalib Mohamad Noh said that the revenues flowing from the new rates would not fully cover higher operating costs resulting from the increased price of natural gas and coal. He said that TNB is projecting an MR4.8 billion increase in revenues from the increased tariffs in 2008 but an MR5.6 billion hike in operating costs.
TNB may thus seek to revise its electricity tariff rates if gas and coal prices rise again, he said.
Meanwhile the government has sought to spread the burden of increased energy costs across the power sector. It announced that it is imposing a 30% windfall tax from July 1, 2008 on the country’s independent power producers (IPPs), who account for a substantial part of peninsular electricity production.
The IPPs have to date successfully fended off attempts to reduce their profits by the renegotiation of the terms of the power purchase agreements (PPAs) that they hold with TNB. But apart from mandating the windfall tax, the cabinet also instructed TNB to resume negotiations on the price and volume of sales within the PPAs held by the private generators.
Following the government’s tariff announcement the local rating agency RAM Ratings noted that the “bold move to overhaul the country’s subsidy system involving fuel and electricity prices” had come after “the government’s subsidy burden has become untenable and inefficient.”
RAM added the “the inflationary impact of fuel costs and electricity tariffs will introduce a change in the cost structure of the economy; this would likely amplify pressure on the Central Bank to raise interest rates to mitigate negative real interest rates on deposits, consequently pushing up borrowing rates as well.”
On the specific issue of the impact of the package on the power industry RAM said that, following the announced imposition of the windfall tax on IPPs, the rating agency would “evaluate the impact on our portfolio of independent power producers and projectfinanced debts.” It noted that “of particular concern are the ratings for debts dependent on equity returns or distributions from the respective IPP project companies, and junior debts raised by the IPPs.”
“Appropriate rating action will be taken once there is greater clarity on the financial positions of the IPPs and their shareholders, after the incorporation of this unexpected windfall tax,” RAM Rating said. But RAM also noted that, for TNB, the tariff hike would “help offset the heavier generating costs associated with more lofty gas and coal prices. This respite will in turn help the national electricity giant to maintain its strong debt-servicing ability,” the rating agency said.