The Effects of Covid-19 on the Performance of the Electric Power Industry in Malaysia:
Application of the SCP Paradigm on a Natural Monopoly.

Introduction

This article examines how Covid-19 affected electricity consumption and analyses its implication on the financial performance of Tenaga Nasional Berhad (TNB), which is the sole distributor of electric utility in Malaysia. This paper is divided into 3 parts, beginning with an overview of the industry and the justification of this topic, followed by findings of the effects on the performance of the firm. Lastly, the relevance of the Structure-Conduct-Performance (SCP) paradigm to the monopoly market structure is discussed.

Background

The supply of electricity is important in the development of any economy (Nkalo & Agwu, 2018). An interruption in the power supply can be detrimental to productivity. Collard- Wexler and O’Connell (2014) showed that electricity shortages reduced the output of manufacturing in India by 5%. By studying the impact of Covid-19 on the financial performance of the electric power industry in Malaysia, one could identify potential threats to the economy for future implementation of more effective solutions.

The electric power industry is divided into three sectors, Generation, Distribution and Transmission, where TNB controls the latter two. The government’s initiative to liberalise the industry (MESTECC, 2019) created concerns in terms of the viability of a competitive model in this market. Supporters of competition claim that more competition is the only way to stimulate innovation and obtain lower prices (Bergendorff, Larsson & Näslund, 1983). However, there are certain conditions where a monopoly produces more output than a competitive firm, hence preferable from the consumers’ point of view (Fershtman & Spiegel,1983). In fact, Tran (2019) argues that by applying the SCP paradigm, a state monopoly will act no different compared to competitive firms. It is therefore vital to study how the firm reacts to the Covid-19 outbreak based on the SCP paradigm.

Effects on Electricity Consumption and TNB’s Financial Performance 

In response to the Covid-19 pandemic, governments across the world have enforced lockdowns to reduce the spread of the virus, which caused a decline in global electricity consumption. The International Energy Agency (2020) reported a 20% reduction in electricity demand for every month of lockdown, on average. In Malaysia, the demand for electricity exhibited a structural break in the weekly consumption pattern (Grid System Operator, 2020), declining drastically during the Movement Control Order (MCO) that was effective 18th March 2020 (Prime Minister’s Office of Malaysia, 2020).

       Figure 1: System Demand for Electricity in Malaysia (Grid System Operator, 2020)

Figure 2: TNB Sales of Electricity, by Sector (TNB 2019 Annual Report, 2020)

Furthermore, the MCO directly affected the industrial and commercial sectors (“Impact of Covid-19 on manufacturers”, 2020), which makes up 40% and 36% of the electricity consumption respectively (MESTECC, 2019). Since 75.90% of TNB’s revenue from sales of electricity is derived from these sectors (TNB, 2020), their overall earnings would be expected to fall.

Figure 3: TNB Actual and Predicted Quarterly Revenue (MalaysiaStock.Biz, 2020)

From 2017 to 2019, TNB’s revenue showed a seasonal pattern, with falling revenues nearing the end of the year, and bouncing back the following year. In an otherwise competitive model, a fall in demand would result in lower earnings, hence the forecast of poorer performance in Q1 2020, breaking the seasonal trend. However, TNB’s revenue is predicted to be uninfluenced by the fluctuation in demand (“TNB’s revenue marginally affected”, 2020) due to state regulations linked to TNB’s monopoly status. Therefore, the forecast for TNB’s earnings in Q1 2020 follows the seasonal trend, reflecting an increase in revenue. 

Relevance of the SCP Paradigm

The impact of Covid-19 on the performance of TNB can further be scrutinised using the SCP approach. While TNB is a public listed company that aims to maximise profits, it is also a government-linked company that aims to maximise social welfare. Therefore, the firm measures performance in terms of 2 distinct goals. To illustrate, I prepared the following diagram.

Figure 4: TNB’s Observable Application of SCP paradigm

With high barriers to entry and complete vertical integration, TNB is in a monopoly ‘structure’ for the Distribution and Transmission sector of the industry. Consequently, the company adjusts its ‘conduct’ in terms of price-setting. As a price-maker, TNB practises price discrimination towards different classes of consumers. In response to the economic slowdown due to Covid-19, TNB announced a 6-month discount of 15% for the business sectors most affected by Covid-19, as well as a 2% discount for consumers (TNB, 2020). By lowering the price, TNB can alleviate the pressure on affected stakeholders, thus aiding the economic recovery process. This will generate returns for TNB in the longer term, because a more vibrant economy will increase its demand for electricity, hence increasing their future earnings. Thus, its ‘conduct’ has contributed positively to its ‘performance’ amidst the Covid-19 pandemic.

Government policies are a key component in the SCP paradigm for TNB. For instance, the ‘structure’ of the Generation sector in the electricity industry is an oligopoly due to the introduction of Independent Power Producers (IPP) by the government following a massive blackout in 1992 (Rector, 2005). This ‘structure’ leads to different reactions to Covid-19 in the ‘conduct’ stage. In particular, the IPPs established by the government will assist to avoid the possibility of electricity shortage (Mohamad & Hamidon, 2016) that may be caused by delays in constructions of new energy infrastructures due to Covid-19 (“Impact of Covid-19 on the global energy sector”, 2020). Also, government regulations at the ‘conduct’ stage, such as the regulated asset base structure, sheltered TNB’s revenue from being affected by the Covid-19 outbreak (Shankar, 2020). Ultimately, the policies implemented by the government throughout ‘structure’ and ‘conduct’ positively affects the financial performance of TNB and social welfare amidst Covid-19.

Most importantly, due to complete vertical integration, TNB can relay feedback throughout the SCP paradigm with ease. The uniqueness of the SCP framework allows for cause and effect in both directions. For instance, TNB’s performance can affect its conduct, and further affect the structure of its own market. This cannot be done in a conventional static market structure such as monopoly or perfect competition. This can be seen through TNB’s quick and constructive response to the Covid-19 pandemic; acknowledging its status as a price-maker, TNB was able to reduce prices to combat the economic slowdown and maintain its financial performance. As such, a dynamic approach was taken by TNB to formulate the most effective solutions in facing situational setbacks such as the Covid-19 pandemic.

Conclusion

The Covid-19 pandemic is not expected to significantly affect the financial performance of TNB due to its response through the SCP paradigm. Viewing TNB through the SCP perspective showed that TNB was able to capitalise on its monopoly status to adjust prices accordingly to maximise performance in response to Covid-19. Also, government policies play a key role in the SCP paradigm of the electric power industry by ensuring the continuity of electric power supply throughout the MCO and making sure that TNB’s revenues are unaffected by Covid-19.


Writer: Lee, Yang Ler

Reviewer: Vikky Beh, Millen

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