Achieving a sustainable future via ICPT
KUALA LUMPUR: There have been discussions in the media recently around electricity tariffs and how the downward movement of international coal and gas prices in recent months should be reflected in lower tariffs.
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), that has been adopted by many 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 the liberalisation of the utility market, as mentioned by industry observers.
Under the Incentive Based Regulation) (IBR) framework under Energy Commission (ST), the government fixes the tariff for a period of three years at a time (called 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 fuel prices are reflected as rebates or surcharges depending on the decrease or increase of fuel prices compared with the budgeted fuel prices set by government, which is passed onto consumers. The ICPT mechanism is meant to be fair and transparent, in line with global standards and complies to the IBR framework. Since March 2015, consumers have enjoyed a rebate of more than RM 6.3 billion until the middle of last year.
In the current regulatory period (or RP2), the “budgeted” price for coal is set at US$ 75/tonne (RM306/tonne. However, last year when the surcharge was fixed, coal prices had risen. Since then coal prices have fallen by a quarter to below US$ 90/ton since the middle of last year. Given that there is usually a lag of six months for adjustment to actual fuel prices, there is high likelihood there will possibly be a lower surcharge for the next ICPT period during July to December this year.
The tariff through the IBR framework has and continues to keep the interest of the people in mind, given that the tariff for domestic or residential customers has been capped and the surcharge is being subsidised by the government.
Research has shown that electricity is a small driver of cost of living; it comprises only 2.7 per cent of the overall CPI (CPI = Customer Price Index; Source: CPI 2018 report from Department of Statistic) basket. This means the small increase in electricity prices alone should have only a negligible impact on overall business costs and cost of living.
It may also be the right time to view the situation through a set of different lenses, one that takes into account the long term sustainability of our future and the Malaysian economy.
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 burden on the rakyat, these subsidies can negatively impact the economy in the long run.
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 these subsidies cannot last forever. This calls for a more efficient mechanism of subsidies.
This is one of the reasons why the government has implemented a subsidy rationalisation plan, which aims to reduce allocation on subsidies to enable efficient spending on development programmes.
The effects of climate change and rising temperatures are apparent over the past few months.
However, as in other developed economies, maybe it is time for Malaysians to adopt more energy efficient practices to reduce energy consumption and rising bills.