It’s the rakyat who will pay for power plant delays

AS this article goes to print, Tenaga Nasional Bhd will be in the final stages of commissioning the 1,000 MW coal-fired power plant in Manjung, Perak. The special-purpose vehicle undertaking the project is 12 days behind schedule and has to pay a fine of about RM500,000 per day, which comes to about RM6mil, to TNB under the terms of the power purchase agreement (PPA).

But a delay of 12 days for a project that runs over three years is no real delay. In large projects that are dependent on cashflow such as constructing and commissioning a power plant, delays running into months can make the project completely not viable financially.

The amount that TNB pays is a meagre sum compared to billions that consumers will end up forking out from their pockets if the power plant is not ready as scheduled. This is because if the electricity that has been planned from the 1,000 MW coal-fired plant does not come onstream on time, Tenaga has to run less efficient power plants that are more expensive to operate to fulfil the requirement.

Worst, TNB may even have to import electricity from neighbouring Thailand and tiny Singapore to ensure supply and the cost is much higher, like it did in 2014.

In the end, it is the consumer who ends up paying if power plants that have been awarded are not being built and commissioned as scheduled. There is no doubt the company that is awarded the contract will pay damages for delays but the cost of fulfilling the electricity demand is much higher.

Coal is cheaper than gas or distillate. That is why the Energy Commission since 2011 has awarded another 4,000 MW of coal-fired power plants to be constructed and commissioned by 2018/2019 to meet the requirements of the country at the cheapest possible cost.

But it does not appear that all the 4,000 MW will come onstream into the national grid as scheduled. Of the 4,000 MW, some 2,000 MW is to come from 1Malaysia Development Bhd’s power plant to be built in Jimah, Port Dickson under an award dubbed Project Track 3B.

The award to a joint venture of 1MDB Energy Sdn Bhd and Mitsui Co Ltd in February 2014 came with the condition that the power plant should be up and running by 2018 and the company is to seal a PPA and coal supply agreement with TNB.

But now it is obvious that the joint venture will not be able to complete the coal-fired power plant on time.

1MDB has cashflow problems, something that even top Finance Ministry (MoF) officials have admitted in parliament. It had planned to list the energy unit in the first quarter of this year and the proceeds were to be used to reduce the debt obligations tied to the power plant.

But the management headed by its new president and group executive director Arul Kanda Kandasamy has withdrawn the application from the Securities Commission. The reasons have not been disclosed.

But bankers speculate that 1MDB may have not been able to disclose more details on Project 3B such as the financing that are required under the listing rules. The sale of the power plant unit was explored but an investment bank hired to do the job has been relieved of its task.

According to pre-listing documents sighted, the internal rate of return (IRR) for the project is 6%, which is not attractive considering 1MDB’s cost of funds are higher. Even though 1MDB is owned by the MoF, its cost of funds are significantly higher than the rates lenders charge the Government.

1MDB has debt obligations of RM5.07bil this year and needs more than RM1bil every year to service its debt obligations. In 2022 and 2023, which is only a mere seven years from now, the obligations will jump to almost RM25bil collectively for the two years due to lump sum payments.

When the 2,000 MW coal-fired power plant will come onstream is unknown. But the country needs the electricity – based on statistics and statements from the Energy, Green Technology and Water Ministry (KeTTHA) – and at the cheapest cost.

KeTTHA had said in June last year that Malaysia’s average actual operating reserve was a mere 8.9% or 1,510 MW.

This was the reason the ministry used to justify awarding a consortium led by SIPP Energy Sdn Bhd, Tenaga and YTL Power International Bhd the job to build a gas power plant with a capacity of between 1,000 MW and 1,400 MW.

The award dished out in June last year was without any competitive tender on the basis that it needed to be fast tracked and brought forward to 2018 from an earlier planned commissioning period in 2020. By awarding directly instead of a competitive bid, KeTTHA went against the general principle in the reform of the energy sector, whereby all power plants are to be awarded based on a competitive tender.

Since June last year, YTL Power has pulled out because of the misconception on the way the project was awarded.

TNB and SIPP are still in project 4A but nothing seems to suggest that the two have firmed up a shareholders agreement. Also there are reports which state that the joint venture is seeking a higher price for supplying electricity compared with the previous power plant rates awarded on competitive basis.

If this report is true, the Energy Commission and KeTTHA were wrong in awarding the project through direct negotiations because the rates are supposed to at par or lower than the existing benchmark rate of 34.7 sen per kWh.

In justifying the direct award to the SIPP Energy led consortium, the ministry went to great lengths to state that there was an emergency situation on May 7, 2014, where six states were affected by power outages and the national grid operator – which is TNB – had to exercise load shedding in order to stabilise the system.

TNB, said KeTTHA, had to even import electricity six times from Thailand and twice from Singapore last year.

Imported electricity comes at a high cost that is borne by consumers eventually.

To address the possible non-deliverable of the project 3B, the ministry and Energy Commission are looking at extending the tenure of several power plants that are due to de-commissioned or whose PPA comes to an end this year and next.

But at what cost? The cost is most likely to be higher than the cost of electricity coming from Project 3B had it progressed on schedule.

At the end of the day, it’s the consumers who bear for the late deliveries of power plants.

Shouldn’t keTTHA and the Energy Commission take more proactive steps to address the issue? Under normal circumstances, when a company is unable to deliver on a project for whatever reasons, the situation must be rectified immediately and not a year or two from now.

Being silent about it can be taken as KeTTHa and the Energy Commission being agreeable to the delays.