This article is based on the article, "Demand for electricity has exceeded supply: TNB chief", in The Star
“Demand
for electricity has exceeded supply with some industries not getting the supply
they need.” - Che Khalib Mohamad Noh
The
electricity industry works in a simple model of converting energy resources
into electricity. The structure, operation and financial implications form a
natural monopoly. A natural monopoly exists in the electricity industry because
the cost of producing electricity is lower due to the economies of scale if
there is just a single producer than if there are several competing producers. Malaysia’s
largest and national electric utility company, Tenaga Nasional Berhad (TNB)
once held a unique position as a monopoly in the generation, transmission and
distribution of electricity in Peninsular Malaysia and Sabah. However, due to
the 1992 nationwide power blackout crisis which resulted in the introduction of
the Independent Power Producers (IPP) as well as the signing of the Power
Purchase Agreement (PPA), the market structure has changed from monopoly to
oligopoly.
As
electricity is an essential utility, it is a controlled item whereby the electricity
tariff is regulated by the government. Demand for electricity is a relatively inelastic demand as a change
in the price yields to less than proportionate change in the quantity demanded.
Since the quantity demanded doesn't change as much as the price, the curve looks
steep. Here’s a simple analogy. If my electricity rate goes up, I cannot simply
disconnect my house from the power grid and connect it to another power grid as
there is only one main power grid. Regardless of the demand, the price is fixed
thus resulting in an inelastic demand.
Since Malaysia’s independence, it has had one of the
best economic records in Asia with the GDP growing an average of 6.5% for
almost half a century. As the demand for electricity in Malaysia grows in
tandem with its GDP growth, the forecasted growth for electricity has shown an
increase of 3.7% in 2012 driven especially by strong demand from the commercial
and domestic sectors. With an economic
growth of 5.1% in the first half of the year and the growing population exceeding 27.5 million, numerous concerns have
been raised by the government regarding the issue of the increase in demand of
energy consumption.
Causes of decrease in
electricity supply
Three
main issues have been identified to contribute to the declining rate of
electricity supply:
i.
Shortage of gas supply
TNB's gas supply has been inconsistent
due to numerous factors such as unpredictable shutdowns at Petroliam Nasional Bhd's (Petronas) offshore platforms. Subsidised gas and the inflated demand it encouraged
are some of the factors that led to the severe gas shortage faced by TNB. Resultantly, gas supply was limited and had to be
distributed between the power and non-power sectors. As TNB relies heavily on subsidised gas from Petronas to fuel its power
plants in the peninsula, and the lack of cheap gas means it has to use more
expensive alternative fuel.
ii.
Aging of power plants
A number of power plants are
effectively at the end their useful lives, and are no longer competitive. The existing, aging and inefficient power plants
reduce the capacity of electricity generators to supply sufficient electricity
effectively. Even though power plant projects are underway, the completion of
the electrical facility projects would still take a few years to complete.
iii.
Loss of 1st
generation PPA capacity
With the 1st
generation capacity expiring between 2015 and 2017, at least 4105MW of capacity
needs replacing even after factoring in the 622MW in new hydro power in the
peninsula and the 2000MW expansion of coal plants in Janamanjung and Tanjung
Bin.
The official power
generation capacity of 21,792MW available in the peninsula means Malaysia still
has a comfortable 35.9% reserve margin for 2012 – however, with factors of gas
shortage, mothballing of older power plants and loss of 1st
generation capacity the reserve margin will diminish to a dangerously low level
of 10% by 2017.
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Malaysia’s electricity
shortage
An
increase in electricity demand and a decrease in electricity supply will increase the equilibrium price. The
change in equilibrium quantity is uncertain
because the increase in demand increases the equilibrium quantity and the
decrease in supply decreases it.
The graph above represents the demand and supply
curve, whereby the vertical axis represents the price and the horizontal axis
represents the quantity demanded. The intersection between the two curves at
point P2 and Q2 is the market equilibrium. A shortage (Q3 – Q1) of electricity supply occurs at a price below the
market equilibrium price, P2. At such a price, consumers are willing to consume
more electricity than TNB is willing to generate and sell. This is due to the
high production cost incurred during the gas shortage as TNB was forced to spend an additional 400 million ringgit ($134.4
million) per month to burn oil and distillates as an alternative to keep
generating electricity. Therefore, quantity demanded is greater than
quantity supplied thus leading to the rise in price of electricity so that the
market reaches the equilibrium price and quantity via the 7.12% electricity tariff hike by the 1st of June last
year.
In
order to ensure a successful policy recommendation and implementation on the
electricity market, it is essential for the government to recognize the
intensities of electricity consumption. It is a
question of the political will of the Federal Government to implement what has
been planned, and of the policymakers to make the most economical decisions -
for instance, regarding the abolishment of gas subsidies and regulation of the
IPPs. As we know, when anything is scarce, a price hike begins. As
electricity shortages become more of a concern, the market mechanism will
induce price increment. With other bills already at record highs and incomes
remaining low, the average household is likely to feel the pinch.
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