2014: Upward Pressure On Electricity Tariffs In Asia

BMI View : Electricity tariffs in many countries in Asia were changed over the course of 2013, with the majority being upward revisions. Given the possibility for the gap between the cost of electricity generation and revenues generated from electricity sales to widen further, we believe that there is significant scope for further tariff increases in 2014. Several countries have already implemented price revisions since the start of 2014, but we believe there is still room for more price revisions among several Asian countries over the course of 2014.

Electricity tariffs in many countries in Asia were changed over the course of 2013, with the majority being upward revisions. In this article, we analyse the reasons for these revisions, and look at the possibility of further revisions to electricity tariffs in 2014. We also identify the impacts of these possible changes on various parties in the sector.

In 2013, some of the more noteworthy tariff revisions in Asia include:

  • A 15% increase in electricity tariffs for all users in Indonesia. This was executed in four separate increments of approximately 4% each quarter. The Indonesian government also hiked the price of subsidised petrol and diesel fuel by 44.4% and 22.2% respectively in June 2013 ( see 'Reshuffling Of Power Mix In The Works', November 18 2013).

  • An effective increase of 6-10% for all electricity users in South Korea. The South Korean government increased tariffs for all users by around 4% in January 2013, and followed up with a second increment on November 21 2013. This second increment saw prices for industrial plants and buildings increased by 6.4%, and rates for households and farms by a more modest 2.7% and 3.0% respectively.

  • Electricity tariffs in Pakistan were increased significantly in August 2013. The revision saw the rate for industrial users increased by 25-98% depending on the industrial sector and usage, while commercial users experienced an increase of 19-74%. Rates were raised again by a further 2.5-5.0% in October 2013, though this increment affects all electricity users (including residential users).

  • Electricity tariffs in Vietnam were increased by 5% in August 2013. The country's state-owned utility, Electricity Vietnam, also received approval from the Vietnamese government to raise retail electricity prices by up to 7-10% every six months. The rate hike could be done without a need for government approval and starts from 2014 onwards ( see 'Higher Tariffs And Deregulation Bearing Fruit', October 17 2013).

LNG Prices In Asia Elevated
Average Spot Prices For LNG, By Region (US$/mnBTU)

BMI View : Electricity tariffs in many countries in Asia were changed over the course of 2013, with the majority being upward revisions. Given the possibility for the gap between the cost of electricity generation and revenues generated from electricity sales to widen further, we believe that there is significant scope for further tariff increases in 2014. Several countries have already implemented price revisions since the start of 2014, but we believe there is still room for more price revisions among several Asian countries over the course of 2014.

Electricity tariffs in many countries in Asia were changed over the course of 2013, with the majority being upward revisions. In this article, we analyse the reasons for these revisions, and look at the possibility of further revisions to electricity tariffs in 2014. We also identify the impacts of these possible changes on various parties in the sector.

In 2013, some of the more noteworthy tariff revisions in Asia include:

  • A 15% increase in electricity tariffs for all users in Indonesia. This was executed in four separate increments of approximately 4% each quarter. The Indonesian government also hiked the price of subsidised petrol and diesel fuel by 44.4% and 22.2% respectively in June 2013 ( see 'Reshuffling Of Power Mix In The Works', November 18 2013).

  • An effective increase of 6-10% for all electricity users in South Korea. The South Korean government increased tariffs for all users by around 4% in January 2013, and followed up with a second increment on November 21 2013. This second increment saw prices for industrial plants and buildings increased by 6.4%, and rates for households and farms by a more modest 2.7% and 3.0% respectively.

  • Electricity tariffs in Pakistan were increased significantly in August 2013. The revision saw the rate for industrial users increased by 25-98% depending on the industrial sector and usage, while commercial users experienced an increase of 19-74%. Rates were raised again by a further 2.5-5.0% in October 2013, though this increment affects all electricity users (including residential users).

  • Electricity tariffs in Vietnam were increased by 5% in August 2013. The country's state-owned utility, Electricity Vietnam, also received approval from the Vietnamese government to raise retail electricity prices by up to 7-10% every six months. The rate hike could be done without a need for government approval and starts from 2014 onwards ( see 'Higher Tariffs And Deregulation Bearing Fruit', October 17 2013).

Why Tariff Hikes?

We believe that there are two main reasons for electricity tariff hikes in Asia:

  • Cost escalation: Fuel prices in Asia remained elevated over 2013, due mainly to negative demand-supply dynamics. LNG and oil prices in Asia had spiked significantly after the Fukushima disaster in March 2011 - as Japanese utilities switched away from nuclear generation to thermal generation - causing utilities reliant on gas- and oil-fired generation in the region to experience an increase costs. Utilities not importing LNG for gas-fired generation also felt the effect of higher prices as gas supplies in the region were diverted to customers willing to pay a greater premium. Meanwhile, the cost of coal-fired generation in several Asian countries also increased as a result of stricter regulations on coal mining and burning.

LNG Prices In Asia Elevated
Average Spot Prices For LNG, By Region (US$/mnBTU)
  • Reduced subsidies: Electricity tariffs in many parts of Asia are subsidised as generation costs are higher than tariffs in a number of countries, necessitating subsidies from governments. For instance, Indonesia spent IDR94.6trn (US$788mn) on electricity subsidies in 2012 (against a budget of IDR65.0trn), and has set aside a reduced sum of IDR89.8trn for subsides in 2014. However, governments are starting to reduce these subsidies as they act as a drag upon their fiscal position and divert resources from their budget. Additionally, the increase in fuel costs and generation since 2011 have led to a growing gulf between cost of electricity generation and revenue derived from electricity sales, putting governments in a difficult situation where inaction would require an increase in subsidies.

Malaysia: Electricity Subsidies A Substantial Drag
Malaysia - Budget Expenditure On Subsidies

Confirmed Revisions For 2014

We see significant scope for further tariff increases in 2014. This is because fuel prices in the region are still elevated, and numerous governments in the region are still trying to unwind costly electricity subsidies. At the time of writing, a number of revisions have already taken place since the start of the year, while others have been approved by various governments. These include:

  • Malaysia: Malaysian state-owned utility Tenaga Nasional (TNB) hiked electricity retail prices in the country on January 1 2014. Prices in Peninsular Malaysia were raised by 15% under the new pricing scheme, while prices in the state of Sabah and the territory of Labuan were raised by 16.9%.The revision only affects customers using more than 300kWh per month, representing around 30% of electricity users in the country.

  • Hong Kong: The Hong Kong government approved a 3.9% hike in utility CLP Power's net tariff rate effective of January 1 2014. The average net tariff for Hongkong Electric, the country's other major distribution utility, remains unchanged as of now.

  • Japan: All of Japan's 10 major power utilities will raise their rates in February 2014 to reflect the higher prices of crude oil and liquefied natural gas (LNG). Electricity and gas tariffs in Japan are reviewed every month - in line with changes in fuel prices - as part of new regulations following the Fukushima disaster in March 2011, and this increase is the first time that all 10 major utilities are raising their rates together since August 2013 ( see 'Sustained Cost Pressures Prompt February Tariff Increase', January 2 2014). Rates for electricity users would increase by 0.5-2% depending on the utility.

  • Pakistan: On January 2 2014, the National Electric Power Regulatory Authority (NEPRA) sanctioned a retroactive increase of PKR0.27/kWh to power tariffs effective as of November 2013. Customers of city utility Karachi Electric Supply are exempt from the increase. According to NEPRA officials, distribution companies had requested a tariff increase of PKR0.45/kWh.

2014: More Revisions Extremely Likely

We continue to see room for more price revisions among several Asian countries over the course of 2014. This is in addition to the tariff revisions that have already been implemented or approved at the time of writing.

  • Malaysia: We believe retail tariffs could be hiked again in the latter part of 2014 or possibly 2015, but we expect any further hikes to be lesser than the January 1 2014 increment. According to the secretary-general of the Ministry of Energy, Green Technology and Water, Loo Took Gee, a complete removal of subsidies would cause electricity prices to increase by about 19% for all users. However, the current increment will only affect 30% of electricity users, and the Malaysian government is still expected to spend a sizeable MYR2.4bn (US$0.7bn) annually on electricity subsidies. As such, we see room for further hikes to come during the government's bi-annual review of fuel subsidies and electricity prices ( see 'Further Electricity Tariff Hikes Likely', January 6 2014).

  • Hong Kong: Electricity tariffs in Hong Kong are likely to increase again in 2014 and over the next five years, according to statements released by the country's two main electricity distribution utilities. Residential tariffs in Kowloon and the New Territories are set to increase by almost 40% in the next five years according to utility CLP Power, while prices on Hong Kong Island are expected to remain unchanged.

Hong Kong: Aggressive Price Hikes Projected
Hong Kong - Proposed Electricity Tariffs, HKD/kWh
  • Pakistan: Pakistan is likely to hike electricity rates again in 2014 as it has to withdraw power subsidies in the next couple of years to adhere to an agreement it has with the International Monetary Fund (IMF). In September 2013, the government agreed to phase out electricity subsidies over three years in order to obtain a US$6.6bn loan from the IMF. The government is still expected to spend around 0.7% of GDP (or PKR180mn) on electricity subsidies annually, and will need to reduce this within the next two years.

  • Korea: We believe that the government is likely to increase electricity tariffs in 2014 as electricity prices are still below generation costs. It is our opinion that generation costs in South Korea are likely to increase further in 2014 as we expect the share of costly LNG, a feedstock for electricity generation, to experience further increases. In particular, we see room for electricity prices to increase by an additional 5-10% in 2014, in order to bring prices in line with costs and create financial viability for KEPCO ( see 'Further Tariff Hikes To Come', November 20 2013).

No Price Respite In Sight
South Korea - Value Of LNG Imports By Month (US$mn)
  • Japan: Rates in Japan are likely to be increased further in 2014 as generation costs for most of the country's 10 large utilities will remain elevated. Many of these utilities have been forced to invest in new gas- and coal-fired capacity, while the continued shuttering and maintenance of the country's nuclear reactors have acted as a drain on the utilities resources.

  • Thailand: We believe that electricity tariffs in Thailand could be increased in 2014 as the country is due to experience several disruptions to its gas supply. Several major gas fields both in and outside of the country are due to undergo maintenance activities in 2014, which would place upward price pressure on gas and electricity prices. While Thailand could increase its imports of LNG as a stopgap measure, the higher prices of LNG relative to piped gas would also lead to an increase in generation costs and thus electricity tariffs ( see 'Power: Gas Down, Coal And Imports Up', November 11 2013).

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