Malaysia’s anticipated open access power grid regime could pose challenges

Open access to the power grid helps to introduce competition to electricity markets and increase their efficiency by allowing any party selling or buying electricity to use transmission and distribution systems without discrimination, subject to transparent constraints and the uniform application of fees.

Malaysia’s National Energy Transition Roadmap (70-page / 19.5MB PDF) - which was released in August 2023 and provides a policy framework for the transition to low carbon and renewable energy – recognises the importance of developing a third-party access regulatory framework with a transparent mechanism for calculating ‘wheeling fees’ which can help to bridge the demand-supply gap for green electricity.

While the government has indicated it will need more time to implement the framework while it considers the current tariff structure, the roadmap represents a key moment in deregulation and open access for Malaysia, putting in a pathway so far only achieved in Southeast Asia by Singapore and the Philippines. The roadmap also highlights the importance of cross-border renewable energy trade and the need to establish an electricity exchange system which could help to position Malaysia as a regional hub for renewable energy as well as helping to drive the ASEAN Power Grid initiative, which intends to build electricity interconnectivity within Southeast Asia.

Malaysia is targeting implementation of the new third-party access regime in September this year, covering both renewable and conventional energy, which will allow TNB to benefit from increased grid utilisation and higher wheeling charges.

A key and important aspect of Malaysia’s proposed open access regime is the absence of an electricity market or pool. While open access is often an essential component of a deregulated market - whereby all sellers of electricity have the ability to bid their power into a power pool which can then be dispatched based on least cost, with open access providing the non-discriminatory access regime - the approach in Malaysia appears to be seeking to provide for open access without a power pool. 

The move towards open access and deregulation will be central to Malaysia’s ambitions in becoming a regional hub for renewable energy, however it will come with a unique set of challenges to prepare for.

The hurdles to open access

Having multiple sellers and buyers of electricity in the market is an indispensable feature of an open access regime, and this will either require ownership separation – known as ‘legal unbundling’ – or accounts separation - ‘functional unbundling’ - of transmission and distribution facilities from generation and supply.

Transmission must be unbundled from generation and supply to ensure a level playing field for generators, and this level of ‘vertical unbundling’ is required even for a minimal open access regime.

Challenges of unbundling

In jurisdictions which have already moved to an open access regime, entrenched monopoly interests can resist unbundling or can attempt to block market entry for third parties - for example, by shielding from public view the system’s availability to accommodate third-party transactions.

There have been historical cases in the US, for example, where the transmission and distribution company with generation interests has refused to wheel power from other sources to preserve their distribution monopoly. This has led to antitrust legislation being passed to protect open access to distribution franchises, and the implementation of further energy policies and regulations. 

Need for regulatory oversight

Simply having laws in place to protect open access will not be enough if the country adopting the regime lacks the institutional governance structure necessary to enforce open access. Even in fully deregulated or unbundled markets, the full function of the market can be impeded through the co-ordinated acts of market participants. Strong and transparent regulatory oversight is essential to achieving efficient market outcomes.

There have been instances where the state has intervened in electricity market operations and the regulator has not had the legal authority or institutional strength to prevent or counteract the intervention.

There have also been instances where the regulatory bodies at a subnational level act in ways which do not align with the national law or the rules set by the national regulator, or there has been a lack of technically sound, uniform and transparently implemented open access guidelines.

‘Coping’ with success

Even the successful implementation of an open access regime can carry risks. One risk, for example, is that the demand for new connections, especially from generators, can overwhelm the limited resources of the grid and its operators. Since transmission system capacity can only be expanded gradually, it can then be difficult for the grid company to accommodate the upsurge in the number of requested connections. The regulatory regime for the independent grid operator should sufficiently incentivise investments ahead of demand to avoid system constraints, while also avoiding stranded costs and assets.

In markets such as the UK and Australia, the current boom in renewable energy has meant that prospective new projects have had to wait as many as five years to be granted access, though legislation or other measures are being proposed to prevent this from happening in future. 

Challenges with planning

Network expansion is the natural response to growing generation and the planning process for expansion becomes more challenging in a competitive open access regime, requiring input from many more players, such as independent power producers, multiple buyers and demand responders.

As planning can no longer be confined to the utility level and must instead involve a participatory process with a variety of stakeholders, transmission bottlenecks can develop, particularly in congested high-demand areas. The intermittency of renewable energy compounds the challenges for grid planning.

In addition, the expanded electricity trade made possible by open access can bring congestion points to focus, with wholesale electricity prices occasionally spiking due to network constraints.

Risk of reintegration

In some countries in Latin America and the Caribbean region, effective competition in the generation and retail segments has been hampered by creeping monopolisation and vertical reintegration over the past two decades.

A few major investors, through a series of strategic investments and mergers, have gained a significant degree of market control and, in such instances, the return of horizontal and vertical integration can create serious concerns about the possible abuse of market power.

Benefits of open access

Granting open access to electricity markets can be advantageous for consumers, power producers, and the power markets themselves.

Open access provides consumers with a broader selection of energy providers, potentially leading to more competitive pricing and innovative service offerings. Additionally, it allows consumers to meet renewable purchase obligations or preferences.

For power producers, open access allows greater flexibility in the connection and usage of the transmission and distribution system, allowing producers to benefit from the difference in prices paid by various market participants using the grid.

Open access can allow a greater utilisation of grid infrastructure, allowing higher wheeling charges and greater funds available for grid infrastructure investment, as well as improvements in system reliability and efficiency.

Open access will also impact the pricing mechanism for the current Corporate Green Power Agreements (CGPA) that are being implemented in Malaysia, which oversee the direct sale and purchase of renewable energy between power producers and consumers. The current mechanism does not take into account wheeling charges, and instead provides for a commercial price between buyer and seller, together with the addition of the system marginal price. While this has the benefit of simplicity, it does not properly value the cost of transmission of the power. An open access regime with a transparent pricing mechanism will enable power producers and consumers to derive cost reflective pricing for their CGPAs.

The Malaysian energy market can reap considerable benefits from having an open access power grid regime in place, but it must also consider the possible challenges in order to successfully navigate the change.

Co-written by Jonathan Fong of Pinsent Masons.