Energy ministers of the Association of South East Asian Nations (ASEAN) met in Singapore in August 2007 to sign a memorandum of understanding covering the formation of the ASEAN power grid. The formation of the grid, which had been under discussion for many years, is an ambitious project that aims to interconnect the ten member nations that form ASEAN in order to promote power trading and exchange across South-East Asia. It is one of the key building blocks of the proposed ASEAN Economic Community (AEC), which is part of a wider plan for regional integration set out in the Bali Concord II agreed in 2003.
How ASEAN envisages a future, interconnected power grid in the region
These unification projects, if concluded, will help weld ASEAN into the type of cohesive unit that can begin to act on the world stage with one voice. ASEAN was established in 1967 with five members: Indonesia, Malaysia, Philippines, Singapore and Thailand. Since then membership has grown with Brunei joining in 1984, Vietnam in 1995, Laos and Myanmar in 1997, and Cambodia in 1999, bringing the total to ten.
In 2006, the region had a gross population of around 560 million, covered a total area of 4.5 million km2, a GDP of $1100 billion and total trade worth $1400 billion.
The ten member countries are both politically and economically diverse. Regimes include the small but powerful city state of Singapore, a military dictatorship in Myanmar, centralized communist regimes in Vietnam and Laos, a Sultanate and five more and less-well established democracies. Consequently, the degree of integration they can achieve is currently limited. Tariff reductions aimed at freeing trade between the members has begun but free movement of people is unlikely in the foreseeable future.
Meanwhile, political consensus is almost impossible to achieve as witnessed when the members found it extremely difficult to exert any influence on Myanmar during the recent disastrous flooding in the south of the country. Given these political limitations, economic co-operation is probably the area in which most agreement can be reached. Current plans call for the accelerated establishment of the AEC by 2015, the date having been brought forward by five years.
According to Ong Keng Yong, Secretary General at the time the advanced timetable was announced, this will coincide with the conclusion of free trade agreements with neighbouring countries such as China, Japan, Australia, and New Zealand. However, achieving the target will require some of the nations to push market reforms much further than they have at present.
The Theun Hinbun hydropower dam, central southern Laos
Energy is one of the areas that could benefit most from open trading within ASEAN. The ASEAN grid, when completed, will form a powerful hub for energy co-operation.
Electricity trading and the eventual formation of a single electricity market is a major goal. However, its creation will depend on convergence of the electricity markets within the ten countries. Today, that seems a long way off. Without significant convergence the best that can be hoped for is a series of bilateral electricity trading agreements or a sub-ASEAN block of more progressive nations where trade already exists. A number of pipeline projects to move natural gas across the region, which are necessary before any co-operative projects can begin, are also planned.
Thailand is one of the two largest electricity producers and users in ASEAN (alongside Indonesia). Installed capacity in 2007 was almost 28 000 MW and production in 2006 was 142 TWh. Most of the country’s electricity is generated from natural gas fired power plants which account around 70 per cent of total generation.
The electricity market in Thailand is dominated by the Electricity Generating Authority of Thailand (EGAT), a state-owned generator which controls 60 per cent of the generating capacity, as well as the transmission system. The remainder of output is supplied by independent power producers (IPPs). Distribution is also state-controlled via two companies: the Metropolitan Electricity Authority provides power to the capital Bangkok and two neighbouring provinces; and the Provincial Electricity Authority supplies power to the remainder of the country.
Privatization and market-oriented reforms have proved difficult in Thailand. There have been a number of plans to privatize EGAT. A privatization bid was thwarted in 2006 when the Supreme Administrative Court deemed it illegal. In light of this ruling, it seems unlikely that there will be further progress in the near future. This could seriously hamper development of an ASEAN power market since Thailand will form the main hub for the movement of power in the Mekong region.
Demand for power in Thailand is expected to grow steadily with current predictions suggesting that capacity will need to reach between 46 000 MW and 50 000 MW by 2020 to keep pace with demand. Under the most recent proposals, half of this is to be built by EGAT and half will be offered to the private sector. Natural gas is expected to continue to be the dominant fuel source to produce electricity. Additionally, the country imports power from both Laos and Malaysia, which may also increase. This could provide opportunities for hydropower developments in Laos, Cambodia and Myanmar.
Indonesia is the second of the two largest electricity producers in ASEAN (also see Thailand). It comprises an archipelago of over 13 000 islands, making it almost impossible to establish a single national grid. Interconnection of the five largest islands is possible, but today the only significant grid is that of the main population centre, Java, which has interconnections to Bali and Madura. Installed capacity on this system is estimated at around 25 000 MW. Across the whole of the country the installed capacity may be as high as 43 000 MW in the absence of reliable figures.
Most of the capacity in Java is operated by the state-controlled company PLN. Similar to Thailand there have been attempts to liberalize the sector and to break up and privatize PLN. The last attempt was ruled unconstitutional in 2004 and control of the electricity sector has since become more centralized, albeit with greater autonomy for regional governments.
Traditionally Indonesia has relied on oil for power production but the recent high cost has forced a switch towards coal and gas. PLN has struggled financially since the Asian financial crisis at the end of the 1990s and as a consequence there has been significant under investment. The country desperately wants to attract foreign investors and IPPs into the power sector but many are wary of a repeat of problems experienced by IPPs when the financial crisis struck and PLN had to force the renegotiation of power purchase agreements.
There seems little likelihood of electricity sector liberalization in the short term and the introduction of an open electricity market would appear extremely difficult at present. However, Indonesia could benefit greatly from construction of the ASEAN grid which could eventually link all the main islands allowing both the import of power, to counter regional shortages, and the export of power generated from the country’s rich fossil fuel reserves.
The Malaysian electricity system comprises three geographically separated grids in Peninsular Malaysia, Sarawak and Sabah. The largest integrated grid, that of Peninsular Malaysia, is operated by TNB, a vertically integrated utility that controls the transmission and distribution systems as well as generation, though further generation is supplied by IPPs. Total Malaysian generating capacity is around 20 000 MW.
Malaysia relies heavily on gas fired power generation but the government is promoting coal-combustion and hydropower in order to provide a more diverse fuel mix. The generating capacity required to meet demand is expected to double by 2020 to 40 000 MW.
The Malaysian government started to liberalize the electricity sector during the 1990s with the break up of TNB and the creation of TNB Generation that took control of the company’s main power plants. IPPs were allowed to enter the market but had to negotiate power purchase agreements with TNB. In 2006, there were 19 IPPs operating and liberalization has not progressed since then and TNB remains effectively a government controlled, vertically integrated utility. This is likely to remain the situation in the short to medium term.
The 2240 MW Sultan Salaluddin Abdul Aziz gas, coal and oil fired power station - Malaysia’s largest
Malaysia already has an interconnection with Thailand and a link to Sumatra is expected to be one of the first projects to form part of the creation of the ASEAN grid.
This will be the main interconnection between Indonesia and the remaining countries of ASEAN. Meanwhile, a proposed link between Peninsular Malaysia and Sarawak will eventually enable the interconnection of the Philippines into the grid.
The Philippines was the first of the major ASEAN economies to introduce private sector participation into the electricity sector. After substantial excess demand at the end of the 1980s and the start of the 1990s, IPPs were permitted to build plants and sell power to the national utility Napocor. By 2001 around 40 per cent of the country’s electricity was produced by IPPs and the remainder by Napocor.
The installed capacity in the Philippines is around 15 000 MW but this is expected to exceed 30 000 MW by 2020. Coal is the primary source of electricity followed by oil, but the high cost of the latter is forcing a switch to natural gas. There is also significant hydropower and geothermal capacity.
The privatization of the electricity sector in the Philippines was enshrined in the Electricity Sector Reform Act of 2001. Under the Act Napocor was split into generation, transmission and distribution, with the bulk of the generation and transmission assets to be sold to the private sector. However, the target date of 2005 for the sale of the transmission and 70 per cent of generation passed with only 14 per cent of generation assets and no transmission assets sold. Meanwhile, a wholesale electricity market began operating in 2006, though competition was limited and retail prices remain controlled by the government.
Like Indonesia, the Philippines is an archipelago, making unification of the disparate grids difficult. The country is unlikely to become part of the ASEAN grid in the near future since this will require both an undersea interconnection between Peninsular Malaysia and Sarawak and then a long undersea interconnection between Sarawak and the Philippines.
Vietnam has become one of the fastest growing economies within ASEAN, with GDP growth averaging 7.3 per cent over the past ten years, partly as a result of the development of its oil and gas reserves. This has led to a rapidly accelerating demand for electricity that the country has found difficult to meet, and there have been regular power shortages, particularly during the summer when hydropower plant reservoir levels are low. Coal and hydropower have been the traditional sources of electricity in Vietnam but natural gas is now becoming an important source too, accounting for close to 30 per cent of generation.
The electricity sector in Vietnam is still centrally controlled through the state-owned utility EVN that controls around 80 per cent of generating capacity. A new electricity law came into effect on 1 July 2005 which is intended to introduce diversity into the electricity sector and eventually a competitive electricity market. This is likely to be limited by the will of the government to maintain control of the transmission system, regulation of the sector and construction and operation of large power plants.
The precise way in which the market will develop remains unclear since many of the details have yet to be defined. Private sector involvement is likely to be through joint ventures, build-own-operate, or build-operate-transfer schemes. EVN is itself planning to build 74 power plants by 2020, including two nuclear plants, raising generating capacity to a staggering 81 000 MW. This is an enormously ambitious plan and far outstrips other estimates of expected capacity. The country may also start importing power from Laos to complement imports from China. Integration of Vietnam into the ASEAN grid will depend on interconnections with Cambodia and Laos, and via both these Mekong Delta countries into Thailand.
Singapore has an installed generating capacity of around 11 500 MW, mostly fuelled by natural gas. All fuel for power generation has to be imported as it has no indigenous natural resources. The country began restructuring its electricity sector at the beginning of this century with the break-up of the state-owned generator into three separate companies. In 2008, the first of these, Tuas Power, was sold to a Chinese utility. The government has also established an electricity market and will gradually extend retail competition from large to smaller customers. As a consequence, Singapore is probably the most advanced of all ASEAN countries in terms of liberalization of the electricity industry.
Cambodia, Laos and Myanmar
Cambodia, Laos and Myanmar have the least developed electricity sectors among the ten members of ASEAN. Much of Cambodia’s infrastructure was destroyed by war and the electricity infrastructure remains highly fragmented with a large number of isolated systems. The state-owned utility, Electricité Du Cambodge, provides power to the capital, Phnom Penh, as well as to 12 provincial towns and to two areas near the Vietnam border. There is one other public sector utility and several private sector generators. The country is reliant on costly diesel-based generation, though it has significant hydropower resources.
The main utility in Laos is Electricité du Laos, also state-owned, which controls all the main generation, transmission, and distribution assets. Like Cambodia, supply is fragmented and only around one-third of the population have access to electricity. The country has significant hydropower resources and has already built capacity which exports power to Thailand. A number of new hydropower projects, many involving the private sector, are either under construction or in planning, with a view to export power to neighbours.
Myanmar had an installed capacity of 1240 MW in 2002, more than half of which is hydropower-based and the rest based on gas fired plants. The power sector is state-owned with control shared among a number of different government agencies. Plans to develop hydropower projects that will export electricity to Thailand have been under discussion for at least ten years and in 2006 EGAT and Sinohydro Corp signed a memorandum of understanding for construction of five projects with an aggregate capacity of 12 600 MW.
ASEAN member countries will, in principle at least, be interconnected by the power grid. However, a fully integrated grid remains a long way off. Current plans involve the construction of 11 interconnections.
Seven of these are in the Mekong region and will interconnect Thailand, Laos, Vietnam and Cambodia with a single connection between Thailand and Myanmar. There will also be interconnections between Peninsular Malaysia and Sumatra, and between Brunei, Sarawak, Sabah and West Kalimantan.
This will still leave all of the Philippines and the main Indonesian population centre of Java isolated. Although its stated intention is to create an ASEAN Economic Community by 2015, there is no timetable for construction of the interconnections needed to establish the grid. It seems unlikely that it will be in place before the end of the next decade at the earliest.
This will obviously hinder development of an electricity market. Given the economic and political diversity of the members of ASEAN, it is difficult to see how a transparent and effective open electricity market can be established in the short to medium term. For that to become possible, virtually all the countries have to enact major reforms of their electricity sectors, some of which appear currently impossible to achieve. Even where reforms have already begun there remain questions of transparency which need to be resolved if a stable market is to be created.
Given these limitations, the immediate prospect appears to be for bilateral agreements on exchange of power which will expand in scope and potential as more of the interconnections necessary to establish the grid are put in place. Bilateral agreements, which will build on existing power exchange and export agreements, may eventually form the basis for more open market trading between nations but much will depend on the implementation of reforms that encourage both transparency and competition. Development is likely to be driven by the most powerful members of ASEAN, in particular Thailand, Malaysia and Singapore, with the influence of Indonesia and the Philippines curtailed until they become connected to the ASEAN grid.