The new chairman of the Energy Commission (EC) Datuk Abdul Razak Abdul Majid is probably in a tight spot.
Before taking on the top post in the EC, he was heading MyPower Corp Bhd, the entity under the Energy, Green Technology and Water Ministry given the mandate to reform the electricity sector. One of the key initiatives of MyPower is to see through a process that will allow for competitive bidding in the awards of building power plants so that the cheapest cost of energy is delivered to the consumer.
Ironically, in his first major challenge since assuming the post on April 1, he is faced with the prospects of awarding a major power plant project on a directly negotiated basis – a move that would effectively dismantle the reforms that he had championed for over the past four years.
“MyPower was responsible for the competitive tender process to bring down the cost of generating electricity. Abdul Razak played a prime role in MyPower,” says an official in the power industry.
It is learnt that the EC has decided that the award of Project 4A, involving a combined gas turbine plant with a 1,100MW to 1,400MW capacity be done on a direct negotiation basis – something that has not gone down well with an industry that was preparing for a competitive tender.
The latest development comes just after a 50MW solar farm award was given on a direct negotiation basis to 1Malaysia Development Bhd (1MDB).
The EC is expected to issue a statment on the matter today.
“The episode has raised eyebrows. Just recently, the EC had assured that future awards of power plant projects would be done via competitive bidding,” says an industry insider.
On May 19, Abdul Razak was quoted as saying that the commission had not received any directive from the authorities to engage in direct talks with potential suitors.
But to the unions which had met him, Abdul Razak was reported to have said that he would consider direct negotiations if told to do so.
“This flip flop will not go down well with investors, especially international investors looking to park their money here. So far, the EC has rightly instituted open tenders to make the industry more transparent, competitive and efficient. The award of the RM3bil Prai power plant to Tenaga Nasional Bhd (TNB) two years ago is a case in point. But the latest award is setting a precedent, where we seem to be regressing to the old ways of doing business,” he adds.
Prior to 2011, awards to build power plant were given on direct negotiation basis, which sparked rent seeking and ultimately contributed to higher cost of electricity.
At this juncture there is still time to award project 4A via competitive bidding, say industry players but they noted that it has to be done by year-end.
TNB, in a statement to StarBizWeek, says there is adequate time to conduct an open bidding exercise for Project 4A as that was the case with previous projects such as Project 3B.
“By conducting an open bidding process, there will be more transparency in the process, allow more players to participate and offer competitive prices for consumers,” it says.
TNB says it is interested in participating in Project 4A and is confident that it will be able to offer competitive rates.
Some industry players reckon that fasttrack in the award of Project 4A could have something to do with the recent controversial award of the 2,000MW coal-fired power plant called Project 3B to 1MDB.
The sovereign investment fund had won the tender to build the power plant after a stiff contest with SIPP Power Sdn Bhd, a company backed by YTL Power International Bhd and the Sultan of Johor.
The delay in the award of Project 3B had underlined the intense politicking involved in the decision-making process. 1MDB needed the new power plant to boost the impending listing of its power assets. In the case of YTL Power, which had partnered the Sultan of Johor Sultan Ibrahim Ismail Sultan Iskandar in bidding for Project 3B, it needs the new plant given the impending expiry of its first-generation power-purchase agreements (PPAs) for the Paka and Pasir Gudang power plants in September 2015. If YTL Power fails to get a new deal, it would exit the local independent power producer (IPP) scene by next year.
Project 4A benchmark
Sources said the benchmark for Project 4A is the 34.7 sen per kilowatt-hour tariff of the new 1,071MW Prai power plant that is also a combined-cycle gas turbine and expected to commence operations by March 1, 2016. “At this rate, it is still attractive for the developer. After all the consumers bear a certain cost.
“There is big money involved in power plant projects and you lock in your cashflows for the next 21 years of the concession,” says an industry player. Industry players reckon that the internal rate of return (IRR) – the widely-used formula for gauging the value of an investment in a project – for the 2,000MW plant is likely to be in the high single-digit range. The older independent power producers have enjoyed a higher IRR, but the Government is now stricter with the terms of power concessions.
Since building and operating the first independent power plant in the country in 1993, YTL Power – controlled by the Yeoh family - has not won any new project for power plants locally. Interestingly, the lease for the present site of YTL Power’s Pasir Gudang plant will expire in September next year. The land is said to belong to TNB. “To me it seems like a case of collateral damage,” says the industry insider.
It is no secret that there has been intense lobbying for Project 4A with TNB, YTL Power and even the Sultan of Johor being said to be in the fray.”
The Sultan of Johor is said to be very keen to participate in power sector and may use the public listed vehicle linked to him – Damansara Realty Bhd for Project 4A.
Adding to the debate is that no party in authority has ever raised the issue that there is an urgent need to plant up the country’s power.
Despite the recent power outages in several states, the EC has never really spoken out on the need to hasten the planting up to cater for the future demand. The energy regulator, which has always been involved in the planning of the country’s energy sector, has already scheduled the commissioning of new power plants to replace those that are expiring.
What seems to have fast-tracked the direct negotiations for Project 4A is that early this month, a few states in Peninsular Malaysia had experienced disruption of electricity supply raising alarms that the country’s electricity generation was not sufficient.
TNB acknowledged that are some issues with its Jimah and Tanjung Bin power plans and says there will be design modifications to their generation facility to improve reliability.
Demand going up
The country’s average growth of electricity demand from 2014 to 2018 is expected to be 3.31%. In 2013, the electricity demand peak at 16,562MW and this is expected to reach 19,492MW in 2018.
TNB is said to have sufficient reserve margins currently and has more power plant sources scheduled to be commissioned in the coming years but they will not be sufficient to meet overall demand going forward.
Industry players say the Government had responded to the needs with the extensions of power purchase agreements and new power plant up to 2016 and 2017 but the country needed to cater for 2017, 2018 and beyond.
According to the EC, the reserve margin for 2013 is 31% with an installed capacity of 21,749MW.
Nevertheless, industry experts say the country should be looking at operating a reserve margin to cater for scheduled and unscheduled outages, as well as “deration” in power plants.
“Sometimes machinery and equipment need to be shut down for maintenance and repairs. These are scheduled outages and there are also unscheduled outages at power plants caused by lightning, floods and other mishaps,” an industry player says.
After taking into account scheduled and unscheduled outages, industry players believe that the operating reserve margin is now between 10% and 21%.
Industry players say the gradual power planting is pushed so that there are not too many new power plants or it would result in excess reserve margins.
They opined that if the expansion is done so that every 1,000MW is commissioned in stages, it can prevent potential excess in capacity, especially if demand turns out to be weaker-than-expected.
The country experienced a near nationwide blackout in 1992 and it is unlikely that the Government would allow a repeat of such an incident. Following the major blackout, independent power producers (IPPs) were formed. While the first generation IPPs have provided steady power supply, it came at a cost. As a result, TNB had been under significant financial strain, given the hefty payouts to the IPPs and criticisms against it over the IPP deals.
It is still unclear as to which party Project 4A has been awarded to but one thing is certain: If the award is done through direct negotiation as expected, it will send a wrong signal to the industry. “Things will not be seen in the same light like previously,” said one player.
