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This article first appeared in The Edge Malaysia Weekly, on October 5 - 11, 2015.

 

THE Energy Commission last week launched the first phase of its New Enhanced Dispatch Arrangement (NEDA) that will incentivise the country’s generators to be more efficient. At the same time, the NEDA will also open the door for independent power producers (IPPs) to supply power to the grid without a power purchase agreement (PPA).

Right off the bat, the NEDA looks like it will have a positive impact on the grid by increasing competition between generators, which should drive costs and tariffs down. The NEDA is a first step away from the current long-term PPAs towards a merchant market system like Singapore’s.

So, what does increased competition mean for existing generators?

“The guy who makes a lower bid will displace the guy who is more expensive. But the guy who is more expensive will still get capacity payments so he is not really losing out in that sense, but it will encourage healthy competition,” explains Charanjit Singh Gill, senior general manager of the Single Buyer Unit (SBU) — a ring-fenced arm operating independently within Tenaga Nasional Bhd that determines how much each power plant will generate on a day-to-day basis.

To recap, the NEDA will allow generators to compete based on their variable operating rates (VOR) effective Oct 1.

Previously, generators could not alter their VOR, which was fixed based on the PPA or service level agreement (SLA). Hence, there was minimal incentive for power plants to compete on efficiency over the life of the contract.

Under the NEDA, generators can decide if they want to bid a VOR lower than their PPA/SLA, in exchange for more dispatch (generation supply). Hence, power plants that are better managed and more efficient will be able to make more money at the expense of their less competitive peers.

“No one is losing [money] per se. The IPPs are being paid two forms of payment. They have capacity payments — if they are available, they will get paid,” says Charanjit.

Capacity payments are fixed payments made to generators as long as their plants are meeting availability requirements, and will not be affected by the NEDA.

“The question you should ask is: who is gaining? The consumer. The system cost as a whole will come down and it will be passed through via the ICPT (imbalance cost pass-through) mechanism to the consumer,” Charanjit adds.

EC chairman Datuk Abdul Razak Majid says, “Based on the trial runs we conducted from September to December, we saved tens of millions of ringgit in four months.” He points out that the generators — TNB and the IPPs — had shown interest to compete under NEDA, based on the trial run.

“A mere 1% improvement in generation efficiency will save about RM150 million a year in fuel costs,” Abdul Razak adds.

On the other hand, industry players say that the NEDA savings would be relatively small compared with the overall energy bill each year. TNB’s annual revenue, for example, exceeds RM43 billion.

Ironically, if the NEDA is able to produce substantial savings, it would imply substantial inefficiencies in the existing system as well.

 

Generating without PPAs

Going forward, IPPs will also be very keen on the second phase of the NEDA that will introduce merchant generators, such as expired IPPs, private generation and co-generation plants.

“The cost of the assets for expired power plants has already been paid off. If they can generate at the right price, then they will be able to supply to the grid,” explains Abdul Razak.

The second phase is only expected to begin in March 2016, about six months from now. This could spell a new lease of life for several PPAs that did not manage to secure an extension.

It would also open the door for Petroliam Nasional Bhd’s 1,200mw co-generation plant in the Refinery and Petrochemical Integrated Development, Pengerang, to supply electricity to the grid since it doesn’t have a PPA at the moment. It is understood that Petronas has discussed with TNB on supplying about 600mw to the grid once the plant is completed.

Recall that in the most recent round of PPA extensions, only two extensions were awarded — 1Malaysia Development Bhd’s 434mw open cycle gas turbine (OCGT) plant in Teluk Gong, Melaka, which is held under Powertek Bhd, and YTL Power International Bhd’s 800mw combined cycle gas turbine (CCGT) plant in Paka, Terengganu.

There are still other plants that have expired, or are about to, but did not manage to secure an extension like YTL Power’s 400mw CCGT plant in Pasir Gudang, Johor, which expired on Sept 30. Malakoff Corp Bhd’s 435mw OCGT power plant will expire in January 2016 and hasn’t been extended either.

The challenge for IPPs, however, will be determining the best price to sell to the grid.

“Right now, there isn’t a market price to sell electricity to the grid. How the EC plans to determine that is not clear. Without a market price, how can the IPPs make their decisions?” asks one industry veteran.

“Without clear visibility on the price, or the capacity that the grid needs, how can IPPs plan ahead? They need time and money to refurbish their machines. Unless they can be certain that NEDA is commercially viable for them, it makes more sense for them to shut down the plant, sell the parts for cash and save costs,” he adds.

Furthermore, Charanjit points out that the grid has enough capacity for now.

“We still have a 25% reserve margin. In fact, peak demand this year is lower than last year — 16,822mw compared to 16,901mw. With the new power plants coming online, we should not have a shortage of power,” he says.

“Overall load factor (total energy consumed) has gone up but there is less variance in daily demand. This is ideal for the grid,” he adds.

Looking forward, it will be challenging for IPPs to sell power to the grid, even if they do not need a PPA. The risks will certainly be higher without guaranteed payments and, likewise, the tariffs. But if they can price themselves competitively, it might force other younger but less efficient power plants to sit idle.

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