The Incentive-Based Regulation (IBR), a bold transformation for Malaysia’s energy sector, is a framework used by regulators to determine costs and recovery for electricity supply and services. This includes setting incentives to enhance operational efficiency and provide quality service to consumers.
According to Associate Professor Dr Muhammad Irwan Ariffin from the Department of Economics at the Kulliyyah of Economics and Management Sciences, International Islamic University Malaysia (IIUM), the drive for efficiency aligns with energy savings and low-carbon emissions across the sector, helping Malaysia achieve its goal of carbon neutrality by 2050. He said, while IBR does not directly mandate the adoption of renewable energy, the performance-based structure and efficiency incentives create an environment that encourages sustainable practices.
“Utility operators are incentivised to improve their operational efficiency, which can contribute to reducing carbon emissions,” Dr. Muhammad Irwan said in an interview with Bernama. He further highlighted that the energy regulatory framework in Malaysia, including IBR, progressively integrates policies that encourage utilities to adopt cleaner technologies and reduce their environmental footprint.
The IBR also makes energy more affordable by requiring utilities to operate within permitted revenue limits during the regulatory period while passing on variations in fuel costs and actual generation costs to consumers through the Fuel Cost Pass-Through (CPT) mechanism, which is reviewed every six months.
“This structure protects consumers from extreme energy price fluctuations and ensures that efficiency savings are directly passed on to the end consumers,” he explained.
Dr Muhammad Irwan also emphasised the importance of transparency in cost changes, aligning with the government’s goal of providing accessible energy at affordable prices that stimulate economic growth, create market opportunities, and offer cost advantages for the people.
Additionally, IBR supports energy security through regulatory and market reforms, encouraging 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 that can handle the growing demand for renewable energy and manage the changing energy load,” he added.
The IBR framework also focuses on continuous improvements in regulation through a transparent, performance-based approach, ensuring that utilities prioritise reliable service and resource optimisation. This strengthens the resilience of Malaysia’s energy supply while balancing affordability, he said.
Technology innovation and data transparency are additional steps that complement IBR’s broader goals. The mechanism incentivises data accuracy and operational transparency, crucial for implementing innovative solutions such as energy storage, smart grids, and data-driven management systems.
As utility operators report and optimise performance data under IBR, Malaysia is better able to track energy use, demand patterns, and emissions, which is a crucial step in meeting policy targets and fostering innovation, Dr. Muhammad Irwan concluded.
