IF Tenaga Nasional Bhd (TNB) acquires 1Malaysia Development Bhd’s power assets, this could increase its installed capacity in the country from 43% presently to almost 57%. In fact, with another 4,000mw of new capacity in the pipeline for TNB, the national utility would end up with more than 63% in the next few years.

This shouldn’t affect the electricity rates for consumers since the tariffs have been agreed upon in the power purchase agreements (PPAs) that have been signed. However, it does raise concerns about having a single party controlling almost two-thirds of the country’s power generation capacity if one recalls how the independent power producers (IPPs) came into the picture in the 1990s.

TNB by itself could not keep the lights on back in those days.Hence, IPPs emerged. 

Now, TNB’s proposed acquisition raises concerns of anti-competitiveness while also going against the grain of the government’s long-term policy of privatisation.

It is important to note that TNB already controls two structural monopolies — the transmission and distribution of power for Peninsular Malaysia as well as a monopoly on the procurement of fuels, like coal, for all the power plants.

If it ends up with more than 70% of generation capacity, TNB would have unrivalled control of the industry.

This is especially pertinent since electricity is a critical utility. Furthermore, the price is not determined by market forces, but by the government.

It would take an astute and unwavering regulator to ensure that TNB does not pass the cost of inefficiencies arising from lack of competition to the consumer.

Unlike other industries, competition in the energy sector is not regulated by the Malaysia Competition Commission (MyCC), but the Energy Commission (EC). As far as the EC is concerned, TNB would not be breaching any competition guidelines should it acquire 1MDB’s power assets.

The EC in recent years has put in place several checks and balances to ensure that TNB is as competitive as possible. If checks and balances, along with a diligent regulator, were all that was needed, the country wouldn’t have faced a power crisis and major blackouts in the 1990s.

Probably, the first-generation IPPs, which were labelled greenfield projects, were controversial. Opaque contracts were awarded on a direct basis, resulting in very rewarding ventures for players like the YTL and Genting groups.

Today, however, the power sector landscape has evolved substantially. Competition is rising, at least when the government allows open tenders for projects.

Fat internal rates of return (IRRs) in the high 20s or more are no longer possible. Instead, project IRRs are now in single digit, leaving project developers with razor-thin margins against their weighted average cost of capital.

Despite the good margins for earlier IPPs, their presence and the resulting competition have certainly driven down tariffs. Would TNB have been able to achieve this on its own?

On the flip side, TNB might argue that generation should be left to it if it can do so at the lowest price, even if it stems from it being a government-backed utility. IPPs are already struggling to compete with TNB, which enjoys lower borrowing cost because it is a government-linked company.

Nonetheless, the private sector companies have managed to stay competitive by being cost efficient.

It is worth noting that despite controlling more than half of installed capacity, TNB only generates about 23% to 27% of the country’s electricity on average. This shows that the IPPs have plants that operate on a higher load — meaning a higher utilisation rate — than TNB.

But to be fair, TNB has to shoulder the burden of social interest, beyond commercial success, and this has, to some extent, compromised its efficiency. For example, TNB cannot pick and choose the best projects for itself, unlike the IPPs that are driven purely by profit. This may force TNB, for example, to build and operate hydroelectric power plants that cannot operate around the clock but are crucial to the grid as a whole.

Unlike manufacturing, power generation is a matter of national security and interruptions cannot happen. The proposed acquisition could drastically alter the landscape of the power industry,  and the EC will have to keep a close eye on the changes.

This article first appeared in digitaledge Weekly, on August 3 - 9, 2015.