Government looking at other choices besides IPPs

  • Business
  • Thursday, 20 Nov 2008

THE Government is considering other options to obtain electricity, apart from extending the contracts of the first generation independent power producers (IPPs), which will expire between 2015 and 2017, said Energy, Water and Communications Minister Datuk Shaziman Abu Mansor.

“There are a few IPPs that are going to expire (and) my thinking is that, upon expiry, the machines and equipment are still in working order and can run for five or six more years,” said Shaziman in an interview recently. “So, why must we scrap and waste them if we can get cheap electricity without having to build greenfield plants?”

“As long as they make some reasonable profits and we still need the capacity and can get cheap electricity, I don’t see why we should close our door,” he said, adding that “the IPPs should only receive payments on energy generated based on their operating costs, plus a fair margin.”

“If these IPPs that are about to expire ... can produce electricity at a cheaper cost, we will consider,” Shaziman said. “Maybe we can get them to sign a power purchase agreement for a short period.”

However, the minister stressed that “the IPPs must understand that they can no longer enjoy the cushy terms (enjoyed in the current contracts).”

Shaziman also said that any extension of the current contracts would be decided through a competitive tender process.

Among the options being considered are for the Government to buy over the plants from IPPs whose contracts are expiring and put for tender the plants’ operations and maintenance.

Another option is for the IPPs to sell capacity not required by Tenaga Nasional Bhd directly to consumers or commercial users.

The last option would involve Tenaga Nasional buying over the plants from IPPs but this is considered unfavourable as the Government would appear to be backtracking on the privatisation of the power sector.

An industry observer says it makes sense that the Government is negotiating now to extend the contracts of the first generation IPPs as “it generally takes about five to six years for new plant set-ups.”

“If discussions were taking place just a year or so closer to the expiry, then the IPPs would be in a better bargaining position because the Government will be more pressed to reach an agreement as it can’t do the plant set-ups soon enough to meet required capacity,” the observer said.

The first generation IPPs were awarded 21-year concessions on a build-own-operate concept during the initial years of the country’s privatisation of the power sector in 1993.

There are five first generation IPPs, owned by YTL Power International Bhd, Genting Bhd, Malakoff Bhd, Sime Darby Bhd and Tanjong plc.

Relatively, the earlier batch of IPPs enjoy lucrative terms, with an average power purchase price as high as 15.5 sen/kWh as opposed to 10-11 sen/kWh for the second generation IPPs.

Still, the possible extension of the contracts should come as good news for the power sector’s private players who have had to deal with several major blows this year.

Their positions were threatened by the likelihood of a renegotiation on the terms of the PPAs – a move that investors would have no doubt balked at as it would have signalled that the Government had little respect for the sanctity of a contract.

But the biggest blow, however, came in the form of a windfall tax payment (effective July 1) which sent industry players scurrying to the Government for some leniency.

The plan was scrapped two months later but the IPPs had to make a one-off payment equivalent to the windfall profit levy payable for a year.

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