Falling prices of solar power warrant scrutiny

  • Business
  • Saturday, 31 Aug 2019

The latest round of tenders calling for the construction, commissioning and operations of large-scale solar (LSS) power plants reveals a few startling facts of the state of renewable energy in the country.

The price to supply solar energy is falling fast. Only two years ago, companies offered to supply electricity through solar plants at an average tariff of between 40 sen and 50 sen per unit.

Today, there is at least one company offering to supply 100 megawatts (Mw) at only 17.7 sen.

Early this week, almost all bidders that participated in the supply of electricity through an LSS exercise offered to supply electricity at rates of less than 33 sen.

One bidder offered to supply 100Mw at 17.7 sen. The other end of the band was one bid to supply 9.9Mw at 58 sen.

The rest of the 113 proposals received by the Energy Commission (EC) offered between 22 sen and 32 sen per unit, suggesting that solar energy is getting cheaper and cheaper.

In fact, based on the proposals, it shows that if Tenaga Nasional Bhd (TNB) wanted, it can source more than 4,000Mw of solar power at less than 30 sen.

The developments suggest that the price of solar energy can only go lower. But how low? The lowest price is a mere 17.7 sen per unit, but there are doubts if it can be done at such low rates.

Banks are reluctant to lend to LSS power plant projects if the agreement to supply power to TNB is less than 32 sen per unit. This is unless the proposal is from a company that is financially strong, or does not have to acquire land to put up the solar plant.

In the latest exercise called LSS3, the bulk of the 113 bidders have generally put in their proposals to supply the power at between 23 sen and 30 sen per unit.

This is well within the reference price in the tender document of 32.4 sen per unit.

Even at this rate of 32.4 sen, questions arise on the financial viability of the proposal. The returns are expected to be in the single-digit range or less than 12%.

For the kind of risk investors take to manage a power plant for 21 years and ensuring the delivery of electricity to TNB, they are better off putting their money elsewhere.

This brings us to the question of who are the bidders that have offered to put up solar power plants at such low rates?

Speculation is rife that joint ventures (JVs) of local and foreign companies are the ones capable of offering such low rates.

In the latest round of bidding for solar power plants, local companies are allowed to JV with foreign companies. However, the conditions are that the local companies must hold at least 51% and they have to undertake the engineering, procurement and construction (EPC) job themselves.

It is easy to fathom why Energy, Technology, Science, Climate Change and Environment Minister Yeo Bee Yin has endorsed the two conditions. This is to help smaller companies get financing and ensure that they do the EPC work themselves instead of allowing foreign companies to take over the solar energy works just because they are better off financially.

Industry officials are speculating that the reason why the rates are so low in the third round of the LSS bidding process is because of the participation of foreign companies, especially from China. The companies from China are able to get cheap financing, as many are ultimately owned by state-owned agencies such as China Power.

Some industry players feel that it gives them an unfair advantage compared to wholly local companies that have to compete on commercial terms and financing.

As it is, even some companies that had been awarded LSS contracts last year at rates of about 34 sen have not been able to get financing. Only the likes of TNB with its cheap cost of funds are able to complete and commission their solar plants.

If rates drop so low, local companies following the rules would probably not stand a chance, unless the EC and ministry undertake close scrutiny of who are the people that have bid at such low rates. The shareholders agreement, if they have a JV with a foreign company, should be closely scrutinised. As added measures, the authorities should also ensure that the companies awarded the job have employed capable persons with the necessary track record to undertake the EPC contract.

This practice is already in place for the East Coast Rail Link (ECRL) where China Communications Construction Co is looking at the profile of local companies tendering for jobs to minimise the “Ali Baba” arrangement.

The reason why foreign companies masquerading as local companies should be weeded out is because there is uncertainty as to how many would still be around in the last 10 years of the 21-year concession period of the LSS power plants.

Solar power plants need to be maintained, inverters replaced and measures taken to improve efficiency when degradation takes place.

Generally, most solar panels come with a 20-year warranty. After 10 years or so, the panels and inverters need to be replaced or worked on to improve efficiency.

But there are not many manufacturers of solar panels with a 20-year track record around. This is because solar energy on a large scale is fairly new in this part of the world.

Hence, how many of the foreign companies that participate in the LSS exercise would be around to maintain the facilities in 10 or 15 years’ time?

Companies from China are aggressive in manufacturing solar panels. They have set up operations locally and provide the panels for local and export markets.

Now, speculation is rife that many also want to participate in the construction and commissioning of LSS power projects. Hence the JVs with local companies.

But how many of these JVs would be around over the longer term.

Also, some of the materials to manufacture the solar panels need to be disposed carefully when they are no longer in use. They are hazardous. The disposal exercise has to be handled carefully.

How many of these companies would be around to see an orderly de-commissioning of the LSS power plants when the concession ends? The aggressive stance taken by the government to promote solar energy is good, but it needs strong companies with an able track record to last the pace of the concession period.

More importantly, the rules must be observed when companies are picked to implement the LSS.

The rules state that foreign companies must only remain as 49% shareholders and not have any role in the EPC. This should be the case.

We should not allow foreign companies masquerading as local entities to sweep up all the awards for the construction and commissioning of LSS power plants.

The views expressed here are solely that of the writer.

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