Energy price hikes will boost efficiency, say economists

By Lee Wei Lian

May 31, 2011

File photo of an electricity transmission plant. The revised energy prices are seen as a move to help Tenaga Nasional deal with higher power generation costs. — Reuters pic

KUALA LUMPUR, May 31 — The energy price hikes announced yesterday will help throw out foreign investors who depend on Malaysia’s energy subsidies and boost investment in the alternative energy sector, say some economists.

RAM Ratings chief economist Dr Yeah Kim Leng said that while cheap energy gave Malaysia a competitive edge in the past, it was not a sustainable advantage.

“It will weed out foreign investors who depend on energy subsidies,” he said. “Higher gas prices will make investors focus on energy conservation and alternative fuels will be slightly more attractive economically.”

He added while it was good the government was “grabbing the bull by the horns” by making energy prices more market driven it was still a “small cow” compared to the fuel subsidies which could go up as high as RM20 billion this year, or roughly half the size of the federal deficit.

“It is better to reflect market prices so that resource allocation is more responsive to the market.”

Maybank Investment Bank chief economist Suhaimi Illias said the revised energy prices were seen as a commitment by the government to fiscal reforms but it is also a move to help Tenaga Nasional deal with higher power generation costs and Petronas with the chronic issue of foregone profits due to underpricing of natural gas.

He said however that foreign investment may not be impacted as energy costs are rising around the world, adding that Malaysia’s dependence on cheap energy to be competitive was not sustainable.

“We cannot compete on subsidies and cheap labour,” he said. “It should be based on efficiency, manpower, education and stability.”

The government yesterday gave the go ahead for Tenaga Nasional to increase electricity tariffs by as much as 2.23 sen per kilowatt hour (kWh) from June 1.

The last time electricity prices were hiked was in 2008 when tariffs went up by 24 per cent.

Natural gas prices meanwhile would rise RM3 per mmBtu every six months until 2015, which is expected to cut gas subsidy costs from RM27.22 billion to RM25.64 billion.

Energy, Green Technology and Water Minister Datuk Seri Peter Chin Fah Kui said that a collection of one per cent from users of 301 kWh and above would also be channelled to a renewable energy fund.