In efforts of fulfilling Malaysia’s energy-saving and low-carbon targets towards carbon neutrality by 2050, the government introduced the Incentive-Based Regulation (IBR) framework that is meant to be used by regulators to determine efficient costs and their recovery for electricity supply and services.
The framework includes built-in incentive schemes for utilities to improve productivity and provide an expected level of service quality to customers.
International Islamic University of Malaysia (IIUM) associate professor of the Department of Economic, Kulliyyah of Economics and Management Sciences, Dr Muhammad Irwan Ariffin 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 incentivized 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.
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 continued.
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,” he opined.
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.
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.
Furthermore, 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.
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 refrain profitable while ensuring that revenue needs are kept within limits that prevent excessive profit-taking.
“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, which would help to 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 pointed out.
However, Irwan said that there have been several concerns regarding IBR. Specifically, utility companies and some stakeholders are apprehensive over the revenue caps and performance benchmarks set under IBR as these may limit revenue potential and increase operational demands.
To address this, 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.
Additionally, phased implementation of certain performance measures should allow for gradual adaptation by utilities, according to Irwan.
“Accurate data is essential for setting revenue caps, performance targets and adjusting tariffs under the ICPT mechanism,” he explained, also emphasising 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.
