Have you wondered what can you do without
electricity in the modern society of today? Back in the olden days, people survived
without the use of electricity and electronic gadgets like we have in today’s
life. Do you really know which company supplies electricity to us? Let me tell
you that. Tenaga Nasional Berhad (TNB) is one of the monopoly firm operating in
Malaysia consumer market. TNB became a privatized company wholly-owned by the
government on 1st September 1990. The government and agencies holds
about 60% of the equity. (JT, 2008)
Despite the risk of having competitors, TNB is the largest electric utility company in Malaysia and largest power company in Southeast Asia. It generates, transmits and distributes electric supply to households and factories with different tariff rates. Tenaga Nasional Berhad is listed on the main board of Bursa Malaysia and equipped with more than 33,500 employees and almost RM87 billion worth of assets. TNB has powered the nation for over a decade, serving at least 8.3 million customers in Peninsular Malaysia, Labuan and Sabah. Tenaga Nasional Berhad was formed in 1990 by the Electricity Supply Successor Company Act 1990. Today, TNB continues to foster social development and economic growth in the country.
Despite the risk of having competitors, TNB is the largest electric utility company in Malaysia and largest power company in Southeast Asia. It generates, transmits and distributes electric supply to households and factories with different tariff rates. Tenaga Nasional Berhad is listed on the main board of Bursa Malaysia and equipped with more than 33,500 employees and almost RM87 billion worth of assets. TNB has powered the nation for over a decade, serving at least 8.3 million customers in Peninsular Malaysia, Labuan and Sabah. Tenaga Nasional Berhad was formed in 1990 by the Electricity Supply Successor Company Act 1990. Today, TNB continues to foster social development and economic growth in the country.
Market Structure
Monopoly firm exists as a single firm who
produce goods and services with no close substitutes. Some of the monopoly
company in Malaysia are Tenaga Nasional Berhad (TNB), Keretapi Tanah Melayu
(KTM), Syarikat Bekalan Air Selangor Sdn. Bhd (SYABAS), Telekom Malaysia (TM)
and many more. TNB have extensive market control, so they are the price maker
and consumers are price takers. They earn supernormal profit in the long run.
Since monopoly firm is the only firm in the market, the firm’s demand curve is also the market demand curve, P = D = AR. The demand curve is a downward sloping line. A monopolist will produce at a point where MR = MC because that is the profit maximizing output. However, the price will be charged at higher than AC to reap supernormal profit.
Since monopoly firm is the only firm in the market, the firm’s demand curve is also the market demand curve, P = D = AR. The demand curve is a downward sloping line. A monopolist will produce at a point where MR = MC because that is the profit maximizing output. However, the price will be charged at higher than AC to reap supernormal profit.
 |
| Graph 1 |
Electricity can be classified as
essential utility. The demand for electricity is relatively inelastic demand as
the change in price do not directly affect the quantity demanded. Therefore,
the demand curve look steep as shown in the graph. For example, when
the price of electricity rises up, consumers has no choice but to accept the
fact. (TNB,
2011)
 |
| Graph 2 |
Malaysia GDP growth was expected to
increase by 4.3% in 2013 and with population of 29 million. (The
Star, 2013) With that figure, the demand for
electricity is expected to increase by five to six percent in the next two
years. (Khamis, A .et al ,
2010).
Demand and Supply
 |
| Graph 3 |
The graph 3 above shows the demand
and supply curve for electricity, where the vertical axis represents the price
and horizontal axis represents the quantity demanded. At the point where supply
intersects with demand, market equilibrium is reached. In this case, shortage
of electricity supply occurs at point (Q3-Q1). At this price (P3), demand is
more than supply. Consumers are willing to pay more than TNB is willing to
supply. This can be result from the rise of production cost when government
planned to remove the subsidy on electric. It is estimated that if the subsidy
is removed, the true cost of power will exceed 40 sen per kilowatt-hour (kwh)
compared with the current rate of 33. 54 sen/kwh (New Straits Times,
2013).
When the demand increases, the demand curve shifts to the right; whereas when the quantity supplied decreases, the supply curve shifts to the left. This causes the market price to increase. There is a rise of 7.12% electricity tariff by 1st June 2011 which increased the burden of lower income group.
When the demand increases, the demand curve shifts to the right; whereas when the quantity supplied decreases, the supply curve shifts to the left. This causes the market price to increase. There is a rise of 7.12% electricity tariff by 1st June 2011 which increased the burden of lower income group.
Barriers to entry
There are many barriers to entry designed to prevent
or completely block potential entrants from entering the market to compete with
existing monopoly firms. Tenaga Nasional Berhad has obtained the patent or
license to operate in Malaysia market. Legal barriers to entry allows only the monopoly to provide services
to the entire nation. Since then, this blocks new firms to
enter the industry easily and compete with them. By having strict barriers to
entry such as huge initial capital, new entrants with low capital cannot afford
the high start-up costs of setting up power grids and power stations to
generate and supply electricity. This industry also required specialized techniques
and skills which potential new entrants are not able to provide. The second
barrier to entry is economies of scale. TNB
enjoy economies of scale by producing at a higher output with a lower cost in
order to reap supernormal profit. Their average cost of production will be
relatively high and this will force the company out of the market. This could
not be enjoyed by new entrants as the cost of production can be electrifying. Government
directive also make the new entrants to be unattractive or almost impossible to
enter and compete with Tenaga Nasional Berhad.
Moreover, TNB has the ownership on scarce raw
materials. In this case, TNB uses coal to generate electricity because this is
the cheapest method to produce electricity in Malaysia. Currently, coal for electricity generation is fully imported from other
countries which include Indonesia, Australia and South Africa. (TNB, 2011)
This plays a big part in making effective barriers to entry because no firms
have the power to obtain scarce materials to compete with TNB. They have complete
control over the industry.
Since 1st October 2008, A RM20 subsidy
was given by Malaysia government to all residential users of TNB on their
monthly electric bills amounting to RM20 or less. However, residential users
with 0kwh monthly reading are not eligible for this rebate. (Bernama, 2013). Government
subsidies RM8 billion to RM12 billion a year for electricity in the nation. (Singh.
R, 2013) However, the government might reduce the subsidy for electricity because
government had heavily subsidized the current tariff particularly for gas.
(Bernama, 2013). If subsidies were to be removed, electric tariff could spike
up to RM0.40/kwh and this will greatly burden the end users. (Singh. R, 2013)
According to The Star, Petroliam Nasional Berhad (PETRONAS) is unwilling to
supply subsidized gas to TNB and felt that Malaysia government should take over
the responsibility of future subsidies. PETRONAS currently provides a RM20bil
subsidy to power industry by selling natural gas to them below market prices.
Overall, it has forked out RM108.5 bil in subsidies for TNB since 1997 (The
Star, 2012)
Malaysian is one of the fast economic growing as well as industrial
countries. Graph 4 shows the overall power demand in Malaysia. Due to fast
industrialization, the overall power demands from 1990 to 2009 in Malaysia is
increased about 3 times from 1990 to 2009. As a result, the power plant
installation also increases. The power plant capacity is increased from 14,291
MW to 24,377 MW between 2000 to 2009
 |
| Graph 4 |
In relation, TNB was able to secure
the coal at a cheaper price. However, TNB had also secured a bid on a new
combined cycle gas turbine plant in Seberang Prai. (Mohd Jamaludin. R, 2012) “Malaysia's
electricity demand keeps increasing every year. The new plant is to meet the
requirement of generation capacity in the peninsula,” Tajuddin said in a
briefing. (Hung Yee. L and Carvalho. M , 2012) With the efficient plant, TNB is able to increase their
profit by producing an output of 60 per cent. In addition, they are able to utilize
the raw materials and cost of production can be kept low.
Price Discrimination
Tenaga Nasional Berhad practices
price discrimination in consumer market. Price discrimination is a pricing
strategy that charges different groups of customer with different price for the
same product and services. TNB practices second degree price discrimination
that charges a certain price for the first given amount of usage, and a
different price for next given amount of usage. The tariff can be shown in the
table below. As you can see, for the first 200 kWh of usage, the price is 21.8
sen/kWh; whereas for 201-300 kWh of usage, the price is 33.4 sen/kWh. This is
increasing until the maximum charge which is 45.4 sen/kWh. (TNB, 2012)
 |
| Table 1 Source: TNB |
Conclusion
In a nutshell, although Tenaga
Nasional Berhad is a privatized company, it is still partially owned by the
government. The existence of TNB is important to the society as they are
providing essential utility to the nationwide. Everything would be messed up
without electricity supply. Although TNB is facing competition from independent
power producer (IPP) such as YTL Power International, Genting Sanyen, Kapar
Energy and so on, they still have the power to conquer consumer market in
Malaysia.
References
Bernama , Friday 19th July 2013 Focus: Upward power tariff
review possible as government may reduce subsidy for power, says TNB.
[online] Available at: < http://news.malaysia.msn.com/regional/upward-power-tariff-review-possible-as-government-may-reduce-subsidy-for-power-says-tnb> [Accessed 18
October 2013].
Hung Yee. L and Carvalho. M, Wednesday
10th October 2012 Focus: Two IPPs get 10-year extension; TNB to
build Prai plant. [online] Available at: < http://www.thestar.com.my/story.aspx?file=%2F2012%2F10%2F10%2Fbusiness%2F12149089&sec=business> [Accessed 19
October 2013].
JT, Friday 24th October 2008 Focus: Power market- TNB must
move towards liberalisation. [online] Available at: <
> [Accessed 20 October 2013].
Khamis, A .et al, Thursday 24th June 2010. Focus: Energy & electricity
consumption analysis of Malaysian power demand. [online] Available at: <http://ieeexplore.ieee.org/xpl/abstractAuthors.jsp?arnumber=5559171
> [Accessed 20 October 2013].
Mohd Jamaludin, R. Wednesday 10th October 2012 Focus: TNB
wins Prai power plant contract worth RM3b. [online] Available at: <
http://www.themalaysianreserve.com/main/news/corporate-malaysia/2270-tnb-wins-prai-power-plant-contract-worth-rm3b> [Accessed 15 October 2013].
New Straits Times, Tuesday 3rd
September 2013. Focus: Need to remove
energy subsidies. [online]
Available at: < http://www.nst.com.my/mobile/opinion/columnist/need-to-remove-energy-subsidies-1.348137 > [Accessed 16 October
2013].
TNB, 2011. Focus: Increase in Electricity Tariff. [online]
Available at: <http://www.tnb.com.my/announcement/2011/05/increase-in-electricity-tariff.html[Accessed
18 October 2013]
TNB. Focus: Energy Security. [online] Available at: <
http://www.tnb.com.my/nuclear/energy-security.html> [Accessed 18
October 2013].
The Star, Monday 7th
October 2013. Focus: World Bank lowers Malaysia GDP Growth. [online]
Available at: <http://www.thestar.com.my/Business/Business-News/2013/10/07/World-Bank-Malaysia-GDP.aspx> [Accessed 18 October
2013].
The Star, Wednesday
14th March 2013. Focus: TNB sees solution to subsidy issue soon.
[online] Available at: < http://www.thestar.com.my/Story.aspx?sec=b&file=%2F2012%2F3%2F14%2Fbusiness%2F10909992> [Accessed 18 October
2013].
Singh, R. Thursday
29th August 2013. Focus: Higher tariff on electricity likely
after Putrajaya studies subsidy mechanism. [online] Available at: <http://www.themalaysianinsider.com/malaysia/article/higher-tariff-on-electricity-likely-after-putrajaya-studies-subsidy-mechani> [Accessed 17 October
2013].
By Kenneth Wong Hon Hoong 0310909 Section 6
