Pass-through mechanism common in many countries
Published: Jun 2, 2011 7:54 AM | Updated: Jun 2, 2011 8:11 AM
Many countries that provide fuel subsidies are now forced to pass through part of the increases in world fuel prices, which have escalated by about 26 percent since the beginning of the year.
Many countries that provide fuel subsidies are now forced to pass through part of the increases in world fuel prices, which have escalated by about 26 percent since the beginning of the year.
RAM Holdings Bhd group chief economist Yeah Kim Leng told Bernama today the fuel cost pass-through (FCPT) mechanism, which was used in Malaysia before 1980, was common in many countries such as Singapore, Thailand, Philippines, Japan, US and Europe to counter the volatility in fuel prices.
Malaysia and China introduced this mechanism for the power sector early this week, by implementing new electricity tariff rates which will help them mitigate the effects of higher gas prices.
Under this mechanism, the government will review fuel cost every six months and any changes (upward or downward) due to the fuctuations in fuel prices (gas, coal and oil) will be passed through in the end-user tariff.
As part of Malaysia's ongoing subsidy rationalisation exercise, the government on Monday raised the average electricity tariff by 2.23 sen kilowatt per hour (kWh), or 7.12 percent, to 33.54 sen kWh, from 31.31 sen kWh, effective June 1.
Of the 7.12 per cent increase, 5.12 percent (1.6 sen/kWh) is to compensate for the 24 percent upward revision of the natural gas price to the power sector from RM10.70 per million metric British thermal units (mmbtu) to RM13.70 per mmbtu while the remaining 2 per cent (0.63 sen/kWh) is a base tariff revision to cover the increase in the cost of supply of electricity since the last base tariff review in June 2006.
The move, however, would not affect about 75 percent of the population who mainly consume less than 300 kWh per month.
Inefficient energy use
China on Monday raised the price for electricity used for industrial, commercial and agricultural purposes across the country’s 15 provinces and municipalities by 16.7 yuan (about US$2.57) per 1,000 kWh, while electricity prices for residential use were unchanged.
Yeah said the rising subsidies had raised concerns over unproductive use of resources, inefficient energy use and unsustainable government spending, especially for countries facing deficit budgets.
The higher cost of power for the country's largest trading partner would push up the prices of agricultural and industrial products in China, he said.
"As for the impact on the Malaysian economy, we do not expect the price pressure to be large, especially for products in highly- competitive international markets where cheaper substitutes are available," he said.
Thus, he said, imports from China would eventually cost more, making them less competitive.
He said it would take time before the local industries and consumers would be affected by the price increase as there would be an adjustment period for both the domestic and export prices.
Currently, imports from China made up about 12 percent of Malaysia's total imports, Yeah said.
Yeah said Tenaga Nasional Bhd's (TNB) outlook and earnings had improved considerably as a result of the tariff revision.
"It has eased market concerns over its ability to cope with rising coal and gas prices," he said.
FCTP puts TNB in better position
He said the introduction of the FCTP mechanism would also put TNB in a better position to face unpredictable as well as sharp swings in world fuel prices.
CIMB Research said the Performance Management and Delivery Unit's hint at tariff increase after the power purchase agreements with independent power producers were fully resolved was positive for TNB.
"This is a big plus for TNB as it will allow it to enjoy a timely (every six months) and transparent (FCPT) review of its tariff rates as well as ease market worries that it would have to carry the burden of future rise in fuel costs," it said in a research note.
The research house has also upgraged its rating for TNB from 'neutral' to 'trading buy" with a new higher target price of RM8.05, from RM6.82.
"We view the FCPT as a big plus since it will lift worries over inconsistent tariff reviews in the past and this will place Tenaga on a firmer financial footing," it said.
Meanwhile, Affin Investment Bank economist Alan Tan Chew Leong said the Chinese authorities were taking preemptive measures, by increasing the electricity tariffs, to prevent power producers from cutting production to minimise their losses.
"China raised electricity tariffs amid rising costs brought on by prices of natural gas, coal and crude oil, similar to the challenges faced by Malaysia," he said.
- Bernama
RAM Holdings Bhd group chief economist Yeah Kim Leng told Bernama today the fuel cost pass-through (FCPT) mechanism, which was used in Malaysia before 1980, was common in many countries such as Singapore, Thailand, Philippines, Japan, US and Europe to counter the volatility in fuel prices.
Malaysia and China introduced this mechanism for the power sector early this week, by implementing new electricity tariff rates which will help them mitigate the effects of higher gas prices.
Under this mechanism, the government will review fuel cost every six months and any changes (upward or downward) due to the fuctuations in fuel prices (gas, coal and oil) will be passed through in the end-user tariff.As part of Malaysia's ongoing subsidy rationalisation exercise, the government on Monday raised the average electricity tariff by 2.23 sen kilowatt per hour (kWh), or 7.12 percent, to 33.54 sen kWh, from 31.31 sen kWh, effective June 1.
Of the 7.12 per cent increase, 5.12 percent (1.6 sen/kWh) is to compensate for the 24 percent upward revision of the natural gas price to the power sector from RM10.70 per million metric British thermal units (mmbtu) to RM13.70 per mmbtu while the remaining 2 per cent (0.63 sen/kWh) is a base tariff revision to cover the increase in the cost of supply of electricity since the last base tariff review in June 2006.
The move, however, would not affect about 75 percent of the population who mainly consume less than 300 kWh per month.
Inefficient energy use
China on Monday raised the price for electricity used for industrial, commercial and agricultural purposes across the country’s 15 provinces and municipalities by 16.7 yuan (about US$2.57) per 1,000 kWh, while electricity prices for residential use were unchanged.
Yeah said the rising subsidies had raised concerns over unproductive use of resources, inefficient energy use and unsustainable government spending, especially for countries facing deficit budgets.The higher cost of power for the country's largest trading partner would push up the prices of agricultural and industrial products in China, he said.
"As for the impact on the Malaysian economy, we do not expect the price pressure to be large, especially for products in highly- competitive international markets where cheaper substitutes are available," he said.
Thus, he said, imports from China would eventually cost more, making them less competitive.
He said it would take time before the local industries and consumers would be affected by the price increase as there would be an adjustment period for both the domestic and export prices.
Currently, imports from China made up about 12 percent of Malaysia's total imports, Yeah said.
Yeah said Tenaga Nasional Bhd's (TNB) outlook and earnings had improved considerably as a result of the tariff revision.
"It has eased market concerns over its ability to cope with rising coal and gas prices," he said.
FCTP puts TNB in better position
He said the introduction of the FCTP mechanism would also put TNB in a better position to face unpredictable as well as sharp swings in world fuel prices.
CIMB Research said the Performance Management and Delivery Unit's hint at tariff increase after the power purchase agreements with independent power producers were fully resolved was positive for TNB.
"This is a big plus for TNB as it will allow it to enjoy a timely (every six months) and transparent (FCPT) review of its tariff rates as well as ease market worries that it would have to carry the burden of future rise in fuel costs," it said in a research note.The research house has also upgraged its rating for TNB from 'neutral' to 'trading buy" with a new higher target price of RM8.05, from RM6.82.
"We view the FCPT as a big plus since it will lift worries over inconsistent tariff reviews in the past and this will place Tenaga on a firmer financial footing," it said.
Meanwhile, Affin Investment Bank economist Alan Tan Chew Leong said the Chinese authorities were taking preemptive measures, by increasing the electricity tariffs, to prevent power producers from cutting production to minimise their losses.
"China raised electricity tariffs amid rising costs brought on by prices of natural gas, coal and crude oil, similar to the challenges faced by Malaysia," he said.
- Bernama
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