IPP, PETRONAS AND MONOPOLY

IPP

Admittedly we can’t talk about electricity without discussing about IPP.

Why IPPs have become the convenient whipping boy for the Opposition to stir public sentiment for few decades?

Basically it is due to the lack of transparency in the first generation IPPs back in the 1990 where the ‘take or pay’ deal enjoyed by the IPPs seems unfair to the government. We must understand that when Malaysia experienced a national power crisis, it requires a quick and expensive solution which can only made possible by private sector venture. Because it involves multi-billons capital and the risks it undertook were thought to be phenomenally high, the deal ‘take or pay’ was included.

It is strange to see at some of the  these IPPs which are now seen as “locusts” were the “white knights” which had come to aid the Government to plant-up quickly, using private sector funding. If not for the IPPs, the peninsula might have experienced more severe and persistent power outages in the 1990s and 2000s as TNB did not deliver value and quality electricity to consumers.

Actually the ‘take or pay’ deal was only given to YTL Power. And YTL’s license will expire in 2015. It means, in two years’ time, there will be no more ‘take or pay’ deal to any IPP’s in Malaysia.

Why IPPs are given subsidies when the people are not? Actually the cheaper gas by Petronas to IPPs and TNB are meant to benefit the people in the form of low tariff rates.  It is not like IPPs or TNB can sell and trade the subsidized gas for their own profit.

In fact if there is no subsidy given to them, the people will have to pay the market price for electricity. This is what happening right now. The government has decided to gradually remove the subsidy (cheaper gas) thus resulting the increase of electricity tariff.

Some may say all the IPP licenses were given to cronies of the government. But cronies or not, the frequency and minutes of interruptions would have driven away many investors if the IPP solution was not initiated in 1990. The involvement of IPPs in the power generation business had introduced efficiencies besides contributing significantly towards stabilising the nation’s reserve margin.

Not only that, thousands of job have been created and today we proudly see some of the IPPs have ventured international market to do business in energy sector.

PETRONAS

How about Petronas? Shouldn’t Petronas’ profit be used to subsidise the energy sector?

Petronas is already has to forgo revenues amounting up to RM12 Billion annually because of the discounted gas price given to TNB and IPPs. It would be better if this revenue channeled to further develop high-value downstream activities.

Not only the revenue is falling, the gas supply from local offshore gas fields is depleting, hence, the need to import gas from Australia and Qatar. The imported gas has to be subsidised at about RM40 per mmbtu instead of the market rate of RM145 per mmbtu. It means Petronas can only sell the gas at one-third of the cost. It’s a loss-making business.

How long Petronas can sustain this? It is worth mentioning that Petronas is not the biggest and the largest oil company in the world.

MONOPOLY

Some readers questioned why TNB is the sole electric provider in this country. They argue in most developed countries there are few providers that compete with each other in giving the best rate to the consumer.

To be fair to their suggestion, it is not accurate to say TNB has monopolised the electric sector in Malaysia given the current practice. While TNB is the sole electricity distributor in this country, it is not the only electric producer.

Under the Malaysia Electric Supply Industry (MESI) transformation, TNB will have to compete with IPPs in terms of building a new plant and generating electricity. The competitive bidding (apart from ensuring transparency), allows the government to choose the most competitive rates and eventually pass on the savings to consumers.

For the record, the government has recently conducted its first competitive bidding process for the new power plant in Prai, which was won by TNB and the extension of PPAs for some of the first-generation IPPs.

Obviously IPPs brought competition to TNB in an industry that TNB had long monopolized.

ONE OFF VS GRADUAL INCREASE

Many wonder why the government hasn’t impose the price hike gradually? Why it should be one-off increase.

Politically, I don’t think any government in the world would want to portray themselves as an unpopular government by keep announcing price hike, even for a small increase. After all, one-off increase suits well with the Malaysians attitude that forgets easily.

Economically, one-off increase will give a faster result and substantial savings whereas the savings from the gradual increase might be insignificant.

MatRodi

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