LETTER | The Association of Water and Energy Research Malaysia (Awer) would like to thank the federal government for focusing the assistance from the Prihatin Economic Stimulus Package on the M40 and B40 groups’ welfare. Due to the magnitude of Covid-19's impact on the global economy and the slump in the crude oil market, we would like to urge the government to prepare for a worst-case scenario. Awer’s primary objective is to ensure Malaysia is able to stabilise our key economic enabler sectors such as water and energy to ensure we are prepared for a turbulent economy in 2020 and 2021.
1. Kumpulan Wang Industri Elektrik (KWIE)
The KWIE fund is generated from saving in fuel costs, capacity payments and recovery of revenue from Tenaga Nasional Berhad (TNB) when TNB generates more revenue from the regulated cap set by the Energy Commission. KWIE belongs to the people and the business sector. The recent discount given in electricity tariffs comprises of KWIE funds, contributions from TNB and the government.
Due to the current movement control order (MCO), TNB will face a drop in revenue collection that may impact funds channelled to KWIE for 2020. If our predictions are correct, the drop in crude oil prices will all rally a drop in coal and natural gas prices. This fuel price rally will add more funds to KWIE when fuel costs drop below benchmarked prices for fuel set in electricity tariff reviews.
The government and ministry in charge must be prudent in the utilisation of KWIE funds so that this fund can continue to play a cost-dampening role in electricity tariffs for 2020 and 2021.
2. Energy Price Stabilisation Fund
Awer has been proposing the establishment of an Energy Price Stabilisation Fund for many years now. Energy resources prices are volatile and can be subject to a cartel as Malaysia also depends on energy resource imports. In addition to that, currency volatility will also be a major factor that affects affordable energy resource supplies.
Therefore, it is vital for Malaysia to establish an Energy Price Stabilisation Fund to assist consumers to absorb sudden shocks in energy resources prices. This fund is not a form of a subsidy and it is auto-generated from the retail prices of energy resources via modelling of historic data and forecasts.
It is used only to cushion the sudden impact of fuel price volatility in the international market. The current market price used in Malaysia will be coupled with upper limit costs and lower limit costs. When the limit is breached, the market price is moved to a new level with a new upper limit and lower limit.
The gap between limits is derived from historical data on the worst-case-scenario price fluctuations on different types of energy resources. The fund's size is based on the ability to sustain a few folds of worst-case-scenario price fluctuations.
3. Drop in crude oil price and future pricing of coal and natural gas
If coal and natural gas prices can continue the trend of the slump in crude oil prices, there is a positive part for this in Malaysia. The key issue here is that we need to put in effort so that the ringgit remains strong. More than 50% of the energy mix for electricity is using coal and we purchase it using US dollars.
The government must also venture into spot LNG (liquefied natural gas) market to reduce natural gas prices for electricity and the manufacturing sector. This will be able to boost our economy by reducing the cost of doing business. The government must develop a workable mechanism to adopt this as soon as possible.
4. Treated water tariff adjustment must be postponed to 2021
Awer would also like the government to postpone the implementation of a water tariff adjustment for six treated water licensees (water supply operators). The government must also cancel the “cost plus” mechanism used by Suruhanjaya Perkhidmatan Air Negara (Span) to set tariffs as this mechanism does not remove inefficiencies in operation and just adds a regulated profit margin on top of the proposed cost.
The correct mechanism that must be used is the benchmarking mechanism as agreed in 2009. Input cost benchmarking where similar operations’ input cost will be benchmarked to the lowest efficient cost and operators who operate higher than the benchmarked cost will not be allowed to pass on the inefficient cost onto the water tariffs.
For 2020, Span should be directed to use the cost benchmarking method to review tariffs. This will allow a transparent and efficient cost to be passed onto the tariffs. Due to our suggestion to postpone the water tariff adjustment, the Ministry of Finance must also ensure that Pengurusan Aset Air Berhad (PAAB) is able to service existing bonds and any new bonds issued must also be government-guaranteed bonds to ensure least cost pass-through to water tariffs.
These are the few issues we would like to highlight to the government to further enhance the Prihatin economic stimulus package to optimise its positive impact on our nation’s economy. Upon completion of curbing the spread of Covid-19, we need to be prepared to hit the ground running!
The writer is president, Awer.
The views expressed here are those of the author/contributor and do not necessarily represent the views of Malaysiakini.
