While awaiting the implementation of the much-hyped PADU (Pangkalan Data Utama, or Central Database Hub) to facilitate targeted subsidies, additional steps may be taken in the utilities sector — namely electricity and water — beyond the rationalisation already seen in the last two years.

The water industry could see a more flexible tariff structure to reflect the fluctuations in its operating costs due to changes in electricity tariffs, says Natural Resources, Environment and Climate Change Minister Nik Nazmi Nik Ahmad.

Another priority is to reduce leakages from non-revenue water, as an estimated RM2 billion is lost each year because 37.2% of treated water literally goes down the drain as NRW. This is mainly because 29% of distribution pipes have exceeded their designed operational life.

In the power sector, subsidy rationalisation will be expanded further from the top 1% of the largest consumers who have already had their subsidies pulled back, as it is estimated that the top 10% of electricity consumers enjoy 50% of electricity-related subsidies.

But Nik Nazmi cautions that measures have to be progressive. “It has to be gradual. It cannot be a Big Bang approach or a sudden [jump]. We are going slowly, recognising that it’s not just the B40 that are struggling, but also the M40 because we know that they feel squeezed, because they do not qualify for a lot of the financial assistance … but the status quo is not an option.”

Ensuring sustainability of water sector

Nik Nazmi is quick to emphasise that the average water tariff rate for 2023 stands at RM1.59 per cu m, compared with the overall cost of RM2.03 per cu m — a situation that is clearly unsustainable.

Unsustainably low water tariffs have affected the performance of water service operators. In one particularly extreme case, a water service operator ran up an electricity bill of RM1 billion, which it had accumulated over the years.

As operators bleed, they are not incentivised to address the persistent and pressing issue of NRW. This results in wastage, in some states, more than 50% — meaning for every bucket of clean water produced at the plant, half is wasted before it reaches homes.

Last year, Putrajaya allowed state governments to increase water tariffs for the non-domestic sector by an average of 25 sen per cu m.

“So households are the next … Some states have not increased it for 40 years … Menteri Besars are generally supportive — they understand the need to increase,” says Nik Nazmi. “But those who need help can still get some assistance.”

Apart from allowing higher tariffs, the ministry is also considering allowing more frequent adjustments to reflect electricity costs — Nik Nazmi says this is “a big part” of water treatment costs — without having to go back to the federal government or SPAN (Suruhanjaya Perkhidmatan Air Negara, or the National Water Service Commission) for approval.

“So, any time we adjust the electricity tariffs and it affects the water treatment plants, the state governments can immediately decide whether [water tariffs need to be adjusted].”

The next step is to improve the NRW situation. Currently, the national NRW programme provides matching grants to Perak, Penang, Selangor, Terengganu, Melaka, Negeri Sembilan and Johor, whereby the federal government will reimburse 50% to 75% of investments made by water companies upon achieving certain targets of reducing NRW.

“That sounds good, but [the water operator] still has to spend first … the capital expenditure is enormous, up to RM100 million. When they are already bleeding, they won’t do anything, right?

“So now, we have approved an easier mechanism for operators to access [funds available for NRW],” says Nik Nazmi. “But again, the tariff is an important part.”

Further targeted electricity subsidies

Separately, in the power sector, the tariff surcharge adjustment for the upcoming Imbalance Cost Pass-Through (ICPT) cycle for 1H2023 will still be based on consumption volume, before PADU comes into play.

On the industry side, the ministry is also at the early stages of exploring ways to differentiate larger companies in the low-voltage consumption category. “We are in discussion with SME Corp [on how to approach this].

“Obviously this needs some time because we then have to advertise, publicise to these companies. If we say that you could get subsidies being a small company but only if you are registered with SME Corp, then I am sure more will register, as those are the SMEs that will be affected by any steep increase. We are still in discussions,” says Nik Nazmi.

For now, households consuming in excess of 1,500kWh are fully excluded from the two sen/kWh rebate. In 2H2023, total subsidies for this group amounted to around RM58 million based on the surcharge of 10 sen/kWh, compared with the 17 sen/kWh that is supposed to be charged. 

Other reports have inidicated that around 11% of households consume more than 600kWh a month, and removing subsidies for this group would save close to another RM2 billion in subsidy bills. But to Nik Nazmi, beyond consumption-based targeting, the higher-income group should be differentiated from the low-income group.

“The PM (prime minister) did [speak of] the urgency to make some changes. Maybe [there will be further adjustments] towards the higher end of the spectrum [of below 1,500kWh] … I don’t have a certain amount (the details), but the fact that I am still receiving that subsidy shows we need to do more.”

The government is making progress in rationalising the subsidy on electricity tariffs. What has been removed so far is the subsidy for high voltage industrial users as well as the two sen/kWh rebate for households that consume 1,500kWh or more a month.

But there is still a long way to go and many issues need to be addressed along the way. Indeed, the rationalisation of the electricity subsidy could not be more complex, in terms of production costs, compared with the petrol subsidy. This is because we generate power mainly with two types of fuels — coal and natural gas, which make up about 80% of the fuel mix, and their prices fluctuate from time to time.

A lot has been said about the electricity tariff subsidy but there is usually little mention of the cheap natural gas that has generated power at below international market prices. And that is one key element that has enabled the country to enjoy cheaper electricity.

While gas supply agreements (GSAs) between Petronas and independent power producers (IPPs) entail market pricing, the government has capped the price at RM30/MMBtu for the first 800 million MMSCFD of natural gas consumed by the power sector. The current international price is around RM40 to RM45/MMBtu, back-of-the-envelope calculations show.

As the price of natural gas is capped, the country’s electricity production costs are substantially lower than elsewhere even though the fuel costs have factored in the pattern of coal price, which recently retreated from its peak but is still much higher than pre-pandemic levels.

Based on current international price levels, the price of natural gas supplied to the power sector should be roughly RM3 billion higher a year.

The government has allocated RM10.76 billion for electricity subsidies for the first half of the year and RM5.2 billion for the second half. But these lump sums do not take into account the natural gas price discount to the power sector.

In short, the existing electricity tariff is not cost reflective. Although the subsidy for certain groups has been removed, their electricity bills are still subsidised as the so-called non-subsidised tariffs are not on a par with actual production costs, given that the market price of natural gas has gone up in tandem with crude oil prices.

Natural Resources, Environment and Climate Change Minister Nik Nazmi Nik Ahmad, in an interview, says the government is aware that the current electricity tariffs are not truly at market rate due to the discounted natural gas price.

“When we’re talking about 17 sen [Imbalance Cost Pass-Through (ICPT)] surcharge, it is still not the market rate because the gas is not at market rate,” Nik Nazmi acknowledges.

Discussions on the pricing of gas supplied to the power sector are preliminary, according to him.

The minister, in fact, forewarns that gas cost is likely to climb as we become more reliant on imported gas. Currently, the bulk of natural gas is locally produced with the rest imported at international prices. The cost difference is absorbed by the national oil company.

“There will come a point when we become a net gas importer. When that happens, we’ll be relying on LNG from overseas and the prices will be different [from current levels]. And that will have a big impact on the cost of electricity generation.

“That is also one reason why the government has been ‘pushing hard’ to bring up solar energy adoption,” Nik Nazmi explains.

Nonetheless, solar energy is unlikely to be a perfect substitute, considering its intermittency.

The 2021 report by the Planning and Implementation of Electricity Supply and Tariff Committee (JPPPET) forecast an additional 4,000mw of gas-fired generation capacity from 2029 to 2039.

Gas from Peninsular Malaysia fields only meets 70% of current demand while the remaining 30% is sourced from imports. Concurrently, the power sector takes up about 40% of natural gas consumption. In 2022, gas made up 34.4% of the generation fuel mix compared with coal at 41.8%.

According to the National Energy Transition Roadmap (NETR), gas demand is expected to increase from 41 million tonnes of oil equivalent (Mtoe) in 2023 to 46 Mtoe in 2040. At the same time, the cost to develop offshore gas fields in Malaysia will continue to rise as it gets more technical (due to deeper wells) on top of the additional cost to address CO2 emissions.

Soon, the government will have to decide on the surcharge for the ICPT, which will dictate the direction of the tariff in the first half of 2024.

The power guzzlers will definitely demand a cut in the surcharge as international coal prices have dropped. Hence, the formula that takes into account the discounted gas price should reflect a reduction in surcharge.

However, others see this as a window of opportunity for the government to step up efforts in electricity subsidy rationalisation without worsening the cost of living burden on the middle- and low-income households.

The electricity subsidy rationalisation exercise will not come to a completion unless the distortion in gas prices is addressed. But it goes without saying that a sudden increase in natural gas prices to international levels will shock the economy.

The softening coal prices have given regulators some leeway to take steps to rationalise the price of gas for the power sector so that it will spur future gas developments and encourage LNG imports, thus facilitating future supply security and offset depleting local resources.

An industry player comments that it might be hard to imagine the government raising the electricity tariff at one go to reflect higher gas prices. However, he says the government could at least maintain it at current levels so that the industrial users and households can adapt to a higher tariff environment gradually.

“It is easier to cut tariffs than to raise them. It is common knowledge that the electricity rates are not fuel cost reflective. There are valid reasons to at least keep them at current levels,” says the industry player.