The TNB Electricity Tariff: Why Hike?

The TNB Electricity Tariff Hike

Reposted from Tai Zee Kin’s FB status (original link here). Post has been edited for grammar, otherwise left mostly intact. I found this a reasonably clear explanation behind the price hike and it's good input as opposed to our blind bashing of the situation.

1. Why Hike?

As cliché as it may sound, the reason for electricity tariff hike is similar to Petrol RON 95 hike. Malaysia is a developing nation and we are benchmarking our industries/resources management/consumption etc to those of a developed nation (Hey you, yes you. Remember you said we must always compare to the stronger country to improve? This is what developed nations do). They will always allow the “market” to determine the price of resources. 60-70% of the amount in your electricity bill, is the COST of fuel. The remaining 30-40% are COSTS for efficiency (building more transformers, building more underground wiring etc, building more cables).

Many disillusioned Malaysians would then say, eh! Our electricity is generated by hydro-dam. It’s free! From God! Do you know that hydroelectricity contributes only 5.2% of our electricity generation? Most (54.2%) of our electricity is generated by NATURAL GAS. Yes, the natural gas that we need to pay money for? The one that is depleting. You remember protesting against the building of this dam and that dam that would destroy the forest etc? That so far only contributes to less than 5.2% of the electricity generated and sent to your house, to your computer.

Natural gas (54.2%)

Coal (40.2%)

Hydroelectricty (5.2%)

Oil (0.4%).

And renewables - less than 1% of total energy requirements.

What happens now is simple. IN order to manage better our resources, TNB, as well as countries that share our geographies, will have to start using “LNG” Liquidated Natural Gas as fuel for electricity generation. It started early this year. And unfortunately, the cost for “LNG” is higher than the not-as-efficient (not cost efficient, but electricity generation efficient) gas. Why LNG now? Because we have better production of LNG compared to last time. It’s the most Energy-resources-efficient fuel compared to natural gas and coal. Environmentalists, are you guys there? LYNAS protestors, are you there? Please explain to the public what does “energy-efficient fuel” means. (environmentalist / natural resources expert should know this better ).

And also, apart from gas and hydro, we have COAL. Coal (generates 40.2% of our electricity), too, is supposed to be determined by market price. Market mechanism is very simple, the higher the demand, the dearer the cost. Why is there a hike in the price of all these fuel gas, LNG, coal? Because the demand is higher. Why is the demand higher? Because people like you and me, demand for more electricity everyday compared to our parents. Not only we demand more electricity, we demand more products and services that require more electricity to be produced. Hence the higher demand of electricity supply, making TNB demand more for the fuel product. And these fuels are almost non-renewable. And of course, we protest against building more dams. :)

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2. How about the ever blood sucking IPPs? Is the price hike meant to protect them?

Do you remember a blackout back in 1992? To be precise, it began on 29 September 1992 and affected most of the Peninsula in Malaysia. And also the 1996 blackout, which was by far the worst capacity stumble blackout the nation ever experienced. Back then we were a booming industry. Everyone threw their support behind Dr Mahathir for vast modernization and development. Do you think any investor would have bothered to consider investing in a country with electricity supply instability? Answer is no.

The then desperate government has no choice but to go to the private sector for help and the 1992 blackout then triggered the privatization of electricity generation. Later on the TNB stock experienced a near free fall after the 1996 incident, which showcased it’s incapability to produce enough electricity for the country commercial or residential use back then. But again, private sector has this thing called “CBA”, or cost benefit analysis. In order for a private company to undertake something that is so “unprofitable”, they must be given some guarantee in return. That comes in the form of gazetted Natural Gas (Fuel) Price, based on an Act of Parliament, as well as long term contractual protection :

25 years contract for Gas Based IPP, and 21 years of Coal based IPPs.

Why so long? Why 25 years?

I use simple logic. Think of yourself as a private company like YTL, and think again of yourself as the Government. The Government needed MORE electricity that its very own TNB or LLN baby couldn’t produce. To invest in power generation requires A LOT of capital investment. If you, being an investor like YTL, agree to pour in tens and tens of Millions of your own company’s money to build power plants, but risk worrying that the government might not continue your contract (you didn’t even recover your cost), would you have undertaken the contractual offer? No right? So was YTL, Sime Darby and other companies. The issue at stake then was supply of electricity!

So all these allegations about IPP being subsidized… You might want to consider reframing your sentences. They are not “subsidized”. They are just guaranteed the right to purchase NATURAL GAS at a gazetted rate which is much lower than the actual market price so that they can have enough marginal profit to even consider supplying electricity for the country.

Some Dreamers might say, why don’t TNB just do it all? Why need IPP? Well as I said, TNB, despite being grilled over and over have said that they CANNOT do it. Not enough money for capital expansion (capital investments for IPP were invested by… hmm… the private companies themselves), and not enough time to accommodate the interest-losing-foreign-investors.

FACT: Currently, TNB contributes 53% of capacity requirements whilst 47% comes from Independent Power Producers (IPPs) in Peninsular Malaysia.

So they are producing almost half of the nations’ electricity. Almost.

WHAT’s NEXT for IPPS?

TNB and MyPower said, the contract for some IPPs are coming to an END soon in the next 1 or 2 years. The contract will be terminated, and a new scheme called “ competitive bidding” will be introduced for this IPPs to tender for new projects. How open this tender will be? I don’t know. But I think the reason for IPP to survive until today were valid.

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3. Who will be affected by this tariff?

I would be lying if I sing along the tune of the Government or TNB by saying “The electricity tariff increase: 4.56 million or 70.67% of domestic consumers won’t be affected.”

True, these 4.56 million or 70.67% domestic consumer will not be directly hit by the tariff because the 4.99 sen (PLEASE QUOTE THIS CORRECTLY, 4.99 sen means RM0.0499) and 5 sen (PLEASE QUOTE THIS CORRECTLY TOO, 5 sen means RM0.05) hike only applies to consumption after the 300kw band.

According to TNB, there are 70.67 domestic electricity consumers like the “poor” and “working class” who use less than 300kw electricity per month. The hike doesn’t affect these people at all.

It only affects those who use above 300kw, IE people like you and me who pay more than RM 40 per month for our electricity (you know, the air conds, TVs, internets, fan, Fridge, lights, microwaves, water heater etc).

But then why did I say I would be lying if I say these 70.67% “won’t be affected”?
 

If the hike is going to affect the 29.24% , you are looking at affecting the Industrial players. Industrial players pays A LOT A LOT in electricity. A decent manufacturing factory of 1000 workers packing your Maggi Mee might have to pay around RM 20,000 per DAY for electricity. Guess who they are going to pass the cost increment to? You and me back.

Having said that the Government will come back with measures, so they said, to make sure such hike or hike-driven inflation will not hit the lower income group that bad. I am very annoyed by the persistent reliance of using “BR1M” as justification. I am just going to wait and see what the government is going to do about this.

OK that was about the lower class. What about the middle class like you and me? I don’t have a direct thought but maybe the fact below might help explain how “ENERGY CRAVING” you and me are compared to our neighbours.

FACT TO SHARE?

TABLE A

Country        Electric consumption per capita kWh per capita

Brunei                  8,507

Singapore            8,404

MALAYSIA          4,246

Thailand               2,316

Vietnam               1,073

Indonesia            680

Philippines           647

Myanmar             110

Cambodia            164

And then you have the Household final consumption expenditure per capita (TABLE B)

Country        International dollar ($)

Singapore            16,356

Brunei                  10,671

Malaysia              7,316

Thailand               5,134

Indonesia            3,192

Philippines           2,871

Vietnam               1,923

Cambodia            1,353

Myanmar             203

If you know how to compare this chart, you will know 2 conclusions (if you don’t I will explain in a bit).

First: We use a lot a lot of electricity. Second to Singapore and Brunei.

Second: For the amount of electricity we are using, we are the second cheapest, only dearer to Brunei.

Why second cheapest?

You divide Table B by Table A, you get the cost of electricity per Unit across these countries.

Brunei                  -> cost per unit consumption USD 1.254 per unit capita

Singapore            -> Cost per unit consumption USD 1.946 per unit capita

MALAYSIA           -> Cost per unit consumption USD 1.723 per unit capita

Thailand               -> Cost per unit consumption USD 2.217 per unit capita

Indonesia            -> Cost per unit consumption USD 4.694 per unit capita

Philippines           -> Cost per unit consumption USD 4.437 per unit capita

Vietnam               -> Cost per unit consumption USD 1.792 per unit capita

Cambodia            -> Cost per unit consumption USD 8.25 per unit capita

Myanmar             -> Cost per unit consumption USD 1.845 per unit capita.

It simply means, Malaysia’s cost per unit KwH per capita is the second cheapest in the region, after Brunei. Places like Cambodia pays 4-5 times more than ours. Indonesian and Philippines pay twice more than us for electricity.

Moral of the story? If we want to keep on demanding more electricity, not only for our domestic and office use, but also our demand for PRODUCTS and SERVICES that requires more electricity generation, we must be prepared to pay for it like a developed nation does – they pay much more than the table I showed. Try a UK electricity bill.  Or at least like how our neighbours are willing to pay, except Brunei where the population is only 400k, lesser than the town of Subang Jaya but produce more oil than the half of the peninsular.

By the way, many households in Sabah and peninsular (household, not capita) are enjoying free electricity that amounts to 960,000 household, or 14.77 % of total household with electricity access. FREE. Not a dime needed to be paid.

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4. I heard that TNB declared a profit of RM4.6 billion, PROFIT! How come they won’t use the profit to subsidize the rising fuel (Natural gas, coal, LNG) cost?

Hello. You need to ring up an accountant friend and ask him or her or them the meaning of “CAPEX”.
 

You read CAPEX in Biz Section of The Star. You read CAPEX in EdgeOnline.  You just can’t be bothered to find out what CAPEX means.

Yes, TNB made RM 4.6 billion but guess how much they are spending on CAPEX – Capital Expenditure every year? RM 7 bilion! They have to spend that 7 billion every year to maintain the cables, build transformers, maintain distributor stations, build more and more cables etc. that is NOT factored into the P n L that give you the 4.6 billion profit. Here is some explanation on CAPEX from Izhar Moslim.

"a) TNB is involved in power generation, transmission and distribution (IPPs only power generation). Hence they need a lot of Capital Expenditure in order finance the improvement of those three areas to satisfy the growing need of energy in our country.

b) Examples of capital expenditure is to build more power generation plants, build more transmission lines, etc. These requires billions of ringgit and as you pointed out, around RM7 billion annually.

c) These CAPEX is not fully included in the P&L, because these money are raised in the form of loans (from banks, bonds, etc...)

d) What is reflected in the balance sheet is the instalment (principal + interest) payment that TNB makes.

e) There is real profit made there i.e. RM4.6 bil. However, it is unwise to use that money to subsidise the people.

f) In the case of TNB, profits are generated to build more facilities to generate, transmit and distribute. This will create more job and business opportunities for the people of Malaysia. Not just that, their electricity production can also be efficient (older plants and facilities are inefficient)

g) From point (d) above, TNB also needs to make money in order to repay the debt that they have taken What the credit ratings are saying is that TNB's balance sheet is not good as they are not getting the returns they are supposed to get because the tariffs are low, hence their capability to repay their debt is uncertain (debt growing ma).

h) When the tariff was increased, the market reacted positively i.e. TNB's share price increased significantly. This backs up my point (h)."

Period. "

Period.

So if you are to say TNB should use the 4.6 billion to subsidize the fuel cost, let me tell you, there is no RM 4.6 billion around. It’s used to spend on CAPEX. The deficit? Government cover. Period.

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Conclusion

If you bother to read until this far, bravo. There are something that I malas to put in here “Yet”, ie the LNG etc but if you are interested, maybe next few days la I shall share my view on that.

+5. Debunking the 15% myth)

I would like to reiterate the "quantum of the increment" and how it affects the people.

1) There are 6,500,000 (6.5 million) household accounts with TNB currently.

2) Of these 6,500,000 household accounts, 960,000 (or 14.77%) are NOT paying a cent for electricity bill because they use below RM 20, even after the hike. FREE for them.

3) 3,550,000 household (combined with the free, constitute 70.67%) household uses BELOW 300 kwh of electricity. They are NOT affected by the hike.

4.) Only 29% of the household who uses more than 300 kwh of electricity are affected. The range of 15-17% are imposed on the 3rd band onwards. If you are using 360 kwh of electricity, the 15% increment only happens from 301 kwh to 360 kwh, which make it less than 15% in total (could be just 1% increment if you are using say 303 kwh of electricity).

So any generalization of the increment as 15% - 17% is very inaccurate.

Thank you.

TAI ZEE KIN