DEVELOPMENTS IN ENERGY REGULATORY

FRAMEWORK

By

Datuk Ir. Ahmad Fauzi Hasan

Energy Commission

25 Feb 2016

National Workshop Building Sector Energy EfficiencyKUALA LUMPUR25 February 2016

Malaysia’s final energy consumption is dominated by petroleum products, natural gas and electricity

Source: National Energy Balance

2014

Coal and coke – 2.9%

Natural gas – 22.6%

Electricity – 19.8%

Petroleum products - 54.7%

EGA

T

168.6 GWh (0.15%)

22.0 GWh

27,703 GWh (24.3%)

86,289 GWh (75.6%)

17.0 GWh

Domestic: 6,710,032

Commercial: 1,404,501

Industry: 24,852

Public Lighting: 63,340

Mining: 29

Agriculture. & Others : 2,271

EGAT

TNB (G) – 6,616 MW

IPP – 14,570 MW + 440 MW (NUR)

Total energy to grid: 114,182.6 GWh (100%)

Total energy from grid to consumers: 103,466 GWh (90.6%)

System

Losses :

10,716.6

GWh ( 9.4%)

Single Buyer

Oil / distillate

Installed Capacity (To Grid System):TNB (G) : 6,616 MWIPP : 14,570 MWTotal : 21,186 MWMD : 16,901 MW

Export

RE – 271.27 MW

Biomass Landfill Mini Hydro Solar PV

Single Buyer

4,111 GWh

52.9 GWh

Natural Gas

Hydro

Coal

24,298 GWh

40,725.6 GWh

50,536.2 GWh

2,631 GWh

19.94 GWh

56.58 GWh

104.74 GWh

5.28 GWh

2,214 GWh – Licensee (1,225.8 MW )

630 GWh – Private Licensee (352.12MW)

130 GWh

Co-generation

Private Licensee

1,219.26 GWh

1,190.15 GWh

128.5 GWh ( Industrial heat waste)

Electricity Generation and Consumption

for Peninsular Malaysia

22,350 GWh (19.57%)

35,801 GWh (31.35%)

43,308 GWh (37.93%)

1,370 GWh (1.20%)

133 GWh (0.12%)

414 GWh (0.36%)

11.33 GWh (64.03MW)

37.75 GWh (21.62MW)

19.0MW41.60 GWh 77.93 GWh (116.62MW)

Electricity Demand and Generation Fuel Mix

48.2%

25.2%

25.4%

1.3%

Hydro Gas Coal Diesel

75.7%

14.9%

5.7% 3.6%

Gas MFO & Diesel Hydro RE

42.3%51.8%

3.6% 1.8%

0.5%

0.0%

Coal Gas Hydro MFO & Distillate Co-gen Interconnection

Sabah

Peak

Demand

(MW)

Reserve

Margin

(%)

Pen.

Malaysia

16,901 21%

Sabah 914 40%

Sarawak 2,385 70%

Sarawak

Peninsular

Malaysia

Evolution of Malaysian Electricity Supply Industry (MESI) Structure

Distribution

“Vertically Integrated”Dominated by

National Utility-TNB

Early 1990’s -Fully Regulated

TNBG & TNBH

Transmission and Distribution by TNB Privately-owned IPPs

allowed to participate in the generation sector

Mid 1990’s -Multiple Generation

Players

IPPs

Transmission(system operator)

TNBDistribution

Retail

Present

IndependentPower

Distributors /Retailers

Energy Commission

Generation

Transmission

Transmission and Distribution by TNB Privately-owned companies allowed to

participate in generation and limited areas of distribution

Transmission

Distribution

TNB Generation IPPs

As of 2014Multiple Distribution

and Retail Players

Energy Industry Regulatory Framework Under The Energy Commission (EC)

Regulator

Regulatees

(Peninsula and Sabah)

Electricity SupplyIndustry

• Sets Electricity Supply Policy• Prescribes Electricity Supply

Regulations• Approves Electricity Supply

Licences and Tariffs

Minister of Energy, Green Technology and Water

Minister of Petroleum

Energy Commission• Advises the minister on matters relating to the

energy sector• Develops legal frameworks• Implements policy• Issues licences and certifications • Regulates the electricity and piped gas supply

industriesPo

licy

Exe

cuti

on

&

Ind

ust

ry

Re

gula

tio

n

• Sets Piped Gas Supply Policy• Prescribes Piped Gas Supply

Regulations• Approves Piped Gas Supply

Licences and Tariffs

Downstream Piped Gas SupplyIndustry

Po

licy

Fo

rmu

lati

on Policymakers

Legislation Under The Energy Commission

7

Energy Commission Act 2001

Electricity Supply Act 1990

Electricity Regulations 1994

Licensee Supply Regulations 1990

Electricity Supply (Compounding of Offences) Regulations 2001

Efficient Management Of Electrical Energy Regulations 2008

Gas Supply Act 1993

Gas Supply Regulations 1997

Gas Supply Order (Compoundable Offences) 2006

Regulatory process undertaken by EC

EC advises / proposes to

policymakers

Board of EC Members sets and reviews

regulatory policies and standards

EC prescribes requirements and creates

awareness among regulatees

Minister prescribes regulations and policies

EC issues licences,

certifications and approvals

EC promotes, monitors, inspects, audits,

investigates and enforces compliance

EC consults stakeholders

on initiatives and issues

Malaysia’s New Energy Policy (launched in 2010) Provides Direction For Energy Sector Development

Energy Pricing

• Gradual removal of subsidies

• Decoupling

Supply side

• Portfolio development to increase use of sustainable technologies

• Maintain depletion policy

Energy Efficiency

• Minimum Energy Performance Standards

• Tax incentives

• Support for co-generation units

Governance

• Improve transparency

• Allow option for full market

• Achieve market price

• Improve economic performance

Change Management

• Organise and manage implementation of initiatives

• Proper sequencing to achieve objectives

• Integrated approach mechanism

Economic Efficiency, Security of Supply, Social and Environment

Barriers To Energy Efficiency

• Lack of awareness and interest among key decision makers in

industry

• Lack of funding mechanism

• Inadequate energy service providers

• Tariff policies do not facilitate co-generation and demand side

management

• Heavily subsidized energy prices made EE initiatives not as

attractive

• Inadequate legal and regulatory framework

May 1997 – June 2008:NG Price to Power Sector fixed at RM6.40mmBtu

October 2002: NG Price to Large Industry (>2mmscfd) =

RM11.32/mmBtu NG Price to GMB(<2mmscfd) =

RM9.40/mmBtu GMB average tariff= RM12.87/mmBtu

June 2008:• NG Price to Power Sector

=RM14.31/mmBtuJuly 2008: NG Price to Large Industry (>2mmscfd) =

RM23.88/mmBtu NG Price to GMB(<2mmscfd) =

RM17.99/mmBtu GMB average tariff= RM22.06/mmBtu

March 2009: NG Price to Power Sector

=RM10.70/mmBtu NG Price to Large Industry (>2mmscfd) =

RM15.35/mmBtu NG Price to GMB(<2mmscfd) =

RM11.05/mmBtu GMB average tariff= RM15.00/mmBtu

June 2011: NG Price to Power Sector

=RM13.70/mmBtu NG Price to Large Industry

(>2mmscfd) = RM18.35/mmBtuJuly 2011: NG Price to GMB(<2mmscfd)

= RM14.05/mmBtu GMB average tariff

= RM16.07/mmBtu

Jan 2014: NG Price to Power

Sector =RM15.20/mmBtu

April 2014: NG Price to Large Industry

(>5mmscfd) = RM18.35/mmBtuNG Price to GMB(<5mmscfd)

= RM14.05/mmBtu GMB average tariff

= RM16.07/mmBtu

Domestic Gas Price Trend In Peninsular Malaysia

More Efficient Electricity Pricing Via Incentive-based Regulation (IBR)

IBR is a mechanism or framework for setting

electricity tariff with built-in incentives to improve

efficiency and quality of service

• Structured tariff regulatory process:

– First Regulatory period from 2014 – 2017

– Establishment of regulatory accounts and reporting mechanism

• Separation of accounts of TNB business units

• Determination of reasonable return for licensee

• Imbalance cost pass-through mechanism for uncontrollable costs (changes in forecast vs actual cost of generation)

• Setting of performance targets with incentive/penalty mechanism by regulator

• Efficiency sharing between TNB and consumers in the next tariff regulatory period

Aggregate Revenue

Requirement=

OPEX Depreciation Tax

Return on Assets

WACC (Return)

xRegulated asset

base (RAB)

+ + +

Additional building block for calculating revenue requirement for the second regulatory period

+Efficiency carryover amount

Building blocks to establish revenue requirement

Main Features of IBR

Electricity Customers

Distribution/ Customer Services

Single Buyer Transmission System Operation

IPPsTNB

Generation

Electricity tariff

Transmission tariff

System operations tariffGeneration

tariff

As per SLA

As per PPA Under IBR framework, the CAPEX, OPEX and

RETURN for Distribution, Transmission, System Operation and Single Buyer Operation are regulated based on KPIs with built-in incentive/penalty mechanism

TNB Business Units under IBR Framework (Accounting Separation)

Note 1 : SLAs = Service Level Agreements with TNB’s generation plants2 : PPAs = Power Purchase Agreements with independent power producers

Single Buyer Operation (Non-generation asset + OPEX)

Single Buyer Generation(SLA and PPA costs)

1313

Incentive Scheme - Key Performance Indicators (KPIs) under IBR framework

14

Upper bound target

Lower bound target

Incentive

Penalty

Performance Indicator Scale

No incentive / penalty imposed

Distribution / Customer Services1. System Average Interruption

Duration Index (50%)2. Average of Minimum Service

Level Compliance Performance (25%)

3. Weighted Average Guaranteed Service Level (25%)

System Operator1. Wide Area Loss of

Supply Event (25%)2. Voltage and

Frequency Limit Compliance (50%)

3. Dispatch Adjustment (25%)

Single Buyer Operation1. System Average Cost

(25%) *2. Compliance to Timely

Settlement of Generators’ Invoices (25%)

3. Compliance to Malaysian Grid Code(25%)

4. Compliance to Single Buyer Rules(25%)

Transmission1. System

Minutes (40%)2. System

Availability(30%)

3. Project Delivery Index (30%)

Incentive / penalty capped at +/- 0.3% to 0.5% of annual revenue requirement

The annual incentive / penalty results will be monitored on yearly basis

The actual amount of incentive to be shared / penalty to be imposed will be implemented in the next regulatory period

*Note: number in bracket represents weightage of KPI

14

14

Average Electricity Tariff Has Gradually Adjusted Towards Policy Driven Market Pricing In Line With Subsidy Rationalisation Plan

Base tariff under IBR

for first regulatory

period

Gradual Removal of SIT until 2020

SIT discount will be gradually reduced by 2% every year beginning 1 January 2016

Notes:E3s Tariff: Special Industrial Tariff for High Voltage Peak / Off-peak Industrial TariffE2s Tariff: Special Industrial Tariff for Medium Voltage Peak / Off-peak Industrial TariffE1s Tariff: Special Industrial Tariff for Medium Voltage Industrial TariffDs Tariff : Special Industrial Tariff for Low Voltage Industrial Tariff

Current SIT Discount Rate

Jul '15 Jul '16 Jul '17 Jul '18 Jul '19 Jul '20

E3s Tariff 10.30% 8.30% 6.30% 4.30% 2.30% 0.30% 0.00%

E2s Tariff 8.30% 6.30% 4.30% 2.30% 0.30% 0.00% 0.00%

E1s Tariff 4.80% 2.80% 0.80% 0.00% 0.00% 0.00% 0.00%

Ds Tariff 3.00% 3.00% 3.00% 1.00% 0.00% 0.00% 0.00%

0%

2%

4%

6%

8%

10%

12%

SIT

Dis

cou

nt

Ra

te

17

Overview of Current and New SIT Eligibility Criteria

Current SIT Criteria New SIT Criteria

Eligibility Criteria:

Total electricity cost ≥ 5%Total company operating cost

Document to be submitted:1. Audited Annual Report for the

Previous Financial Year (FY)2. Appendix 1 endorsed by External

Auditor3. 12 months electricity bill for the

same FY

Eligibility Criteria:

Document to be submitted:1. Energy Manager appointment Letter2. Baseline - kWh/production (Year 1)3. Energy Efficiency (EE) plan endorsed by

energy manager4. Improvement on kWh /unit production

and kWh savings (comparison with previous year kWh/production index)

The approval process will be similar to the current practice by TNB (EE and financial audit reports are required for SIT approval)

Enhanced Time-Of-Use (E-ToU) Tariff Scheme

18

E-ToU Periods

0800

1700

2200

1400

Monday to Friday

,

Off -Peak Mid-Peak Peak

1100 -1200

Saturday, Sunday &Public Holidays

Existing Peak and Off-Peak Periods

Monday to Friday

0800

2200

-

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

19

92

19

94

19

96

19

98

20

00

20

02

20

04

20

06

20

08

20

10

20

12

20

14

20

16

20

18

20

20

20

22

20

24

Gen

erat

ion

(G

Wh

)

Year

Sarawak

RE

Diesel

MFO

Coal

Gas

Hydro

Generation Fuel Security Policy Framework In The Power Sector

• Fuel diversification (HHI <= 0.5)• System least cost

Enhanced MESI Structure – Single Buyer “Managed Market” Model

Single Buyer (SB)

A ring-fenced entity in TNB responsible for

procurement of electricity from Generators

and scheduling of generation to meet

demands based on least cost.

Generation Despatch

Daily despatch of IPP/TNB plants based on

variable costs provided in PPA/SLA

Merit order of despatch based on least

variable cost in half-hourly tranche.

Cogen and RE generators sell electricity based

on contract rates/FiT rates.

Grid System Operator (GSO)

A ring-fenced entity in TNB responsible for

the real-time operation of the Grid System in

a safe, secure and least-cost manner.GSO

SB

IPPsCogen, RE

Gencos

Consumers

Franchise Distributors

TNBGeneration

Transmission(Grid Owner)

Planning

Distribution

Consumers

ENERGY COMMISSION

Current Dispatch Arrangement

New Enhanced Dispatch Arrangement

New Enhanced Dispatch Arrangement (NEDA)

Introduction of Price-based

Bidding to complement current

PPA/SLA arrangements:

Generators with PPA/SLA can offer optional reduced heat rates & VOR. If dispatched, generators will be paid at cost using the lower of the PPA/SLA or optional offer of heat rates & VOR.

Non-PPA generators bid to sell energy to the Single Buyer. If dispatched, generators will be paid at Price as Bid.

In addition to sales of energy, non-PPA generators can offer term-based capacity for short-term system reserve, if required by regulator

Single Buyer Single Buyer

Generators with

PPAs/SLAs

Generators with

PPAs/SLAs

Price

Non-PPA Generators

PPA/SLA ratesPPA/SLA rates

or optional offer of reduced rates

22

The Electricity Supply Act 1990 (Act 447) has been amended in 2015

to improve governance and quality of service in the power sector

• Ring-fence Single Buyer and System Operator according to prescribed codes, rules and guidelines

• Require licensee to submit business plan

• Require licensee to administer safety management plan and programme

• Prescribe mandatory standards of performance

• Define a transparent tariff setting process by EC

• Establish industry fund for tariff stabilisation

• Require supply agreements to be subject to EC endorsement

• Require licensee to ensure cyber security of supply system

• Enable advanced metering infrastructure

• Enable ASEAN Harmonised EEE Regulatory Regime

• Increase severity of penalties for non-compliance

• Expand regulatory powers of EC, including to obtain information, plan, audit, resolve disputes and issue and enforce codes, directions, rules and guidelines

Enhanced Legal Framework

Acts of Parliament

Regulations – Power of the Minister to make regulations

Licences – Issued by Energy Commission and approved by Minister

Licence Conditions

1. Energy Commission Act 2001

2. Electricity Supply Act, 1990

3. Electricity Regulations, 1994

4. Licensee Supply Regulations, 1990

5. Electricity Supply (Compounding of offences) Regulations 2001

6. Efficient Management Of Electrical Energy Regulations 2008

7. Licences issued to generators, distributors and suppliers

8. Prescribes mandatory standards for licensees’ activities

Agreements – Between Industry Players / Consumers

10. Power Purchase Agreements

11. Fuel Supply Agreements

12. Electricity Supply agreements

9. Grid Code, Distribution Code, Rules, Guidelines provide guidance for industry

Industry Codes, rules and guidelines – Issued By Energy Commission

Current Reform Initiatives Are Based On “No Regrets” Steps Approach

Existing situation No regrets stepsMarket implementation

Status quo – Managed market

Improvements to the status quo that have benefits in and of themselves

Initiatives required for trading to commence

Benefits flow from the market introduction rather from the individual initiatives

The reform process consists of two distinct phases:

No regrets steps

Market implementation steps

To encourage the entry of more players to bring in more gas to the

market, an open access regulatory framework will also be established

Piping system

Consumers

Consumers

Consumers

Consumers

Consumers

Consumers

Gas Processing Plant/Onshore Gas Terminal

Liquefaction Plant

PRODUCTION TRANSMISSION DISTRIBUTION

1

2

Transmission pipeline

3

City Gate StationLast flange of GPP/OGT

Tie-in point

Connection flange of

loading arm

International BorderEconomic, Safety and Technical

Regulations

Economic Regulations

Demarcation of GSA 1993

RETAIL

Distribution pipeline

Metering or

Regulating Station

RGT

Consumers

Legend:

: Source of gas

: Gas delivery system

Consumers

Private gas licensee

Gradual phasing-out of gas subsidy

Incentive-based electricity tariff regulation with regulatory

accounts unbundling, performance incentive scheme and

imbalance cost pass-through mechanism

Competitive framework for generation capacity development

IPP generation efficiency savings sharing framework

Generation fuel security policy framework

Ring-fencing of single buyer and system operator with

market rules and regulatory oversight

Enhanced time-of-use and cost-reflective tariffs framework

New enhanced dispatch arrangement

Gas third party access framework

National Energy Efficiency Action Plan

Ongoing Initiatives To Improve MESI Performance

Initiatives In The National Energy Efficiency Action Plan

Initiatives for Appliances and Equipment:

• 5-Star Refrigerator Campaign

• EE lighting Campaign

• 5-Star Air Conditioner Campaign

• High Efficiency Motors

Initiatives for Commercial Buildings:

• Energy Audit and Management in Large Commercial Buildings

• Energy Audit and Management in Medium-Sized Commercial Buildings

• Energy Efficiency in New Buildings

Initiatives for Industry:

• Energy Audit and Management in Large & Medium Sized Industries

Initiatives for Government Facilities:

• Energy Audit and Management in Government Facilities

Initiatives for Cogeneration:

• Cogeneration in Industries and Commercial Buildings

Malaysia’s electricity intensity trend has not shown sustained improvement

Note: Intensity = Quantity of energy required per unit output or activity

(*): Electricity Intensity (toe/RM Million GDP at 2005 prices

(**): Electricity Intensity (GWh/RM Million GDP) at 2005 pricesPreliminary Data for 2014

Sources: i) Department of Statistics Malaysia

ii) TNB, SESB, SEB and IPPs

iii) National Energy Balance 2013

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Electricity Intensity (toe/GDP at 2005 Prices (RM Million)) 7.9 8.1 8.57 8.61 9.44 9.89 10.06 10.88 12.26 12.15 12.2 12.91 12.96 13.06 12.87 12.77 12.67 12.59 12.49 13.15 13.29 12.97 13.31 13.45 13.26

Electricity Intensity (GWh/GDP at 2005 Prices (RM Million)) 0.092 0.094 0.1 0.1 0.11 0.115 0.117 0.126 0.143 0.141 0.142 0.15 0.151 0.152 0.15 0.148 0.147 0.146 0.145 0.153 0.154 0.151 0.155 0.156 0.154

0

0.02

0.04

0.06

0.08

0.1

0.12

0.14

0.16

0.18

0

2

4

6

8

10

12

14

16

GWh/GDP at 2005 Prices (RM Million)toe/GDP at 2005 Prices (RM Million)

PRINCIPLES OF GOOD REGULATION

NECESSITYIs the regulation necessary? Can we reduce red tape in this area? Are the rules and structures that govern this area still valid?

EFFECTIVENESSIs the regulation properly targeted? Is it going to be properly complied with and enforced?

PROPORTIONALITYAre we satisfied that the advantages outweigh the disadvantages of the regulation? Is there a smarter way of achieving the same goal?

TRANSPARENCYHave we consulted with stakeholders prior to regulating? Is the regulation in this area clear and accessible to all? Is there good back-up explanatory material?

ACCOUNTABILITYIs it clear under the regulation precisely who is responsible to whom and for what? Is there an effective appeals process?

CONSISTENCYWill the regulation give rise to anomalies and inconsistencies given the other regulations that are already in place in this area? Are we applying best practice developed in one area when regulating other areas?

THANK YOU