IBR Pushes For Energy Efficiency, Modernisation

By M. Saraswathi

KUALA LUMPUR, Nov 26 (Bernama) -- Incentive-Based Regulation (IBR), a bold transformation for Malaysia’s energy sector, is a framework used by regulators to determine efficient costs and their recovery for electricity supply and services.

It includes built-in incentive schemes for utilities to improve productivity and provide an expected level of service quality to customers.

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This push for efficiency aligns with energy-saving and low-carbon emission targets across the sector, helping Malaysia work toward carbon neutrality by 2050, said Associate Professor Dr Muhammad Irwan Ariffin from the Department of Economics, Kulliyyah of Economics and Management Sciences, International Islamic University of Malaysia (IIUM).

He explained that while IBR does not directly mandate renewable energy adoption, the performance-based structure and efficiency incentives create a favourable environment for sustainable practices.

“Utilities are incentivised to improve their operational efficiency, which can lead to reduced emissions. Additionally, Malaysia’s energy regulatory framework, including IBR, is progressively integrating more policies that encourage utilities to adopt cleaner technologies and reduce their environmental footprint,” he said.

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While boosting sustainability, IBR also helps make energy more affordable by requiring utilities to operate within allowed revenue limits during regulatory periods, while passing variations in actual fuel and generator costs to users through the Imbalance-Cost Pass-Through (ICPT) mechanism, reviewed every six months.

“This structure protects consumers from extreme energy price fluctuations and ensures that efficiency savings directly benefit end-users,” he told Bernama in an interview.

Muhammad Irwan emphasised that the transparency in cost changes aligns with the government’s goal of providing accessible, reasonably priced energy, which stimulates economic growth, creates market opportunities, and offers cost advantage for the people.

IBR also supports energy security through regulatory and market reforms, promoting investment in grid modernisation and smart infrastructure — key components of energy security in the National Energy Policy.

“By encouraging utilities to innovate and adopt new technologies, IBR helps build a more resilient and flexible grid capable of handling growing renewable energy demand and changing energy loads.”

Additionally, IBR focuses on regulatory improvements that anchor a transparent and performance-based approach. This ensures utilities prioritise reliable service and resource optimisation, strengthening Malaysia's energy supply resilience while balancing affordability, he said.

Technological innovation and data transparency are additional ways in which IBR supports the broader goals of the National Energy Policy. IBR incentivises data accuracy and operational transparency, which are essential for implementing innovative solutions like energy storage, smart grids, and data-driven management systems.

As utilities report and optimise performance data under IBR, Malaysia can better track energy use, demand patterns, and emissions — crucial steps for meeting policy targets and fostering innovation.

Affordability for Consumers

Muhammad Irwan explained that IBR also strikes a balance between profitability for energy companies and affordability for consumers through a structured framework that sets performance-based incentives, revenue limits and fuel cost adjustments.

IBR achieves this balance through comprehensive cost recovery, the Imbalance-Cost Pass-Through (ICPT), performance and efficiency-based rewards and penalties, transparent tariff adjustments and a fair return on investment with public oversight.

Under IBR, the regulator sets a revenue cap based on allowable operational costs, capital expenditure and a fair rate of return on investments.

“This cap is typically reviewed every few years (often every three years) to provide a stable yet reasonable return for utility companies. By doing so, IBR allows energy companies, such as Tenaga Nasional Bhd (TNB), to remain profitable while ensuring that revenue needs are kept within limits that prevent excessive profit-taking.”

Since fuel costs are volatile and form a significant part of electricity generation expenses, IBR includes the ICPT mechanism to manage this risk. The ICPT allows for periodic adjustments in consumer tariffs, typically every six months, to reflect changes in global fuel costs.

“By passing through only the actual increase or decrease in fuel costs, IBR ensures that consumers pay a fair price that aligns with current market conditions. This helps avoid sudden, large tariff hikes for consumers while stabilising revenue for the energy company as they are not financially burdened by fuel price fluctuations,” he said.

Implementation of IBR

Asked if there were any obstacles, such as resistance from stakeholders, limited data transparency, or technical limitations, Muhammad Irwan said there have been several concerns regarding IBR, but they have not hindered its implementation in Malaysia, which began in 2014.

Utility companies and some stakeholders have expressed concerns over the revenue caps and performance benchmarks set under IBR as these may limit revenue potential and increase operational demands.

The introduction of performance-based rewards and penalties has sometimes been met with apprehension, especially if companies feel that standards are too stringent or not fully achievable with existing resources, he said.

To address this concern, regulators should engage in regular consultations with stakeholders, including TNB and consumer advocacy groups, to gather feedback on revenue caps, performance metrics and incentive structures.

These consultations aim to create a more inclusive regulatory process that allows companies to raise concerns while reinforcing the shared goal of achieving affordable and reliable energy for consumers.

Additionally, phased implementation of certain performance measures should allow for a gradual adaptation by utilities, he added.

“Accurate data is essential for setting revenue caps, performance targets and adjusting tariffs under the ICPT mechanism.”

In conclusion, Muhammad Irwan emphasised that IBR has been instrumental in ensuring the sustainability of energy supply and will be crucial as the country moves toward its net-zero ambition.

-- BERNAMA