Looming electricity tariff hike sparks debate over Malaysia's love affair with power-hungry data centres

The boom in data centres in Malaysia could be the reason for planned electricity tariff increase recently announced, as the government continues to lure the energy-guzzling sector with various incentives, the cost of which will ultimately be passed on to consumers, say experts.

In a Bursa Malaysia filing recently, Tenaga Nasional announced changes in the electricity tariff rate and tariff structure for Peninsular Malaysia starting July this year, which has since seen conflicting statements from government leaders.

Deputy Prime Minister Fadillah Yusof said TNB had not been given approval for a tariff increase, while Prime Minister Anwar Ibrahim, said any tariff hikes would not affect the majority of Malaysians.

A former deputy governor of Bank Negara Malaysia recently wrote that TNB's announcement should be seen in the context of its investment needs as multinationals were rapidly setting up their data centres in the country.

"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," said Sukudhew Singh.

By the end of 2024, there were 54 data centres in Malaysia with an IT capacity of 504.8 MW, with more being planned to increase the capacity to 1,313 MW.

According to the Malaysian Investment Development Authority, there was about RM115 billion in investments from data centres between 2021 and 2023, with Johor Baharu emerging as the fastest growing data centre market in Southeast Asia.

Malaysia has become a favourite for data centres due to its cheap electricity tariffs, considered the lowest in the region.

This was made even more attractive as the government had previously exempted tax for eligible data centres and cloud companies.

Critics have pointed to the environmental impact of data centres, which are notorious for their high energy consumption and could put a strain on both the national power grid and water supply.

In October last year, Treasury secretary-general Johan Mahmood Merican conceded that data centres may not add value to Malaysia despite the large capital.

“We are rethinking this enthusiasm for data centres. They are large in terms of capital expenditure (capex), but they don’t necessarily create many high-skilled jobs, and sometimes they consume a lot of electricity and water,” he had said.

Ireland, Germany, Singapore and China have imposed restrictions on new data centres.

Sukudhew said Malaysia was not adequately prepared in terms of water and power capacity to handle the onslaught of data centres, adding that the industry was putting pressure on TNB to build the capacity.

"Ideally, the cost of investment in new capacity should be reflected in the costing of these resources to the data centres," he wrote in a LinkedIn post.

He said it was common practice to offer generous incentives to attract such investment, including lower water and electricity rates.

"If that is the case, TNB will have to shift the cost to other consumers.

"The alternatives are limited. TNB 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," he added.

Mazli Noor from the Institute of Corporate Directors Malaysia said TNB's financial report raised questions about its cash flow, adding that no dividend had been declared.

He said if the data centres were indeed profitable as claimed, TNB should turn to the debt market instead of raising tariffs.

"They can still raise funds from the debt market for data centres as these are new potentials that are profitable enough to fund the projects," he said, adding that profits for viable data centre projects could enable TNB to raise funds from the debt market.

Economist Adilah Zafirah agrees, saying that as a listed company, TNB could issue shares or bonds.

"Malaysia needs to stop offering cheap resources as a competitive advantage to attract foreign investment," said Adilah from the IRIS Institute.

She referred to the National Investment Aspiration launched in October 2022, which aims to attract quality investments instead of labour and energy-intensive industries.

"We need to gear up our capabilities to do so," she said.