This article first appeared in The Edge Malaysia Weekly on April 24, 2017 - April 30, 2017

TENAGA Nasional Bhd (TNB) has proposed to acquire a 70% stake in the 1,440mw combined cycle gas turbine (CCGT) power plant project that was awarded to SIPP Energy Sdn Bhd, say sources familiar with the project.

“SIPP Energy has been granted a high tariff. It lacks the balance sheet, the track record and the expertise for such a large project. This increases the risk of the project and [consequently] increases the finance costs,” explains one source.

“By taking a stake in the project, TNB is hoping to negotiate for a lower tariff while maintaining the project’s overall profitability.”

When contacted, TNB declined to comment.

The ball is now in the Energy Commission’s (EC) court, which has to approve both the lower tariff and TNB’s stake in the project.

Another key consideration for the EC will be to minimise delays for the project, better known as Track 4A. It was supposed to be a fast-tracked power plant, originally slated for commercial operation next year. As it stands, Track 4A is at least two years behind schedule.

The EC cannot afford any more financing hiccups at SIPP Energy that may cause further delays.

Recall that the EC chose to shave several months off the project by forgoing an open tender and awarding it on a direct basis to SIPP Energy. That decision has not paid off. The earliest Track 4A can be completed is 2020, based on the three or more years a plant of this size typically takes to build.

And with an estimated cost of RM3 billion, SIPP Energy is struggling to undertake Track 4A without TNB’s financial muscle. SIPP Energy simply lacks the balance sheet for such a massive project.

As at June 30 last year, filings with the Companies Commission of Malaysia (CCM) show that SIPP Energy had negative reserves of RM772,581 against only RM100,000 in paid-up capital.

In addition, its gross liabilities of RM5.6 million outweighed its gross assets of RM4.9 million.

But the company’s weak balance sheet has not been a deterrent for it to undertake the project. After all, SIPP Energy is closely linked to the Sultan of Johor, who used to be a major shareholder in the company.

Today, SIPP Energy is controlled by Datuk Daing A Malek Daing A Rahaman (70%) and Anuar Ahmed (30%).

Daing A Malek is most notable for being a member of the Johor Council Royal Court. He is also the executive vice-chairman of Damansara Realty Bhd.

Both Daing A Malek and Anuar are also directors of another vehicle linked to the Sultan of Johor — SIPP Rail Sdn Bhd, which has a 10% stake in YTL Power International Bhd’s Express Rail Link Sdn Bhd that runs the express train service from Kuala Lumpur to Kuala Lumpur International Airport and klia2.

In addition, they are directors of SIPP Energy’s wholly-owned Southern Power Generation Sdn Bhd, which signed the power purchase agreement (PPA) for Track 4A with TNB last September.

It is interesting to note that TNB’s filings with Bursa Malaysia at the time did not mention the company taking a stake in the project. The filings also failed to disclose the tariff for Track 4A, which is rather unusual. TNB almost always discloses the tariff for the PPAs it inks.

Sources say SIPP Energy has been awarded a levelised tariff of 37 sen per kilowatt-hour. This is substantially higher than the reference price of 34.7 sen per kWh that was awarded to TNB’s 1,073mw CCGT power plant in Prai via an open tender.

At face value, direct awards by the EC appear to grant higher tariffs, which will translate into more expensive electricity for consumers.

A closer look at the tariff, however, reveals that it could be even more lucrative for SIPP Energy.

Sources familiar with the matter say the 37 sen per kWh rate is based on a reference exchange rate of RM3.80 to the US dollar. However, today’s exchange rate is almost 16% higher at 4.4 against the greenback. Based on this, the effective tariff could be much higher as well — perhaps as much as 42 sen per kWh.

For perspective, the recent round of large-scale solar power projects that were awarded via open tender was able to achieve tariffs of less than 40 sen per kWh for 50mw solar farms.

Over a 21-year concession, the difference is huge. A seven-sen per kWh difference (compared with Prai’s 34.7 sen per kWh) works out to an additional RM750.6 million a year or RM15.8 billion over 21 years.

As the sole off-taker, TNB will directly benefit from lowering the tariff. Clearly, consumers will also benefit from lower tariffs.

That said, it is not clear if TNB will be able to generate a reasonable rate of return from the 70% equity interest it is taking up in the project. It will depend on the price TNB pays for the stake and the financial costs it undertakes for the project.

Presumably, the company will look to break even at least.

That said, TNB’s motivations are not entirely altruistic. It is also understood that Track 4A is slated to be built on TNB’s land in Pasir Gudang, Johor. By taking a controlling stake in the project, it is expected that TNB also aims to maximise the value of its land, which may otherwise have been injected at less-than-desirable terms.

Against this backdrop, it is clear that TNB’s proposed acquisition will result in a tenuous marriage with SIPP Energy. Recall that TNB was previously involuntarily partnered with SIPP Energy when Track 4A was first awarded in 2014.

While the EC had awarded the project solely to SIPP Energy, the letter of award roped in both TNB and YTL Power as SIPP Energy’s partners.

YTL Power was quick to withdraw its participation in the project, leaving TNB as a relatively unwilling partner in SIPP Energy’s power ambitions.

It was only in October 2015, when the EC reportedly rejected SIPP Energy’s proposed tariff of 39.19 sen per kWh, did TNB ditch the project.

“Following the decision made by the EC [to reject SIPP Energy’s proposed tariff], the heads of agreement [with SIPP Energy] had lapsed and TNB ceased to be part of the consortium,” reads TNB’s filing with Bursa in October 2015.

Yet, two years on, it seems TNB may once again get involved with SIPP Energy. And once again, both parties may find themselves as reluctant partners in the RM3 billion project.

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