Tenaga Nasional Berhad

              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 1^st 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. 

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. 

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).

Graph 3

Demand and Supply

        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 1^st 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 1^st 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 19^th 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 10^th 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 24^th October 2008 Focus: Power market- TNB must move towards liberalisation. [online] Available at: <

http://www.malaysiakini.com/letters/91889

> [Accessed 20 October 2013].

Khamis, A .et al, Thursday 24^th  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 10^th 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 3^rd 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 7^th 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 14^th 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 29^th 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