Time for IPPs to help the rakyat

Kudos are due to Business Times for this op-ed piece. This blog has hammered the IPPs for the lop-sided Power Purchase Agreements (PPA). The BT's op-ed reminder is timely. I implore the government to pay heed to this perspective that come the time to renegotiate the PPAs, the government must support Tenaga Nasional's position and pay heed to the massive burden that the Malaysian consumer has to endure with this example of dodgy privatisation model.

Here's the BT op-ed piece:

Sweetheart deals that the first-generation independent power producers (IPPs) secured in the early 1990s will expire in stages from end-2014 or 2015.

It is often highlighted that these IPPs have collected billions of ringgit from lopsided power purchase agreements (PPAs) that put them in very minimal or an almost zero-risk environment.

The IPPs are YTL Power Generation Sdn Bhd, Genting Sanyen Power Sdn Bhd, Segari Energy Ventures Sdn Bhd, Powertek Bhd and Port Dickson Power Sdn Bhd. They are controlled by some of the country's richest families and individuals.
These IPPs have a collective generation capacity of around 4,100 megawatts (MW) sold to national utility firm Tenaga Nasional Bhd (TNB) under the "take or pay" PPAs. TNB also generates its own electricity through its network of power plants.

Many lamented that the IPPs had generated excess profits at the expense of the industry and Malaysian consumers. Now it's time for them to give up some of what is left of their concession. If they can make such hefty profits with almost no risk involved, they should give some back to the public through a review of the PPAs.

Indeed, as the country faces economic slowdown and local consumers are burdened with significant rises in the cost of living, lucrative payments to the IPPs do not appear apt. Electricity is a necessity and thus, excessive profiteering from such essential should not continue.

All other industry participants have played a role - Petronas via a gas subsidy, TNB via absorbing higher costs and customers through higher tariffs. The only one left is the IPPs, which continue to make huge profits even when the industry is facing problems due to the increasing costs of supply.The IPPs had made so much money by overcharging, and they should overcharge no longer for the sake of the rakyat.

The first-generation IPPs were shielded against a myriad of risks right from the construction to the operations stage, and project-financing as well, according to industry observers. The engineering, procurement and construction contract took care of risk in price escalation, construction delays and foreign exchange while penalties such as failure to meet completion date and for underperformance were structured in the O&M agreement with the OEM (original equipment manufacturers). In addition, almost all of the IPPs' loans were ringgit-denominated.

Consequently, TNB has been under significant financial strain given the hefty payouts to the IPPs. In addition, it also bears much of the risks associated with the IPP projects, mainly the oversupply of generation capacity and rising fuel prices. The ensuing second (1998-2001) and third-generation licences (from 2002 onwards) were relatively fair as they incorporated a demand-risk sharing mechanism, not found in the first round of PPAs.

The Consumers Association of Penang recently noted that TNB's total payout to IPPs amounted to RM78.3 billion from 2001 to 2010. Last year alone, it would have paid an estimated RM19 billion, or 65 per cent of its total revenue. TNB president and chief executive officer Datuk Seri Che Khaleb Mohamad Noh had once been quoted as saying that the renegotiation of the PPAs was one of the ways to reduce tariff charged on consumers.

TNB, whether it likes it or not, must buy electricity from the IPPs even though the country has a 40 per cent spare capacity out of a total 19,000MW generating capacity.

In effect, TNB - which needs a reserve of only 15-20 per cent - buys electricity it does not need. The IPPs thus win both ways, leaving TNB squeezed in the middle with extra costs eventually passed on to consumers. TNB is a vehicle to provide electricity to nearly 100 per cent of the peninsula, including rural areas and remote islands, and not entirely focusing on being profitable.

An industry insider said that if the total electricity demand dropped by 30 per cent any year in future, it is TNB's power plants that need to be grounded. The fact that TNB's average selling cost per unit of electricity is about 25-30 per cent cheaper than some of these IPPs does not matter. Hence, it's not surprising the first-generation IPPs could earn an IRR (internal rate of return) as high as 20-25 per cent per year, compared with industry average returns of some 15 per cent.

Auditor-general Tan Sri Ambrin Buang, in his 2007 report published by the media in mid-August 2008, had called for a review of the PPAs with the IPPs. He noted that some of the IPPs did not fulfill some of the terms of agreement.

It's good to hear that after a couple of failed negotiations in the past, the authorities have started fresh talks with the first-generation IPPs to convince them to compromise and "do a national service" by giving back something to the rakyat. In return, they will be "rewarded" with an extension of their concession, but this time on more equitable terms.

The Energy, Water and Communication Ministry and the Energy Commission, according to reports, were given until the end of 2010 to reach a pact with the players.

The PPA renegotiation is meant to look ahead and review the returns that will be allowed to the IPPs in future. Hopefully, the IPPs realise that they need to help the public during the trying times.

Source: Business Times