TNB-IPP: It's time power producers agreed to shoulder some of the utility's financial burden

It's time power producers agreed to shoulder some of the utility's financial burden

By S JAYASANKARAN
KL CORRESPONDENT

Published May 29, 2006

MALAYSIAN state-owned power utility Tenaga Nasional finally got its tariff hike although the final quantum may have been disappointing. It asked for 20 per cent: Kuala Lumpur gave it 12.

The price increase will generate roughly RM1.5 billion (S$651 million) in extra revenue a year. But unless Tenaga's contracts with the independent power producers, or IPPs, are renegotiated, the extra income will only represent the proverbial drop in the bucket.

The utility pays around RM2.5 billion annually in 'capacity charges' to the IPPs - that's a charge to the national utility for IPPs actually having the capacity to make electricity available to Tenaga. That does not include the 'energy charge' which is for the power that Tenaga actually uses. Together, they make up over 40 per cent of Tenaga's total cost or over RM6 billion a year.

Worse still is the reserve margin which now stands at 40 per cent. This means that supply exceeds demand by 40 per cent but this energy cannot be stored and so it is, essentially, wasted. And even if it isn't produced, Tenaga gets billed for it anyway through the insidious 'capacity charge' clause. What this boils down to is that the two new IPPs which will come on stream in 2007 and 2008 are, barring a miraculous surge in demand, terribly bad ideas. The IPP contracts have to be renegotiated because they make excess profits at Tenaga's expense. It's that simple and it cannot continue unless the IPPs intend to kill their golden goose.

The first five IPPs make internal rates of return of between 20 and 25 per cent. That's very rich but it's also not to say they are predatory or hell bent on extortionate policies. When they started out in the mid-1990s, interest rates were closer to 10 per cent. It was only in 1999 when rates plunged that IPPs began to really have a ball.

Indeed, one really cannot blame the IPPs for Tenaga's predicament. First, the fact that Tenaga wasn't especially a good negotiator cannot be blamed on the independent producers. Second, the first five IPPs were commissioned in the mid-1990s when demand exceeded supply - or threatened to - which was why all of them were implemented on a fast track basis to add 4,000 megawatts to the national grid between 1993 and 1995.

The resultant surge in supply is the main reason why Malaysia suffers far less brownouts than, say India, Indonesia or the Philippines. It was the Asian financial crisis that dented demand, not an oversupply from the producers.

Finally, the fact that every single IPP raised their quite considerable financial needs in Malaysia, and in ringgit, probably did the most to deepen Malaysia's capital markets.

Between oversupply and a lack of electricity generating capacity, the former, where investors are concerned, is clearly preferable. But there can be too much of a good thing and it is time the IPPs stepped up to the plate and shoulder some of Tenaga's burden. The company is constantly in negative cash flow territory and it needs all the help it can get.

Since 1998, there have been calls for renegotiation but the IPPs haven't played ball. They should because they could be forced to. Contracts perceived to be lopsided in favour of IPPs in India, Pakistan and Indonesia have been summarily thrown out the window and the same could happen here if push came to shove.

It needn't and should not happen. With sense prevailing and goodwill on both sides, an amicable solution cannot be far off. Because if Tenaga loses, everyone does.