Friday, September 19, 2008

Subsidising Gas to Private Power

ENERGY-MALAYSIA: Subsidising Gas to Private Power - State Utility Pays
By Anil Netto

PENANG, Oct 12 (IPS) - A staggering 27.6 billion ringgit (8.2 billion US dollars); that's the amount the Malaysian public has incurred through gas subsidies given out over the years to private power producers by national petroleum corporation Petronas.

With oil and gas prices now soaring, the government – and Petronas – is feeling the pinch of higher fuel and gas subsidies. Petronas has proposed a removal of gas subsidies for electricity production, but much of the attention has focused on the impact it would have on state power firm Tenaga Nasional Berhad.

Tenaga faces a double whammy: from higher gas prices and from higher fuel costs being passed on to it by the privately owned, and from hugely profitable, independent power producers (IPPs). The IPPs sell power to Tenaga under lucrative power purchase agreements (PPAs). Tenaga also generates its own electricity through its network of power plants.

The earliest of these lopsided agreements were signed with well connected firms in the early 1990s under the administration of then premier Mahathir Mohamad. They have about eight years left to run.

The power sector is the biggest consumer of gas in the country consuming 62.5 percent of gas distributed. For the financial year 2007, Petronas supplied 762 million standard cubic feet per day (or 36 percent) of subsidised gas to the IPPs out of a total of 2,128 mscfpd of gas delivered. In contrast, Tenaga received just 27 percent of total deliveries.

Petronas sells gas to Tenaga and the IPPs at 6.40 ringgit (1.90 dollars) per million British thermal units (Btu) whereas the current market price is around seven dollars per million Btu. That's a 70 percent subsidy.

Since 1997, out of 58.2 billion ringgit (17.2 billion dollars) that Petronas has dished out in gas subsidies, 27.6 billion ringgit or 47 percent has benefited the IPPs, 21.2 billion ringgit (6.2 billion dollars) has gone to Tenaga, while small industrial, commercial and residential users received 9.4 billion (2.8 billion dollars). IPPs have thus benefited more from subsidised gas than Tenaga has.

That's not all. Tenaga is forced to buy electricity from the private producers under terms widely seen as favourable to the IPPs – even though the country has a 40 percent spare capacity out of a total 19,000-megawatt generating capacity. In effect, Tenaga, which needs a reserve of only 15-20 percent, has to buy electricity it does not need, reportedly paying 3 billion ringgit annually in capacity charges.

The IPPs thus win both ways, leaving TNB squeezed in the middle, with extra costs eventually passed on to consumers. Over the years, the IPPs, especially the earlier ones, have collectively raked in billions of ringgit in profit -- higher than initially anticipated.

When the first generation of IPPs came online, Tenaga's profits plunged by 30 percent in 1995. "When the generous terms were given to the IPPs, all my other peers around the world asked what was happening," former TNB executive chairman Ani Arope told the media last year. "They said (the contracts to IPPs) were 'too darn generous'. (The terms) were grossly one sided."

When asked how the Malaysian model of IPPs was created, Ani who helmed Tenaga in the early 1990s, replied, "Ask our previous Prime Minister (Mahathir)!"

Some of the earliest power purchase agreements are due to expire in 2015, but reports have suggested that these could be extended by perhaps five years in exchange for lower capacity payments for the IPPs’ older plants.

"The IPPs are getting high returns for very little risks," says economist Subramanian Pillay, pointing out there were no open tenders for these plants. Moreover, he said the loans they obtained were indirectly guaranteed by the government through the capacity payments that Tenaga has had to pay.

A couple of the IPPs plants were even built on sites that Tenaga had identified and done the ground work for, "but for mysterious reasons they were offered to IPPs," he claimed.

As a result of the lucrative PPAs, "the IPPs would continue to enjoy the subsidised gas price as it is shielded from any increase in fuel cost through the pass-through clauses in the agreement signed with Tenaga," noted Azam Aris, group executive editor of The Edge business weekly in a commentary published last month. "Subsidies, for all their good intention, will only be meaningful if they are targeted at those who need them, notably the low-income group."

He said Petronas would not have minded providing subsidy to a government firm such as Tenaga Nasional, but the gas subsidy has gone to privately owned IPPs, "most of which belong to billionaires in this country".

In an earlier analysis, the business weekly identified the IPP beneficiaries as Genting Sanyen Power, YTL Power, Malakoff Bhd and Tanjong Plc/Powertek Bhd - companies "controlled by the families of Tan Sri Lim Goh Tong, Tan Sri Yeoh Tiong Lay, Tan Sri Syed Mokhtar Al-Bukhary and Ananda Krishnan, four of the richest families and individuals in the country".

Analysts like Subramaniam argue that the IPPs are not any more efficient than Tenaga. In fact, Tenaga's chief executive officer was quoted as saying that its own plant in Port Dickson was "the most efficient plant in the system".

Increasingly there is recognition that the lopsided PPAs and gas subsidies favouring the IPPs have cost Petronas, Tenaga, the government and ultimately the public dearly.

Petronas is losing money by subsidising gas to the IPPs, and since Petronas is government owned, that means it is the Malaysian public that is subsidising the profitable IPPs, stressed Subramaniam. "It is time they re-negotiate the deals."

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