Incentive Based Regulation (IBR) briefing to Malaysian International Chamber of Commerce and Industry (MICCI) 7th January 2015

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Background 1

IBR 2

Imbalanced Cost Pass-Through (ICPT) 3

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What is economic regulation?

▪  Economic regulation is a form of

regulatory intervention to ensure

power utilities are operating

efficiently

▪  Introduced by the Energy Commission in 2012

▪  Prices charges will be based on efficient costs

▪  Quality of service and performance of the companies assets are maintained

▪  Utilities get the right incentives to improve its performance and increase investments sustainably

Implementation of IBR …

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Incentive Based Regulation (IBR) is a form of economic regulation

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IBR, also known as Performance Based Regulation has been widely adopted

IBR is widely adopted in Europe…

Ireland

Sweden

Finland

U.K.

Denmark

Netherlands

Estonia

Germany*

Latvia

Lithuania

Poland

Czech R.

France

Belgium

Austria Hungary

Slovakia

Bulgaria

Luxembourg

Portugal2

Spain

Monaco

Slovenia

Greece

Italy

Malta2

Romania

Norway

… and being introduced in South East Asia

Performance Based Regulation) Cost-plus

Thailand Philippines

Laos

Myanmar

Cambodia

Vietnam

Malaysia

Brunei

Indonesia

Performance Based Regulation

•  IBR is an improvement over the cost plus model as it enables tracking of efficiencies and improves costs

•  IBR applies to natural monopoly parts of the power sector such as transmission and distribution networks

No IBR

Source: McKinsey

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Background 1

IBR 2

Imbalanced Cost Pass-Through (ICPT) 3

5

Changes in ICPT

Generation specific costs under SB

OPEX and Return on Asset for SB (Operations), System Operator,

Transmission and Customer Services

Base Tariff

Regulatory Period

Electricity tariff comprises two key components: 1. Base Tariff is set to reflect:

a)  The construction cost of Transmission and Distribution system

b)  Base fuel and power purchase cost c)  Operation, maintenance and

administration costs

2.  ICPT: Tariff adjustment to reflect the change in uncontrollable costs against Base Tariff i.e. change in fuel and other purchasing costs

Base Tariff and Imbalance Cost Pass Through (ICPT)"

Imbalance Cost Pass-

Through

sen/kWh

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FY2015 FY2016 FY2017

2

1

6

Tariff increased by 4.99 sen/kWh effective 1st Jan 2014 79% of the tariff increase in January 2014 is due to removal of gas subsidies and introduction of LNG at market price

3.41

0.17 0.90

0.51

14.89% 4.99 sen/kWh

38.53

2014 Non-Fuel Coal Gas price

3.92

2013

33.54

Source of tariff increase 2014, sen/kWh

Piped gas

LNG

Per centage of increase

78.6% 3.4% 18%

▪  LNG: RM41.68/mmBTU

▪  Piped gas: increased to RM15.20/mmBTU from RM13.70/mmBTU

▪  Increased to USD 87.50/tonne from USD 85/tonne

▪  To account for capex and opex for FY 2014 to FY 2017

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The electricity supply industry is a highly capital intensive sector

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TNB spends RM10 billion in Capital Expenditure in FY2014 to maintain supply reliability and security

CAPEX for Distribution and Transmission -  RM6 billion per year -  RM24 billion (2014 – 2017)

Distribution CAPEX includes new supply and system improvements on its network and multiconnection channels.

Transmission CAPEX includes network enhancement and development.

CAPEX for Generation An estimated RM3 – 4 billion -  Ulu Jelai Hydro Power Plant (372 MW) -  Hulu Terengganu Hydro Power Plant (265

MW)

Generation CAPEX includes power plant developments, and capital projects. TNB is currently spending an estimated RM3 – 4 billion for Ulu Jelai and Hulu Terengganu hydro power plants, expected to be completed in 2015. Whilst CAPEX on capital projects is estimated at RM700 million per year.

33/11kV substation

500275132 kV substations

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2010

-4%

2014

Plant Availability1

37%

2014 2010 2004

9%

2014

SAIDI3 System minutes2

Key performance indicators

Distribution Generation Transmission

87.4

55.0

0.9

0.1

89.4 85.6

Our investments have enabled us to deliver on our performance ...

Notes: 1.  Generation Plant Availability in % 2.  System Minutes – Measures the down time of the Transmission System in a year 3.  SAIDI – System Average Interruption Duration Index, measures the average supply disruption per customer per year

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Background 1

IBR 2

Imbalanced Cost Pass-Through (ICPT) 3

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ICPT is a core part of the IBR, which is a globally adopted mechanism to ensure the financial sustainability of the sector

Electricity tariff, sen per kWh

Regulatory Period 1 Regulatory Period 2

Base tariff adjusted every Regulatory Period ▪  Reflects power purchase costs, operating costs

and returns on regulated assets ▪  Negotiated every 3 years based on regulatory

guidelines set out by the ST

Imbalance Cost Pass Through adjusted every 6 months

Piped gas

Fuel volatility ▪  No incremental profit for TNB ▪  Reflects two components

–  Piped gas subsidy rationalisation for PETRONAS

–  Manages fuel price and volume volatility within period beyond TNB’s control

▪  With subsidy rationalisation, electricity prices will increase over time until gas price reaches “market”

Tariff mechanism is regulated under the Regulatory Implementation Guidelines approved by Cabinet on January 2012

Widely adopted globally in developed and developing

markets (e.g. 4 out of 10 countries in SE Asia)

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49.8 52.8

45.3

76.4

90.2 88.2

106.9 103.6

83.6 75.4

45

75

85

87.5

FY’05 FY’06 FY’07 FY’08 FY’09 FY’10 FY’11 FY’12 FY’13 FY’14

Actual Average Coal Price (CIF)1

Benchmark price in tariff

Benchmark coal price set in Jan’14 tariff revision

Benchmark coal price set in June’06 tariff revision

Benchmark coal price set in July’08 tariff revision

Power Sector Coal Price, USD/MT

Source: 1- TNB Analyst Briefing 4QFY2014

The downtrend in the coal price has resulted in some savings to TNB…

Benchmark coal price set in March’09 tariff revision

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84.40 84.70 84.40

80.80

77.16 78.00

74.63

72.93

85

87.5

Q1FY’13 Q2FY’13 Q3FY’13 Q4FY’13

Power Sector Coal Price, USD/MT

Source: 1- TNB Analyst Briefing 4QFY2013 and 4Q2014

…actual coal prices for FY2013 and FY2014 were below benchmark prices…

Q1FY’14 Q2FY’14 Q3FY’14 Q4FY’14

Actual Average Coal Price (CIF)1

Benchmark price in tariff

Benchmark coal price set in Jan’14 tariff revision

Benchmark coal price set since Mar’09 tariff revision

-17%

Avg FY’14 = 75.4

Avg FY’13 = 83.6

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42.786 43.164

45.552 46.019

47.649

48.772

46.041

41.68

Apr-­‐13   May-­‐13   Jun-­‐13   Jul-­‐13   Aug-­‐13   Sep-­‐13   Oct-­‐13   Nov-­‐13   Dec-­‐13   Jan-­‐14   Feb-­‐14   Mar-­‐14   Apr-­‐14   May-­‐14   Jun-­‐14   Jul-­‐14   Aug-­‐14   Sep-­‐14   Oct-­‐14   Nov-­‐14   Dec-­‐14   Jan-­‐15  

…however, it is offset against a substantially higher LNG cost The actual LNG price billed to the power sector is 10% to 17% higher than the benchmark price set in Jan 2014 tariff

Q2 2013 (Apr - Jun ‘13)

Q3 2013 (Jul - Sep ‘13)

Q4 2013 (Oct - Dec ‘13)

Q1 2014 (Jan - Mar ‘14)

Q2 2014 (Apr - Jun ‘14)

Q3 2014 (Jul - Sep ‘14)

Q4 2014 (Oct - Dec ‘14)

Liquefied Natural Gas (LNG) Price to Power Sector, RM/mmBTU

Actual price billed by PETRONAS1

Benchmark price in tariff

Benchmark LNG price for gas consumption > 1,000 mmscfd set in Jan 2014 electricity tariff revision

+10% +14% +17% +10%

Source: 1- Single Buyer Department, TNB

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Jun-

06

Aug

-06

Oct

-06

Dec

-06

Feb-

07

Apr

-07

Jun-

07

Aug

-07

Oct

-07

Dec

-07

Feb-

08

Apr

-08

Jun-

08

Aug

-08

Oct

-08

Dec

-08

Feb-

09

Apr

-09

Jun-

09

Aug

-09

Oct

-09

Dec

-09

Feb-

10

Apr

-10

Jun-

10

Aug

-10

Oct

-10

Dec

-10

Feb-

11

Apr

-11

Jun-

11

Aug

-11

Oct

-11

Dec

-11

Feb-

12

Apr

-12

Jun-

12

Aug

-12

Oct

-12

Dec

-12

Feb-

13

Apr

-13

Jun-

13

Aug

-13

Oct

-13

Dec

-13

Feb-

14

Apr

-14

Jun-

14

Aug

-14

Oct

-14

Dec

-14

Feb-

15

Apr

-15

Jun-

15

10.70

13.70

Regulated Gas Price to Power Sector, RM/mmBTU

Note: Prior to May ‘97, the Gas Price Formula for Power Sector = 1.04 x MFO Price Source: 1 - Kenyataan Akhbar Pelepasan Kos Bahan Api dan Penjanaan bagi Semakan Semula Tarif Elektrik di Sem. M’sia’, Nov 2014

6.40

14.31 15.20

Jul ‘08 Mar ‘09 Jun ‘11 Jan ‘14 Jun ‘15 May ‘97

May ‘97 – Jun ‘08: Fixed price at RM 6.40/mmBtu

July ‘08: 123% increase

Mar ‘09: 25% reduction

Jun ‘11: 28% increase

Jan ‘14: 11% increase, the new gas price is only applicable to gas consumption ≤1,000 mmscfd

Nov ‘14: Government decided to maintain the gas price until Jun ‘151

Furthermore, TNB needs to also recover additional cost due to the gradual revision of pipeline gas price by the Government – As part of the Subsidy Rationalisation Program

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No increase in tariff despite higher fuel costs incurred RM1.683 bil absorbed by using savings from PPA renegotiation and maintaining piped gas price at RM15.20/mmBTU

NO POWER TARIFF INCREASE UNTIL JUNE 2015 “The Ministry would like to announce that in the interest of the rakyat the Government has decided to maintain the current electricity tariffs rate until 30th June 2015 ” The Star, 6th November 2014

Datuk Seri Dr Maximus Ongkili Minister Energy, Green Tech. and Water

Government will manage the cost

of RM 1.683 billion for fuel and

generation costs, by using

•  savings generated through the

negotiated Power Purchase

Agreement (PPAs) of the first

generation IPPs and

•  maintaining the current piped

gas price supplied by

PETRONAS to the electricity

sector

Jan - June July - Dec

1) TOTAL ICPT RM847.96 million

RM465.93 mill RM382.03 mill

2) COST OF MAINTAINING PIPED GAS PRICE AT RM15.20 / mmBTU : RM836 million

Total cost of RM1.683 billion Govt. announced that tariff will be maintained until 30th June 2015

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Key Highlights – ICPT Jan-June and July-December 2014

1.  Estimated ICPT cost passed through from Jan 2014 to Dec 2014:-

a) Jan 2014 – June 2014 = RM 465.93 mn (0.90 sen/kWh)

b) July 2014 – Dec 2014 = RM 382.03 mn (0.72 sen/kWh)

Total ICPT = RM 847.96 mn (1.62 sen/kWh)

2.  ICPT cost of RM 847.96mn fully absorbed by PPA savings.

3.  Pipeline gas price will remain constant at RM15.20. This will result in a foregone

revenue for Petronas at RM 836 mn

4.  ICPT costs absorbed by savings from PPA renegotiations and deferment of piped gas

price increase

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Thank You

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TNB’s Energy Efficiency (EE) Initiatives

7th January 2015

POWERING THE NATION

Knowledge Sharing Session with MICCI

Disclaimer: All information contained herein are solely for the purpose of this presentation only and cannot be used or referred to by any party for other purposes without priorwritten consent from TNB. Information contained herein is the property of TNB and it is protected and confidential information. TNB has exclusive copyright over the informationand you are prohibited from disseminating, distributing, copying, reproducing, using and/or disclosing this information

Content

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§ BackgroundSustainability ChallengesDefinitions

§ TNB EE InitiativesEE ProgrammesSmart Grid (SG)Demand Side Management (DSM)

§ Conclusions

Introduction

q In the long term, energy derived from fossil fuel could have some

adverse impacts on sustainability and environment.

q Hence requires a prudential and effective approach in energy

utilisation.

q Energy Efficiency (EE) and Demand Side Management (DSM) is one of

the main mitigation measures.

q TNB is embarking on various EE and DSM initiatives to support

sustainable growth.

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Escalating electricity demand

due to high GDP growth averaging

about 4% p.a.

Require significant resources to meet

demand

High dependency on fossil fuels

(more than 90% from gas and coal)

Reliance on 100% imported coal -issue on energy

security

Increasing cost of supply

Rationalisingenergy subsidies and recovery of higher cost of

supply in the long term amid

intermittent cost volatility.

Reduction of CO2emission & low

carbon economy

Commitment to reduce up to 40%

in emission intensity of GDP in

year 2020 compared to 2005

levels

Increasing pressure on energy

security

Higher demand on reliability of energy

supply

Sustainability Challenges

4

Generation Transmission Distribution Consumer

TOUDR/DSM

EV Charging

éUtilisation

êLossêAncillary Services

Usage Optimisation

MicrogridOutage ManagementProactive MaintenanceAnalytics (Grid/Consumption/Asset)

Enhanced DMA

AMI

A Smart Grid incorporates information and communications technology intoevery aspect of electricity generation, delivery and consumption in order tominimize environmental impact, enhance markets, improve reliability and service,and reduce costs and improve efficiency (EPRI)

Smart Grid – Overview (Future enabler of EE & DSM)

Content

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§ BackgroundSustainability ChallengesDefinitions

§ TNB EE InitiativesEE ProgrammesSmart Grid (SG)Demand Side Management (DSM)

§ Conclusions

TNB’s EE Initiatives

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1. ENERGY EFFICIENCY (EE)

• Energy audits and consultancy at TNB and private buildings – completed• Development of Energy managers- ongoing trainings and programmes.• Pilot EV charging terminal – completed• Energy awareness programmes – energy tips, customer engagement.• Home Energy Report (HER) – in progress.

2. SMART GRID (SG)

• SG Pilot project (Smart Meter, AMI, ICT Integration, DR) at Melaka – installation and customer engagement in progress.

• SG Realisation Plan (until 2020) – understudy & in planning stage.

3. DEMAND SIDE MANAGEMENT (DSM)

•Option Interruptible Load- customer engagement and preparation for implementation•Thermal Energy Storage (TES) - Bangsar Energy System, KLIA2•Current TOU tariff (2 part tariff) , Government study on-going for enhancement

1. Energy Efficiency Communication – Internal & External- EE Awareness, Energy Tips on Media

1. Energy Efficiency- Home Energy Report (HER)

q Target the domestic

customer.

q Change consumer energy

consumption via

behavioural science.

q Create peer pressure

behaviour and EE

awareness.

q Provide personalised EE

tips.

2. Smart Grid - Pilot- Advanced Metering Infrastructure (AMI) pilot project

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AMIAMI

Tools for customers

to save energy bills

(TOU)

Tools for customers

to save energy bills

(TOU) DR for

economic operation

DR for economic operation

Enhanced customer service

Enhanced customer service

Enhanced electricity

supply reliability

Enhanced electricity

supply reliability

Revenue AssuranceRevenue

Assurance

Efficient Business

Operations

Efficient Business

Operations

• TNB decided to implement a small scale AMI Pilot project to test its benefits.• Funding was obtained from the Malaysian Government (AAIBE/MESITA Fund).• Implementation for 1,000 smart meters in Melaka and Putrajaya.• The project is part of TNB’s smart grid plan.

200 Smart Meters in Putrajaya

800 Smart Meters in Melaka

3. Demand Side Management- Some of TES projects undertaken by TNEC

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Content

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§ BackgroundSustainability ChallengesDefinitions

§ TNB EE InitiativesEE ProgrammesSmart Grid (SG)Demand Side Management (DSM)

§ Conclusions

Conclusion

q TNB has embarked on numerous EE & DSM initiatives to support

sustainability, including implementing EE and DSM projects via our

subsidiaries e.g. TNBES, TNEC.

q TNB is exploring various options to modernise the ESI including

through development and application of new technologies e.g Smart

Grid & AMI.

q EE & DSM Development will benefit the customer and ESI by

offering more innovative solutions.

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THANK YOU

www.tnb.com.my

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