Foreign factor in LSS5

Interestingly, one winner will likely be TNB, which will be paying for the green energy being supplied under LSS5 at low rates (following the competitive bidding of tariffs).

ON Monday, April 1, Malaysia will enter a new phase in ramping up its renewable energy (RE) installations. Bidding will start for the fifth iteration of the country’s large-scale solar programme (LSS5).

An interesting aspect of this new programme will be how much foreign participation that will be allowed.

There will be at least two gigawatts (GW) of green energy allocated to LSS5, which is more than double the amount allocated to LSS4, announced three years ago. So LSS5 is clearly a big thing in the RE industry.

Industry sources say that foreign ownership is likely to be allowed in LSS5. They believe that some foreign giants have indicated to the Malaysian government their keenness to participate and that they are in a good position with their strong balance sheets and latest technology.

Even if foreign ownership is allowed with minority shareholding, it will impact the local industry.

The basic advantage of foreign giants is their cheaper cost of capital as a result of state-owned or linked financial institutions providing cheap credit to their home-grown RE groups, for them to be more competitive abroad.

Foreign participation was allowed in the first three LSS programmes, but only up to 49% of equity. The first programmes were also for much smaller size projects.

In LSS4, the government took a more “local” approach, allowing only wholly-Malaysian entities or locally listed companies to bid.

The possibility of the government or Energy Commission (EC) inviting foreign parties to participate in LSS5 cannot be ruled out. This is because it will want the best technology and most competitive rates.

After all, the projects are much larger: The maximum aggregated capacity for each bidder will be increased from 50MW (in LSS4) to 500MW (in LSS5).

What happens then? Foreign players will likely dominate the ownership of large-scale solar projects. They will be in a better position to put in lower bids, due to their lower cost of capital.

One industry player explains that even if foreign ownership is limited to 49% of the bidding entity, the foreign party can still have a bigger say and effective control over the assets through structures such as preference shares.

This is more so if the foreign player provides the funding for the project or is the main EPCC or engineering, procurement, construction and commissioning contractor.

How will local players fare then?

Interestingly, one winner from this situation will likely be Tenaga Nasional Bhd (TNB), which will be paying for this green energy being supplied under LSS5 at low rates (following the competitive bidding of tariffs).

And yet, TNB rates are going higher for users following adjustments to the Imbalance Cost Pass-Through (ICPT) mechanism. To be fair, the ICPT is premised on additional generation costs for TNB resulting from higher fuel prices for electricity supply.

But it still begs the question of whether the energy sector is being liberalised sufficiently.

Another aspect of the bidding process of the LSS programmes is that in the desperation to secure an allocation, some players have a tendency to lowball their bids. This was the big problem with LSS4.

Those that have been unable to build their plants as agreed ought to be punished according to the terms of the bidding documents. Instead, in LSS4, these players were given extensions to both their delivery time and the period of their power purchase agreements.

The good news is that Energy Transition and Water Transformation Minister Datuk Seri Fadillah Yusof said last month that there will be no more extensions for delayed LSS4 projects. This means that those that have not completed their projects will have to pay the agreed amount of penalties.

This is only fair, considering that these parties with their lower bids, deprived others from participating in the LSS programmes.

In LSS5, the liquidated damages arising from delayed implementation should be even higher considering it involves larger projects with more capital and risks involved. There should also not be any leeway with extensions to parties that fail to deliver on time.

Meanwhile, kudos to the authorities for implementing LSS5. It does require a fair bit of back-end work.

TNB will have to ensure that its grid is able to take up the new green energy of 2GW or more coming into the system. Battery storage is also needed, considering the vast solar energy and its intermittent nature getting into the grid.

However, the industry still awaits one development from the EC — the Energy Exchange that is meant to be the mechanism for export of electricity from Malaysia.

The EC has been working on it for almost a year now so the industry awaits with bated breath for the exchange which will enable them to export green energy to Singapore.

This article first appeared in Star Biz7 weekly edition.

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