The furore over electricity rate hikes in Malaysia

The recent announcement of a 14% hike in tariff rates in 2025 by Tenaga Nasional, the national electricity utility, has set off a wave of negative reaction from the public, arising both from the suddenness of the announcement and the size of the increase. Without doubt such a hike will have substantial inflationary consequence (which may or may not be noted by the national statistical agency). The Prime Minister has waded in to deny that such a hike was in the offing. That raises more questions. One of which is that since Tenaga Nasional is a national company majority owned by the Government, are we being told that the Government did not know and did not approve the hike? Or are we seeing another instance of the usual political back-pedalling that is so common when there is a large backlash to unpopular government policies?

My own intuition is that Tenaga Nasional has looked at its finances and that the hike is necessary, particularly given its investment needs highlighted in its announcement. So, I have no doubt that Tenaga needs the money. But looking at the proposed investments and the likely growth of the Malaysian economy, there seems to be a dichotomy. The proposed investments are excessive, that is, until one considers one particular aspect of the economy: the sudden surge in data centres in the country.

Based on the Knight Frank’s recent report (Malaysia Data Centre Research Report - 2024 | Knight Frank Research), Malaysia has become the leading location for data centres in Southeast Asia. And that dominance is expected to grow even further. There are at the end of 2024, 54 data centres in Malaysia, offering an IT capacity of 504.8 MW. Existing committed investments, and data centres still under construction, will raise that capacity to 1,313 MW.

Regarding resources, data centres need land, water (for cooling) and electricity. Malaysia has plenty of land, especially in Johor. But the country is seriously underprepared in terms of water and electricity capacity needed by the anticipated increase in data centres in the country.

Tenaga Nasional, being the sole supplier of electricity in the country, will be under pressure to build that capacity quickly. This is especially so given its Green Lane Pathways initiative that gives expedited electricity supplies to data centres. It stands to reason that a surge in data centres would require a surge in investments in the electricity capacity of the country. National energy sustainability plans like National Energy Transition Roadmap (NETR) and Corporate Renewable Energy Supply Scheme (CRESS) are unlikely to offer much immediate help. How is Tenaga going to fund this investment?

Given that data centres are prodigious consumers of electricity and water, how much of these resources were promised and at what cost will determine the impact on utility providers like Tenaga Nasional and ultimately, on other consumers of these resources in the economy. Ideally, the cost of investment in new capacity should be reflected in the costing of these resources to the data centres. However, it is common to offer generous incentives to attract these investments, and it could be that those incentives include generous water and electricity rates that are not reflective of the cost of producing these resources. If that is the case, Tenaga will have to shift the cost to other consumers. The alternatives are limited. Tenaga could fund the investments with new borrowings, but it is already highly indebted. The government could provide the funding, but the government is also highly indebted.

While there will be economic benefits of having these data centres, I wonder what the cost/benefit evaluations were like? These should not only be on the immediate impact but also the long-term costs/benefits to the economy. If there are significant economic benefits to society, then such investments are worth making. However, let it not be the case that most benefits go to private entities, while the costs and externalities are borne by the rest of society, particularly through escalating water and electricity tariffs.