Disruption is coming to the local power industry

This article first appeared in The Edge Financial Daily, on September 17, 2019.

In an interview, Mestecc minister Yeo Bee Yin talks about liberalising the power sector, it’s impact on consumers and why independent power provider projects are now a thing of the past.

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KUALA LUMPUR: The increasing electrification of things will pose a challenge to the local power industry if nothing changes, said  Energy, Technology, Science, Climate Change and Environment Minister Yeo Bee Yin.

This electrification, together with digitalisation and decentralisation, are emerging disruptions the local power industry is facing. These three encapsulate the reason why Malaysia cannot wait anymore to transform its energy industry, as the world is changing quickly.

“There are many technologies here, not only solar PV (photovoltaic), there’s also distributed generation that’s not connected to the national grid, demand response, and peer-to-peer [electricity trading] — these are all emerging technologies that are going to disrupt the industry.

“If we don’t change, if we say let’s do business as usual, then others will change and become more competitive than us. We will lose out. Our domestic users will lose out and our commercial industry users also won’t get good rates from us [which will impact their business]. It will become a problem in the long run,” Yeo said during a briefing on Malaysia Electricity Supply Industry 2.0 (MESI 2.0).

“With the current and future challenges we see, the government wants to make the electricity industry more competitive, to future-proof it. This is not an idealogical-driven reform, but an objective-driven one. It must create value not only to consumers but also investors. It must be a step that while slow, brings no regrets,” said Yeo.

What does electrification mean? It means new technologies that will result in an increase in demand for electricity.

“We will see an uptake surge if there is a technology breakthrough and the electrification of vehicles, of mobility, increases as the technologies behind them become more cost-efficient. That means the whole electricity industry will grow more than the normal 2.5% every year, as there will be increased electrification,” said Yeo. Besides electric vehicles, smart charging technology and appliances are among the key technologies that will contribute to this, according to MESTECC.

At the same time, there is rising digitalisation in our lives, which allow for better control and connectivity among devices for consumers. This is enabling dynamic and innovative use of energy products, with smart meters/smart grid, automation systems, the Internet of Things and the Industrial Revolution 4.0 (IR 4.0) paving the way.

“At this moment, our grid is very rigid. We have the grid, the power system and the consumers — it is one-way through. There is no room for innovative use. But with IR 4.0, there is new technology that can digitalise the value chain, to make it more efficient,” said Yeo.

Consumers themselves — think big multinationals who are wanting more or pure renewable energy to meet their stakeholders’ lower carbon or carbon-free emission aspirations — are also demanding for change, for the decentralisation of energy supply.

“Consumers are coming to ask, ‘Can we have more options? Can we generate ourselves?’ It is decentralisation (that people want). It will no longer be a one-way process in the energy industry. Consumers will be empowered and they want to be empowered,” said Yeo.

Efficiency is the keyword in the planned reform under the MESI 2.0. It will be derived from tackling what the government sees as weaknesses or challenges in the energy industry, among which is the much criticised award of power purchase agreements (PPAs) via direct negotiations to independent power producers (IPPs), which was seen as benefiting cronies of the powers that be.

This “IPP regime”, which was introduced in the 1990s to generate electricity to sell to Tenaga Nasional Bhd (TNB) as the country expected a significant rise in electricity demand due to accelerating economic activities then, has left Malaysia with a surplus capacity of about 35% due to power plants being “planted up too quickly”. This reserve margin is far from the optimal reserve margin of around 25%, according to Yeo, and in turn results in a higher base tariff as the computation of tariff incorporates the cost of spare capacity.

But just doing away with direct negotiations by insisting on competitive bidding in power generation is not enough.

Malaysia plans to do away with the IPP regime altogether under MESI 2.0 and introduce the capacity and energy markets to make power generation more competitive (see main story). It will also tackle the issue of efficiency right from the core issue of fuel procurement, which currently make up the largest segment of Malaysia’s electricity tariff structure at 42% (see chart).

“A lot of people point to retail and say let’s open it up, then there will be competition, which will drive down costs, so we will save a lot. But if you look into the tariff structure, you’ll realise that out of the 39.5 sen per kilowatt-hour that we pay for average tariff, only one sen is actually for retail. If you open competition only for retail, the efficiency you gain will be limited to that one sen.

“The most important thing is fuel procurement if we want to have cost-efficiency across the value chain. It is more than half the tariff structure because there are also fuel procurement elements under power generation (that makes up 26% of the current tariff structure),” Yeo said.

The same lack of incentives for efficiency is seen in the grid system used for transmission of electricity, as TNB’s capital spending under the Incentives-Based Regulation (IBR) framework means it is ultimately borne by consumers, said Yeo.

Transforming the use of the grid is also important to pave the way for the creation of a wholesale energy market, said Yeo, which will resolve the perceived bias issue due to the single buyer and grid system operator being both owned by TNB by providing third party access to the grid. It also opens up the way for the trading of green or renewable energy (RE), which is especially significant for companies and multinationals that prefer or only want green.

It also paves the way for the future export of electricity under the Asean Power Grid, an initiative to enhance cross-border electricity trade in the region that would help undergird rising electricity demand.

 

Timeline for MESI 2.0 initiatives

1. Opening up of Fuel Sourcing/Procurement (gas and coal)

  •     From now till the third quarter of 2020 (3Q2020), the government, via MyPower, will engage with IPPs to come up with the rules and incentive mechanisms, and review and draft amendments to regulatory controls, to open up fuel sourcing in the value chain.
  •     These rules are expected to be approved by the Energy Commission (EC), and be published by end-3Q2020 or early 4Q2020. A pilot can be done by 1Q2021, with full roll-out in 2Q2021.

 

2. Establish a hybrid generation market by introducing capacity and energy markets

  •     MyPower is expected to take about two years (now till 4Q2021) to come up with the energy and capacity markets’ design and rules, to be approved by EC in 2022.
  •     EC will only hold the first auction for the capacity market around end-2023, to pave the way for the entry of the capacity market in 2029, which will mark the beginning of the hybrid market till 2045, when the last batch of the current PPA ends.
  •     In the mean time, EC will roll out an improved New Enhanced Dispatch Arrangement or NEDA+ by 3Q2020, which will have capacity payments (as opposed to just energy payment previously) included to incentivise more power producers with excess capacity or expired PPAs — including large scale solar plants without PPAs — to take part and sell energy by spot contract to the Single Buyer.

 

3. Enable third party access for Transmission and Distribution

  •     By end-2019, EC will seek legal opinion on existing legislation for third party access (TPA) and other reform initiatives
  •     If a new legislation is necessary for the reform initiatives (depending on legal opinion), it will be tabled by end 2022.
  •     In the meantime, EC will, together with Tenaga Nasional Bhd (TNB), determine interim network charges based on Regulatory Period 2 (RP2) in end-2019, to allow green energy power producers to ride on the grid.
  •     In 3Q2020, MyPower and EC are expected to develop the rules/guidelines or codes for the TPA with regards to market participation
  •     EC is expected to approve and submit RP3 to the govt for endorsement, including network charges, by 4Q2020
  •     Once interim network charges are decided, a third party 100MW green contract will be piloted in 1Q2020, to last till the end of the three-year RP3.

 

4. Facilitate choice in retail

  •     EC and TNB will announce the grid’s green rider initiative by end-2019
  •     MyPower will detail and complete a retail regulatory framework, starting end-2019, to be approved by EC by 4Q2020.
  •     In 1Q2021, itemised billing based on RP3 will be rolled-out, together with new tariff design and approved network charges
  •     Electricity time of use (which details different prices for the use of electricity at different times of the day) will be piloted in 1Q2021; pilot for opening up of retail to take place in 2Q2021 after the roll out of retail regulatory framework.
  •     The industry is expected to take up to 2029 to get ready for gradual price-based retail

 

5. Increase transparency and reduce conflict of interest in Single Buyer (SB) and Grid System Operator (GSO)

  •     EC will make first disclosure of the government’s Power Planning Plan by end-2019
  •     MyPower will present a report on enhanced governance of SB and GSO in 1Q2020, with the enhanced ring-fence governance for them to start in 1Q2021

Source: MESTECC

See also: Govt to liberalise power industry