Highlight: IPPs map out strategy against Tenaga, 1MDB

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WITH Tenaga Nasional Bhd and 1Malaysia Development Bhd (1MDB) dominating the power scene with their big balance sheets, independent power producers (IPPs) have turned their attention to submitting unsolicited proposals to the Energy Commission (EC) to supply electricity at competitive rates.

Under the existing framework, the EC can consider proposals from the IPPs to build and supply power to the grid.

"But the bottom line is that the rates must be lower than the benchmark set in the current bidding process of power plants and the concession terms have to be better," says one industry executive.

"The EC does not want to commit to too many power plants and end up with Tenaga forking out a tidy sum as capacity payments to the independent power companies."

The EC is currently in the midst of selecting the winners that will build coal-fired power plants, which will see 3,000mw of electricity come into the system beyond 2018.

However, given Tenaga and 1MDB's size as well as access to cheap cost of funds, it is unlikely that the IPPs will get to build any of the new power plants that are being tendered out under a programme called Track 3A and Track 3B.

For instance, under Track 3A, only Tenaga and 1MDB have been shortlisted for the building and operating of a 1,000mw coal-fired plant, which will be constructed next to an existing plant.

Tenaga is believed to have put in a lower bid of around 22 sen per kWh, compared with 1MDB's bid of 24 sen per kWh. The result of the tender is expected to be announced as early as this week, say industry sources.

Track 3B, which involves the construction of a 2,000mw coal-fired plant, has attracted more players since it can be built on any greenfield site. Apart from Tenaga and 1MDB, the other three consortiums in the running are led by Formis Resources Bhd, YTL Power International Bhd and the soon-to-be-listed Malakoff Corp Bhd.

However, industry players say Tenaga and 1MDB are once again the top contenders for the tender given their access to cheaper financing.

As a result, IPPs have been preparing unsolicited bids for new power plant projects.

"But it's a hard task because the rates have to be competitive for the EC to consider," says an industry player.

One example of a successful unsolicited proposal is the one by Petroliam Nasional Bhd (Petronas) for the Rapid project in Pengerang, Johor, where it will be building a 1,200mw gas-fired plant.

"It was approved on the basis of it being a power plant specifically to cater for the Rapid project. Excess power can be supplied to the national grid but the rates have to be competitive," says the industry executive.

One IPP that is eager to explore such projects is YTL Power, whose power concessions for its gas-fired plants will be expiring in 2016. Industry players say YTL Power is looking to team up with Johor royalty-linked SIPP Sdn Bhd, a consortium member of Formis, to explore unsolicited power proposals.

One key site that the IPPs are eyeing is the regasification plant in Melaka, which would be ideal to build a gas-fired power plant. According to industry sources, the Melaka government, together with private power companies, has proposed to build a 1,200mw to 1,400mw gas-fired plant at the greenfield site.

This will not be the first time such a proposal has been made, although previous attempts were for a smaller 800mw plant.

The site is attractive because the regasification plant will help ensure a steady supply of gas for the plant. On top of that, Tenaga has proposed an undersea high voltage direct current (HVDC) cable to connect Malaysia with Indonesia. A plant built at this site would potentially be able to supply power to Indonesia.

However, such ventures will have to overcome two major hurdles. First, the rate at which the power is supplied to the grid must be cheaper than the current benchmark. That would be a challenge given that main power players, such as Tenaga and 1MDB, are already offering very competitive rates.An IPP would need to have a strong advantage that no one else has to take on the power giants. Tenaga's combined cycle plant in Prai, Penang, has set the benchmark at 34.7 sen per kWh for a gas-fired plant.

In the case of Petronas' 1,000mw plant in Pengerang, the power will be utilised in a special economic zone and some will be sold to Singapore.

Another hurdle that the IPPs will have to overcome is convincing the EC that the country will need the additional capacity in the years to come. One industry player estimates that Malaysia will need at least 6,000mw in new capacity by 2018, or as much as 8,000mw if demand grows quickly.

He points out that the current round of planting up will only add 4,000mw to the grid until 2018.

At the same time, there is roughly 4,000mw of capacity that is due to retire towards 2018. Also, the old plants are inefficient and could be decommissioned.

The EC will have to make a judgement call on whether the additional capacity is really needed. Aggressive planting up backfired in the early 1990s when reserve capacity rose to 45% from the ideal 20%.

The brunt of the burden was borne by Tenaga, which has to pay the capacity charges of power plants even if they are idle.

Clear winners from the more competitive rates will be the Malaysian public and Tenaga, which has to purchase the power.

At the same time, it is clear that the IPPs are not sitting on their laurels while Tenaga and 1MDB dominate the local power scene.

This article first appeared in The Edge Malaysia Weekly, on July 1, 2013.