This article first appeared as 'Transforming Tenaga' in The Edge Malaysia Weekly, on May 20, 2019 - May 26, 2019.
THOSE who pass by Tenaga Nasional Bhd’s headquarters in Bangsar, Kuala Lumpur, will find it difficult to ignore the rectangular building with its iconic neon light bulb at the top. The tower stands tall after 53 years of service. But the once-affluent neighbourhood is dusty and noisy as the building is being transformed into a campus-style powerhouse headquarters complete with an underpass tunnel and an interactive gallery, among others.
In a way, this is reflective of how far the seven-decade-old utility giant — which started as the Central Electricity Board in 1949 — has come. It has a rich legacy and is still evolving.
As Tenaga approaches the half-way mark in its transformation plan, Reimagining TNB 2025, it is facing headwinds in the form of regulatory and market changes on the home front, such as tighter tariff margins, the growing trend of embracing green energy when it comes to fuel mix and new competition.
It has a new captain in the form of Amir Hamzah Azizan, 52, who replaced Datuk Seri Azman Mohd as president and CEO after the latter left eight weeks ago.
In his first interview as CEO, Amir — who spent many years with the Shell group and national oil corporation Petroliam Nasional Bhd (Petronas), including at its subsidiary, MISC Bhd, one of the world’s largest LNG tanker operators — is well aware of the company’s legacy.
“The organisation has a strong reputation, a lot of technical experience and an aspiration laid out in Reimagining TNB … to become among the top 10 utility companies in the world [in terms of financials and quality of service].
“What I have chosen to do first is understand the game plan of Tenaga well,” Amir tells The Edge.
He acknowledges that the ground is shifting. “The most important thing that Tenaga has to do is prepare for changes in the landscape.”
Corporatising Tenaga as the power sector opens its doors
Last year, Tenaga investors were left pondering a big question — the way forward for the company — after the government hinted of more competition across the power-sector value chain.
Tenaga — which raked in RM3.72 billion net profits on the back of RM50.39 billion revenue in FY2018 — can be described as the sole operator in power transmission and distribution in regards to the national grid and last-mile retail supply to end-users. The power generation sector was opened up to third-party or independent power producers (IPPs) in the 1990s.
“It makes sense to keep transmission and distribution under one entity (Tenaga) to ensure that efficiencies are managed properly,” says Amir. This should come as a relief to investors.
The grid contributed RM3.71 billion returns to Tenaga in FY2018 under the incentive-based regulation (IBR) framework, according to the company’s latest financial statement. In a nutshell, IBR unbundles the accounts of entities within Tenaga and the electricity tariff structure to provide transparency. This also helps facilitate the impending deregulation.
The retail segment — which analysts say contributes a mere RM20 million annually to the group’s net operating profit after tax — is also likely to be opened up to third parties.
Tenaga’s response to deregulation is corporatisation, among others. “It is part and parcel of evolving Tenaga to address the changes in the landscape,” says Amir.
Corporatisation here means dividing the different parts of Tenaga’s operations across the value chain into individual subsidiaries, with the possibility of seeking listings for them.
The move provides financial transparency, which would help dispel criticism that Tenaga secures power plant projects by tendering at more competitive rates while subsidising the lower margin with its transmission and distribution arms.
“One of the firm principles is that there should not be any cross-subsidisation occurring across the board. Everybody needs to earn [within] their space,” explains Amir.
He also points to another takeaway from the exercise: “[Corporatisation] facilitates real, good competitive tension where Tenaga will place its people to compete with competitors in a similar form.
“You will do the right thing to manage as a corporate. That forces good discipline. I think that’s okay … at the moment, you tend to get lost within the wider Tenaga [group],” he adds.
It is a big leap from Tenaga’s deeply-rooted structure where one behemoth facilitates everything under one roof. Indeed, talk of a leaner Tenaga is not new. But it is now inevitable and Amir carries the responsibility of pulling it off in the next few years.
Smart metering to enable a power retail market
With an open retail segment, Tenaga aims to allow third parties to piggyback on its infrastructure and provide differentiated products, pending a clearer framework from the regulators.
The structure can be seen in many countries such as the UK, the US, Australia and Singapore. In Malaysia, Malakoff Corp Bhd has distributed power to KL Sentral since 2001, providing “excellent customer service and response time”, according to its official website.
Retailers’ offerings could change depending on how creative they are as well as what technologies will be put in place, particularly the long-awaited smart metering system.
Tenaga rolled out smart meters for more than half of the 340,000 households in Melaka last year. Next is the Klang Valley, followed by 1.5 million homes throughout the nation by end-2020. It has also rolled out its mobile application, MyTNB, to be used concurrently with the smart metering system.
Smart meters allow real-time consumption reading, which can help consumers improve power consumption by automating household equipment, for example. For Tenaga, better delivery accuracy is expected to help reduce distribution losses, which stood at 6.62% last year.
It can also expect major savings on labour as smart meters can be read remotely.
Each retailer could offer unique selling propositions, including bundled services (electricity with internet/gas/water), green energy alternatives, cheaper off-peak electricity, incentives for prudent consumption and attractive long-term packages.
While consumers do get better bundled services, Amir says “it does not necessarily mean cheaper tariffs [ahead]”, as about 70% of the electricity tariff still comprises fuel costs.
Hybrid PPA-merchant contracting
On another front, the power generation segment could gradually expand from long-term power purchase agreements (PPAs) to include a more competitive merchant market — essentially a spot market for electricity that is detached from regulated tariffs.
“PPAs will end, and the question then becomes, do you keep the power plant alive or do you substitute it to [maintain] reserve margins in a different way?” says Amir. One solution, he suggests, is a hybrid of PPA and merchant pricing.
Under a PPA, power generated is bought by the Single Buyer regardless of whether it is utilised by the market. In a merchant market, there is no long-term contract — a buyer can choose to switch from one power supplier to another, which could leave the less attractive plant lying idle.
“To win in that market, there are two things [power producers] need to do very well. Fuel procurement and plant operation efficiency,” Amir says. This would allow their plants to be despatched frequently, assuring reliability of yields.
The key challenge in adopting the merchant pricing mechanism is to do so without affecting reliability of supply.
“Malaysia has been very good in ensuring high reliability of supply. As we evolve into a new market, we must make sure we sustain that going forward. Don’t throw the baby out with the bathwater,” says Amir. “That is why I think one of the key evolutions that we need to do is somewhat a hybrid derivative, as part of the [industry] liberalisation — where there is some form of capacity support but with a bit more merchant pricing mechanism attached to it.”
For Tenaga, it means a new commercial space. “Those are areas that we can manage. We are learning from areas we have seen being operated elsewhere in the world.”
Spain is one country that has the merchant-PPA mechanism, where end users purchase long-term electricity supply in bulk directly from power generators instead of from utility companies.
But unlike Spain, Malaysia’s market will have its own set of challenges amid the landscape changes. Amir says the single-buyer entity of all power produced in the country is likely to remain ring-fenced within Tenaga.
“It is a logical consequence,” says Amir. “Whether the Single Buyer [mechanism] gets tightened up and controlled, it is a derivative that people can talk about. But it is logical that if transmission and distribution are one, you source it and manage it through one access.”
Improving internal efficiency
Tenaga does not have it easy, says Amir. “We’ve seen that over time, the RP (regulatory period) yields force the incumbent (Tenaga) to improve its own efficiency. We see that yields get smaller over time, based on the expectations of the Energy Commission to drive efficiencies further.”
Malaysia is currently in Regulatory Period 2018-2020 (RP2) under the IBR framework. Several changes were made from RP1 (2014-2017), including lower allowable returns on Tenaga’s regulated assets of 7.3% from 7.5%, as well as replacing the price cap model with the revenue cap model for its distribution network.
With yields expected to narrow further in RP3 (2021-2023), Tenaga must find space to improve efficiency, in line with its vision under Reimagining TNB 2025.
“[Under the transformation plan], we highlighted areas that we will spend more time and effort on to improve. Some are operational savings and some are system improvements on efficiency,” says Amir.
They include tighter supply chain management, removal of redundant processes and improvement of capabilities via digital technologies such as remote intervention and better human resource deployment.
“[Out of 10], I think we are close to 6 to 7 in terms of [overall efficiency],” adds Amir. “The key is that we are clear where the prize is. We have a game plan to execute and deliver the prize and we will get closer to 10.”
Beyond that, Tenaga is gearing up to capitalise on its fibre-optic assets in the nation’s power grid lines and to increase its green energy portfolio both locally and overseas.
“These are interesting times,” says Amir. “Like the oil and gas sector, Tenaga [and the power sector] is also at a point of evolution for its portfolio … We are ready to address the changes.”
Read also:
Save by subscribing to us for your print and/or digital copy.
P/S: The Edge is also available on Apple's AppStore and Androids' Google Play.