THE government could announce electricity tariff hikes for high-volume domestic users who are currently collectively enjoying higher subsidies than low-volume users, as early as June this year.
CGS-CIMB Securities Sdn Bhd (CGS-CIMB Research) believes that adjustments to electricity tariffs for high-volume domestic users may be in the pipeline as part of the government’s subsidy rationalisation plan.
Economist Nazmi Idrus said the government is currently still shouldering a significant subsidy burden, even after partly cutting electricity subsidies for large corporations on Jan 23.
Ballooning Subsidies
Nazmi said 2022 was a difficult one for the government. While business activity rebounded with the reopening of the Malaysian economy post-Covid-19, rising commodity prices posed a different challenge.
On May 22, 2022, Brent crude oil prices rose as high as US$120 (RM525.60) per barrel, made worse by the Russia-Ukraine conflict which led to adjustments in other commodity prices, including for food and energy.
With economic recovery still fragile, Nazmi said the government decided to take on the burden of rising prices instead of passing it down to consumers. Subsidised prices were largely kept unchanged, especially for fuel and electricity, while other components, particularly food-related, such as fertilisers, poultry and cooking oil, saw an increase in allocation.
The Ministry of Finance (MoF) said the combined subsidy spending reached almost RM80 billion in 2022, as against RM31 billion allocated in the federal government budget, making spending on subsidy the highest in the nation’s history and resulting in a great strain on its fiscal finances.
Nazmi said massive subsidy commitment prompted the government to call for more targeted subsidy measures.
Low-hanging Fruit
Nazmi said the upward adjustments in electricity tariffs for large corporations which took effect on Jan 23 this year marked the first steps by the new government in realising its goal of rationalising subsidies. The tariff adjustments were drastic, with the media reporting an average increase of 40% in electricity costs for affected businesses.
“Granted, the tariff increases involved large corporations (non-domestic medium and high-voltage users) which had the financial strength to absorb the new tariffs, while rates to small and medium enterprises (SMEs) and domestic users saw no changes. Regardless, we suspect further adjustments are in the pipeline,” he said.
According to Nazmi, the easiest path for the government is to adjust tariffs for high-volume domestic users who are currently still collectively enjoying more subsidies compared to low-volume users even though they account for a smaller share of users.
Furthermore, he added that there is no allocation for electricity subsidy in the budget this year which implies that a higher subsidy commitment will be an additional burden on the government’s finances.
He said that Malaysian consumers already enjoy one of the lowest electricity tariffs in Asean and the continued heavy subsidies are not reflective of the government’s aim of shifting the country from a low-cost production centre into a generator of higher value-added goods and services.
High-volume Domestic Users
“We think the next option for the government is to target high-volume domestic users,” said Nazmi.
He noted that domestic users still enjoy a two sen per kilowatt hour (kWh) rebate in the first half of 2023 (1H23); however, according to the government, the actual amount that should be applied to domestic consumers, given the prevailing input costs, is a 27 sen/ kWh surcharge.
“Our calculation shows that if the full amount is imposed, up to RM5 billion in fiscal savings can be achieved…Even if the government selectively targets users consuming above 600 kWh — classified as high volume — it could still save up to RM2 billion,” he said.
That said, Nazmi believes that the government can impose other variations of the targeted subsidy in order to influence the impact on consumer spending, inflation and economic growth.
“Tariffs may not need to be the fully-adjusted market price, while a partial subsidy can still be maintained.
“The government could also reclassify tariff categories, adding a new segment where it thinks a surcharge can be imposed,” said Nazmi, adding that other options include adjusting the Base Tariff itself without changing the Imbalance Cost Pass Through (ICPT).
“Timing-wise, an announcement can be as early as the 2H23 ICPT review period in late-June 2023, in our view. However, political sentiments may also need to be considered given the state elections in early third quarter 2022 (3Q22),” he said.
More importantly, according to Nazmi, given falling coal and liquefied natural gas prices in 1H23, chances are, the tariff surcharge in 2H23 could be milder than the 27 sen/kWh surcharge suggested by the government.
“This should alleviate some of the subsidy pressures and also reduce the quantum of rationalisation it needs to implement to domestic consumers,” he said.
Irrespective of the government’s decision, Nazmi said, the implications cannot be ignored.
“While inflation is trailing lower, subsidy adjustments could risk inflation tilting to the upside. However, if the government is serious in its drive for fiscal consolidation, the electricity subsidy adjustment is likely to be the easiest path to pursue, in our view.
“Any savings can be channelled back to the economy for a more productive outcome,” he said.
Source: https://themalaysianreserve.com/2023/04/12/electricity-tariff-revision-as-early-as-june/