Fair target subsidy mechanism provides basic ingredients of nation's energy transition

KUALA LUMPUR - The government’s provision of targeted subsidies is aimed to help Malaysia become more energy efficient while maintaining economic growth and lightening cost pressures on low-income groups.

The actual cost of the subsidy to maintain the current electricity tariff, if fully implemented, would reach RM14.9 billion, but with targeted subsidy, the total cost would only be RM10.8 billion, Deputy Finance Minister Steven Sim said in Parliament recently.

He said through targeted implementation, part of the Imbalance Cost Pass-Through will be released to medium and high voltage users among industry players, including multinational companies (MNCs), with a surcharge of 20 sen/kWh.

The government is able to save RM4.1 billion through the implementation of targeted electricity subsidy for half a year in 2023, he said, adding that this implementation only involves the highest one per cent of electricity users, most of whom are MNCs.

A Paris-based autonomous intergovernmental organisation, the International Energy Agency (IEA), has long advocated that fossil fuel subsidies be eliminated or reduced because they widen fiscal deficits in developing economies, send the wrong price signals to consumers, distort markets and discourage cleaner renewable energy (RE) consumption.

"High fossil fuel prices hit the poorest hard, but subsidies are rarely well targeted to protect these vulnerable groups, instead tending to benefit more affluent segments of the population,” the IEA said in its latest analysis of fossil fuel subsidies in 2022.

The organisation was established in 1974 and provides policy recommendations, analysis and data on the entire global energy sector.

The IEA described the granting of subsidies as able to reduce hardships but subsidies do not educate consumers to save and be energy-wise or to switch to alternative energy sources.

It added that subsidies aggravate fiscal imbalances and crowd-out priority public spending.

"We must redouble our efforts to reduce wasteful consumption and accelerate the transition to clean energy. It would be better for governments to spend time and money on structural changes that reduce demand for fossil fuels for long-term benefits, rather than lowering energy bills when fuel (generation) prices rise,” the report said.

Fuel costs contribute more than 70 per cent to the cost of electricity generation in Peninsular Malaysia with most of the fossil fuel sources being coal and gas.

Malaysia is not spared from the impact of the increase in fuel prices on the generation of electricity which has lasted from a global health crisis to a global energy crisis triggered by Russia’s invasion of Ukraine.

It has a severe impact on the energy market as Russia is one of the world’s largest exporters of fossil fuels.

At the height of the global energy crisis, in October 2021, coal and gas prices reached record highs, rising 83 per cent and 11 per cent year-on-year, respectively.

Despite a reduction in the prices of coal and gas, it is still twice as much as set by the government, which is US$79 per tonne under the Regulatory Period 3 (RP3: 2022-2024).

The Glasgow Climate Agreement at the United Nations Climate Change Conference (COP26) in 2021, called on countries to "end... inefficient fossil fuel subsidies while providing targeted support to the poorest and most vulnerable”.

The World Bank is also advocating for the implementation of sustainable energy subsidy reforms while safeguarding the welfare of the poor.

It said that energy subsidies are regressive with the rich receiving disproportionately higher benefits than the poor and encouraging excessive and wasteful consumption, as well as contributing to carbon emissions.

The Dewan Rakyat was told in March that the government is exploring measures to improve the provision of subsidies to reduce leakages and balance the need to preserve the welfare and well-being of the people.

The measures should optimise government spending on programmes and projects that add value to the people and the national economy.

Savings from subsidies can be redistributed for more effective programmes and activities such as reinvestment into energy transition initiatives, financing other economic growth activities and through areas that can benefit the people and the country.

For that, Malaysia’s main database, or Pangkalan Data Utama (Padu), was developed to combine socio-economic information for every household in the country to streamline the implementation of subsidies whose basic purpose is to deal with economic distribution issues so that the people receive fair benefits from the nation’s wealth. - BERNAMA