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By Nurunnasihah Ahmad Rashid
KUALA LUMPUR, Jan 11 -- Coal is one of the major sources of energy used for generating electricity worldwide. Being fully imported into Malaysia, this commodity plays a large role in the nation’s energy scheme.
With global coal prices rising steadily, this puts pressure on the power generation industry in the country.
Coal prices jumped to a record high of US$270 (US$1=RM4.19) per tonne last October, and it stands at US$203 per tonne as at Jan 10, 2022. This is amidst demand for coal hitting a record high in 2021 and supply remaining tight.
Coal and natural gas are used to generate nearly 93 per cent of Peninsular Malaysia’s electricity, the cost of which makes up nearly 36 per cent of base electricity tariff presently.
For now, Malaysia is still heavily dependent on coal power generation and buys most of its requirements from Indonesia (63 per cent), followed by Australia (24 per cent), Russia (11 per cent), and South Africa (two per cent).
How this affects power generation around the globe?
According to the International Energy Agency (IEA), the higher gas and coal prices in Europe, including Spain and Germany, combined with rising European carbon prices, have resulted in higher electricity prices.
In Germany, electricity prices surged last week to their highest level on record, up more than six times from a year ago. While, in Spain, where gas-fired power generation plays a larger role in setting electricity prices, the increase was even higher.
“The price increases are expected to result in a sharp upward pressure on household energy bills and also present broader risks to economic activity, especially for sectors that are directly exposed to price rises.
“Many governments have taken measures to alleviate electricity bills, especially for vulnerable consumers,” IEA said.
Experts said many businesses are likely to face the double impact of rising energy costs and a potential decline of consumer spending due to households’ increased energy-related expenses.
“Rising power prices are already impacting operations of electricity-intensive industries, and several companies have temporarily curtailed ammonia and fertiliser production, citing deteriorating margins due to the sharp increase in gas prices,” they said.
Indonesia, the world’s biggest coal exporter, has suspended coal exports on Jan 1, 2022. This is after the state power utility reported seriously low inventory levels of coal.
This puts Southeast Asia’s biggest economy on the brink of widespread power outages and consequently drove coal prices in Australia and China higher last week.
Indonesia’s Ministry of Energy and Mineral Resources said the ban was a necessary move to avoid the country’s 20 coal-fired power plants with 10,850-megawatt capacity going out, as well as to sidestep power outages for 10 million households.
It was reported that the Indonesian officials wrapped up discussions at the weekend but they have yet to reach a decision about when they might decide to end the ban.
The authorities also discussed overcoming logistics issues that were slowing efforts to distribute coal to domestic power plants.
The republic is one of the few Asian countries with a fully liberalised electricity market. Coupled with higher than usual energy demand and volatile wholesale energy prices, these have put energy retailers under immense strain, particularly those that do not own power generation assets.
As consumer electricity tariffs are locked in with fixed contracts, some retailers were in the red for every unit of electricity sold. Five retailers, including iSwitch, Singapore’s largest independent energy retailer, have powered down as a result.
Electricity tariffs have increased 16 per cent from 20.76 cents/kWh in January-March 2021 to 24.11 cents/kWh in October-December 2021.
From January to March 2022, due to higher fuel costs, electricity tariff for households is expected to increase by an average 5.6 per cent from 24.11 cents/kWh to 25.44 cents/kWh.
The country’s electricity tariff increased by an average of 11.7 per cent, from 8.75 P/kWh in January 2021 to 9.773 P/kWh in December 2021, mostly due to higher generation charges.
Coal prices kept rising while power plant supplies are at a 10-year low, creating a harsh power supply crunch and increasing the country’s demand for natural gas as a coal substitute.
The low power supply has caused rolling blackouts throughout the country, affecting households and forcing factories in this export powerhouse to cut production, threatening to slow the country’s recovery from the pandemic and cause even more disruption to global supply chains.
The effect on global supply chains is not yet clear. In the northeast provinces of Heilongjiang, Jilin, and Liaonin, even households are suffering power cuts, which is likely to have policy implications.
Economic recovery and related increases in energy demand are causing a coal shortage. India’s domestic coal mining, which accounts for 80 per cent of the country’s supply, has been unable to keep pace with demand, and higher international prices are making imports uneconomical.
Power plants that rely on imported coal have slowed or even halted operations, and some plants that rely on domestic coal are starting to run out.
Despite government efforts to address the shortages, several Indian states have suffered serious power shortages, affecting both residential and industrial customers.
Are high fuel prices impacting Malaysia’s electricity industry stability?
Global coal and natural gas prices are increasing for the first time in decades as demand jumps in Asia, Europe and the United States.
The escalating cost of electricity generation has to be adjusted in the form of an Imbalanced Cost Pass-Through (ICPT) rate. Utility companies are able to continue maintenance work, pay vendors/independent power producers for their work and generation of electricity supply.
In Peninsular Malaysia, the electricity tariff is determined by the government through a globally-accepted framework called Incentive-Based Regulation (IBR). It enables an ICPT mechanism to allow adjustment of fuel prices for the electricity sector every six months.
Changes in prices of fuel for electricity generation are reflected as a varying rate of a rebate or surcharge. The electricity industry stability is impacted due to high fuel prices, which impose cost increase as well as put pressure on the utility company to provide electricity, and this would affect the security of our electricity supply.
Utility companies should not be expected to continuously bear unexpected and uncontrollable costs (fuel cost for generation). Additionally, with a number of substations needing to shut down during the recent floods, utility companies such as Tenaga Nasional Bhd (TNB) are bearing high operational costs and is working hard to ensure a proper balance between supply reliability and accessibility.
Analysts opined that while the impact of the ICPT mechanism is neutral on TNB, the imposition of surcharge for the first time after seven cycles of rebates show that ICPT rebates are unsustainable when coal and gas prices continue to escalate.
“With both fuels imported, a weak ringgit versus the US dollar will only exacerbate matters,” they said.
The ICPT mechanism ensures utility companies and providers are neutral from the impact of volatility in market fuel prices and ensure a fair and transparent tariff is charged to customers.
The mechanism will have no impact on a utility company’s own profits from electricity sales but instead acts to ensure continued economic sustainability for this vital sector.
In Malaysia, ICPT provides a flexible way to adjust prices that contributes to a sector that can continue to invest, grow and deliver a competitive and efficient industry.
That means electricity prices that won’t suddenly increase in the future, and fuel costs that don’t cost the future of the industry.
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