DEVELOPMENTS IN ENERGY REGULATORY

FRAMEWORK

By
Datuk Ir. Ahmad Fauzi Hasan
Energy Commission
25 Feb 2016

National Workshop
Building Sector Energy Efficiency
KUALA LUMPUR
25 February 2016
 Malaysias final energy consumption is dominated by
petroleum products, natural gas and electricity

2014

Petroleum products - 54.7%

Electricity 19.8%

Natural gas 22.6%

Coal and coke 2.9%

Source: National Energy Balance

 Electricity Generation and Consumption
for Peninsular 2,631
Malaysia
GWh 128.5 GWh ( Industrial heat waste)
19.94 GWh
56.58 GWh

2,214 GWh Licensee (1,225.8 MW )

630 GWh Private Licensee (352.12MW)

Biomass Landfill Mini Hydro Solar PV
130 GWh

Private
Licensee
19.0MW
37.75 GWh 41.60 GWh 17.0 GWh
77.93 GWh (116.62MW) Co-generation
(21.62MW)
5.28 GWh Export
11.33 GWh
(64.03MW) 168.6 GWh (0.15%) 22,350 GWh (19.57%)
104.74 GWh
Oil / distillate Domestic: 6,710,032
RE 271.27 MW
24,298 GWh 35,801 GWh (31.35%)
EGA 22.0 GWh
40,725.6 GWh
T Commercial: 1,404,501

Natural Gas EGAT

43,308 GWh (37.93%)
27,703 GWh (24.3%)
4,111 GWh Single Industry: 24,852

Buyer
Single Buyer 1,370 GWh (1.20%)
TNB (G) 6,616 MW System
Losses :
Hydro 52.9 GWh 10,716.6 Public Lighting: 63,340
86,289 GWh (75.6%) GWh ( 9.4%)
1,219.26 GWh 133 GWh (0.12%)
50,536.2 GWh
1,190.15 GWh
IPP 14,570 MW + 440 MW (NUR)
Mining: 29
Coal Total energy to grid: 114,182.6 GWh (100%) 414 GWh (0.36%)

Installed Capacity (To Grid System):

TNB (G) : 6,616 MW
IPP : 14,570 MW Agriculture. & Others : 2,271
Total : 21,186 MW
MD : 16,901 MW Total energy from grid to consumers: 103,466 GWh (90.6%)
 Electricity Demand and Generation Fuel Mix

1.3%
Sarawak
Peak Reserve
Demand Margin 25.4% 48.2%
(MW) (%)
Pen. 16,901 21%
Malaysia
Sabah 914 40% 25.2%

Sarawak 2,385 70%

0.5% Hydro Gas Coal Diesel

3.6% 1.8% 0.0% Peninsular
Malaysia
3.6%
5.7%
Sabah
14.9%
42.3%
51.8%

75.7%

Coal Gas Hydro MFO & Distillate Co-gen Interconnection

Gas MFO & Diesel Hydro RE
Evolution of Malaysian Electricity Supply Industry (MESI) Structure

As of 2014
Early 1990s - Mid 1990s - Multiple Distribution
Present
Multiple Generation and Retail Players
Fully Regulated
Players
Energy
Commission
Generation TNBG & TNBH IPPs
TNB Generation IPPs

Transmission Transmission
Transmission
(system operator)
Distribution Distribution
Independent
TNB
Power
Vertically Transmission and Distributors /
Distribution
Integrated Distribution by TNB Retail
Retailers
Dominated by Privately-owned IPPs
National Utility- Transmission and Distribution by TNB
allowed to participate
Privately-owned companies allowed to
TNB in the generation sector participate in generation and limited areas
of distribution
 Energy Industry Regulatory Framework
Under The Energy Commission (EC)

Minister of Energy,
Green Technology and Minister of Petroleum
Water
Formulation Sets Piped Gas Supply Policy
Policymakers
Sets Electricity Supply Policy Prescribes Piped Gas Supply
Prescribes Electricity Supply Regulations
Policy

Regulations Approves Piped Gas Supply

Approves Electricity Supply Licences and Tariffs
Licences and Tariffs
Policy Execution

Energy Commission
Advises the minister on matters relating to the
energy sector
Regulation
& Industry

Develops legal frameworks Regulator

Implements policy
Issues licences and certifications
Regulates the electricity and piped gas supply
industries

Downstream
Electricity Supply
Industry
Piped Gas Supply Regulatees
Industry
(Peninsula and Sabah)
 Legislation Under The Energy Commission

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

7
 Regulatory process undertaken by EC

Minister prescribes regulations and policies

Board of EC Members sets and reviews

regulatory policies and standards

EC advises / proposes to
policymakers
EC prescribes requirements and creates
awareness among regulatees

EC issues licences, EC consults stakeholders

certifications and approvals on initiatives and issues

EC promotes, monitors, inspects, audits,

investigates and enforces compliance
 Malaysias New Energy Policy (launched in 2010) Provides Direction
For Energy Sector Development

Economic Efficiency, Security of Supply, Social and Environment

Change
Energy Pricing Supply side Energy Efficiency Governance
Management

Gradual removal Portfolio Minimum Energy Improve Organise and

of subsidies development to Performance transparency manage
Decoupling increase use of Standards Allow option for implementation
sustainable Tax incentives full market of initiatives
technologies Support for co- Achieve market Proper
Maintain generation units price sequencing to
depletion policy Improve achieve
economic objectives
performance Integrated
approach
mechanism
 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
 Domestic Gas Price Trend In Peninsular Malaysia
Jan 2014:
NG Price to Power
Sector
=RM15.20/mmBtu
April 2014:
March 2009: NG Price to Large Industry
NG Price to Power Sector (>5mmscfd) = RM18.35/mmB
=RM10.70/mmBtu NG Price to GMB(<5mmscfd)
June 2011:
NG Price to Large Industry (>2mmscfd) = = RM14.05/mmBtu
NG Price to Power Sector
RM15.35/mmBtu GMB average tariff
=RM13.70/mmBtu
NG Price to GMB(<2mmscfd) = = RM16.07/mmBtu
NG Price to Large Industry
RM11.05/mmBtu (>2mmscfd) = RM18.35/mmBtu
GMB average tariff= RM15.00/mmBtu July 2011:
NG Price to GMB(<2mmscfd)
= RM14.05/mmBtu
GMB average tariff
June 2008:
= RM16.07/mmBtu
NG Price to Power Sector
=RM14.31/mmBtu
July 2008:
NG Price to Large Industry (>2mmscfd) =
RM23.88/mmBtu
NG Price to GMB(<2mmscfd) =
RM17.99/mmBtu
GMB average tariff= RM22.06/mmBtu

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

May 1997 June 2008:

NG Price to Power Sector fixed at
RM6.40mmBtu
 More Efficient Electricity Pricing Via Incentive-based Regulation (IBR)
Main Features of IBR
Structured tariff regulatory process:
First Regulatory period from 2014 2017
Establishment of regulatory accounts and reporting
IBR is a mechanism or mechanism
framework for setting Separation of accounts of TNB business units
electricity tariff with built-in Determination of reasonable return for licensee
incentives to improve Imbalance cost pass-through mechanism for uncontrollable
efficiency and quality of costs (changes in forecast vs actual cost of generation)
service Setting of performance targets with incentive/penalty
mechanism by regulator
Efficiency sharing between TNB and consumers in the next
tariff regulatory period

Building blocks to establish revenue requirement

Aggregate WACC (Return)

Efficiency
Revenue x + OPEX + Depreciation + Tax + carryover
=
Requirement Regulated asset amount
base (RAB) Additional building block for
Return on Assets
calculating revenue requirement
for the second regulatory period
 TNB Business Units under IBR Framework (Accounting Separation)

Electricity Customers
Electricity tariff

Distribution/ Customer
Services
Transmission System
Generation operations tariff
tariff tariff

Single Buyer Transmission System Operation

Single Buyer Generation Single Buyer Operation

(SLA and PPA costs) (Non-generation asset + OPEX)

As per As per
SLA PPA Under IBR framework, the CAPEX, OPEX and
TNB RETURN for Distribution, Transmission, System
IPPs Operation and Single Buyer Operation are
Generation
regulated based on KPIs with built-in
Note 1 : SLAs = Service Level Agreements with TNBs generation plants incentive/penalty mechanism
2 : PPAs = Power Purchase Agreements with independent power producers
13
13
 Incentive Scheme
- Key Performance Indicators (KPIs) under IBR framework

Single Buyer Operation Transmission System Operator Distribution / Customer Services

1. System Average Cost 1. System 1. Wide Area Loss of 1. System Average Interruption
(25%) * Minutes (40%) Supply Event (25%) Duration Index (50%)
2. Compliance to Timely 2. System 2. Voltage and 2. Average of Minimum Service
Settlement of Availability Frequency Limit Level Compliance
Generators Invoices (30%) Compliance (50%) Performance (25%)
(25%) 3. Project 3. Dispatch 3. Weighted Average
3. Compliance to Delivery Index Adjustment (25%) Guaranteed Service Level
Malaysian Grid Code (30%) (25%)
(25%)
4. Compliance to Single
Buyer Rules
(25%)
*Note: number in bracket represents weightage of KPI

Performance Indicator Scale Incentive / penalty capped at +/- 0.3% to 0.5% of annual
revenue requirement
Incentive
Upper bound target

No incentive / The annual incentive / penalty results will be monitored

on yearly basis
penalty imposed

The actual amount of incentive to be shared / penalty

Lower bound target to be imposed will be implemented in the next
Penalty regulatory period 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

12%

10%

8%
SIT Discount Rate

6%

4%

2%

0%
Current SIT
Jul '15 Jul '16 Jul '17 Jul '18 Jul '19 Jul '20
Discount Rate
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%

Notes:
E3s Tariff: Special Industrial Tariff for High Voltage Peak / Off-peak Industrial Tariff
E2s Tariff: Special Industrial Tariff for Medium Voltage Peak / Off-peak Industrial Tariff
E1s Tariff: Special Industrial Tariff for Medium Voltage Industrial Tariff
Ds Tariff : Special Industrial Tariff for Low Voltage Industrial Tariff
 Overview of Current and New SIT Eligibility Criteria

Current SIT Criteria New SIT Criteria

Eligibility Criteria: Eligibility Criteria:

Total electricity cost 5% Document to be submitted:

Total company operating cost
Document to be submitted:
1. Audited Annual Report for the
Previous Financial Year (FY)
2. Appendix 1 endorsed by External
Auditor
3. 12 months electricity bill for the
same FY
1. Energy Manager appointment Letter
2. Baseline - kWh/production (Year 1)
3. Energy Efficiency (EE) plan endorsed by
energy manager
4. 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)
17
 Enhanced Time-Of-Use (E-ToU) Tariff Scheme

Existing Peak and E-ToU Periods

Off-Peak Periods
Monday to Saturday,
, Sunday &
Friday Public Holidays
Monday to Friday

0800 0800
1100 - 1200

1400

1700

2200 2200

Off -Peak Mid -Peak Peak

18
 Generation Fuel Security Policy Framework In The Power Sector

160,000

140,000
Fuel diversification
(HHI <= 0.5)
120,000
System least cost
100,000
Generation (GWh)

Sarawak
RE
80,000 Diesel
MFO
60,000
Coal
Gas
40,000
Hydro

20,000

-
1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

2016

2018

2020

2022

2024
Year
 Enhanced MESI Structure Single Buyer Managed Market Model

ENERGY COMMISSION

Single Buyer (SB) Cogen, RE

A ring-fenced entity in TNB responsible for IPPs Gencos
procurement of electricity from Generators
and scheduling of generation to meet
demands based on least cost.

Generation TNB
Grid System Operator (GSO)
A ring-fenced entity in TNB responsible for
the real-time operation of the Grid System in
SB
Transmission
a safe, secure and least-cost manner. Planning
(Grid Owner)
GSO
Generation Despatch
Daily despatch of IPP/TNB plants based on Distribution
variable costs provided in PPA/SLA
Merit order of despatch based on least
variable cost in half-hourly tranche. Franchise
Cogen and RE generators sell electricity based Distributors
on contract rates/FiT rates. Consumers
Consumers
 New Enhanced Dispatch Arrangement (NEDA)

Current Dispatch New Enhanced Dispatch

Introduction of Price-based
Arrangement Arrangement
Bidding to complement current
PPA/SLA arrangements:
Generators with PPA/SLA can Generators Generators Non-PPA
offer optional reduced heat rates with with Generators
& VOR. If dispatched, generators PPAs/SLAs PPAs/SLAs
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
PPA/SLA rates
dispatched, generators will be
PPA/SLA rates or optional offer Price
paid at Price as Bid.
of reduced rates
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
 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
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 Enhanced Legal Framework

Acts of Parliament

1. Energy Commission Act 2001

2. Electricity Supply Act, 1990

Regulations Power of the Minister to make regulations

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

Licences Issued by Energy Commission and approved by Minister

7. Licences issued to generators, distributors and suppliers

Licence Conditions
8. Prescribes mandatory standards for licensees activities

Industry Codes, rules and guidelines Issued By Energy Commission

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

Agreements Between Industry Players / Consumers

10. Power Purchase Agreements
11. Fuel Supply Agreements
12. Electricity Supply agreements
Current Reform Initiatives Are Based On No Regrets Steps Approach

Market
Existing situation No regrets steps
implementation

Status quo Improvements to the Initiatives required for

Managed market status quo that have trading to commence
benefits in and of
themselves 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

Demarcation of GSA 1993

PRODUCTION TRANSMISSION DISTRIBUTION RETAIL

Liquefaction Tie-in point

Plant RGT
Consumers Consumers Private gas licensee
Consumers
Connection
1 flange of
Piping system
loading arm Transmission pipeline Distribution pipeline
Consumers
Gas Processing
Plant/Onshore
Gas Terminal Consumers
Consumers Consumers Consumers
2Last flange of GPP/OGT City Gate Station Metering
or
Regulating
Station

Economic Regulations Economic, Safety and Technical

3 International Border
Regulations
Legend:
: Source of gas
: Gas delivery system
 Ongoing Initiatives To Improve MESI Performance

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
 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
 Malaysias electricity intensity trend has not shown sustained improvement
toe/GDP at 2005 Prices (RM Million) GWh/GDP at 2005 Prices (RM Million)

16 0.18

0.16
14

0.14
12

0.12
10

0.1

0.08

6
0.06

4
0.04

2
0.02

0 0
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

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 prices
Preliminary Data for 2014
Sources: i) Department of Statistics Malaysia
ii) TNB, SESB, SEB and IPPs
iii) National Energy Balance 2013
 PRINCIPLES OF GOOD REGULATION
NECESSITY
Is the regulation necessary? Can we reduce red tape in this area? Are the rules and structures
that govern this area still valid?

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

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

TRANSPARENCY
Have 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?

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

CONSISTENCY
Will 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