Three events have affected the momentum of power sector development in the Asia region. The first was the Asian financial crisis in 1997; the second was the California power debacle; and the third is the slow-down in the US economy.
It is now four years since the financial crisis began, but Asia is still bearing the impacts of the turmoil. The banking sector was the most adversely affected, and intensive reform efforts are still being undertaken in many countries to overcome the impacts.
The power industry needs to learn from these important events. We should not think that similar catastrophes will not take place in our industry. For one, the industry is very capital intensive. Second, a large part of the plants and equipment is imported and therefore vulnerable to changes in foreign exchange. On the other hand, continuous investment is required as demand growth typically exceeds the economic growth by a factor of half.
This means that utilities must act prudently in their borrowing and financial gearing policy. So far, we have managed with a high level of leverage because investors view utilities as being a safe and low risk investment. But this may change due to large swings in foreign exchange movements and the current unpredictability in economic growth.
Possible solutions are through newer instruments such as securitization. In the case of Malaysia, we think that the creation of smart partnerships with independent producers is the way to go.
The other developments concerning our industry are efforts to make it more competitive, to create a level playing field, and build an environment conducive for investors to build new plants and facilities. These are issues that we have discussed and studied for a few years now, but like others in Asia we have not yet actually taken the dramatic plunge. Now is the time to rethink the issues and address priorities. The above criteria, for example, should not be pursued at the expense of even more important objectives, namely system stability, reliable supply and of course, stability in prices.
The Californian power debacle has created ripples in the power sector industry. Although many of the factors leading to the problem were specific to California, the event has affected many foreign governments and US states in their thinking about electricity supply industry (ESI) restructuring.
Admittedly there are communities that remain committed to the complete liberalization of their power markets. The PJM system in the eastern seaboard of the USA, for example, has enjoyed tremendous success in its ESI restructuring.
However, each restructuring model should be treated as a special case and cannot be generalized. Otherwise, we would have seen one model being universally adopted by the UK, continental Europe, the USA and Japan. Furthermore, what is appropriate in more advanced countries may not necessarily be appropriate for our own developing economies and small power network systems. I have my own opinion as to the amount of success that can be achieved in the implementation of a fully competitive market in our own developing economies – at least at this point in time. And this is not to mention high costs of implementation and transition as well as the risks associated with restructuring.
In Malaysia, we are advocating a model that builds on the success of the existing system. We stand by the position that unstable prices and unreliable supply are risks that we cannot afford to take – this would be far worse than paying a less competitive price for stable and secure supplies. Like the financial crisis, inadequate energy supply and volatile prices would strip years off the economic growth that we have achieved.
We believe that stable prices and secure supply with continuing interest to invest can be maintained by assuring a stable incumbent utility in each of the three regional franchises in Malaysia. They should continue active participation in all sectors, namely generation, transmission and distribution. Private sector investments in new plants and capacity should be encouraged but through competitive bidding process. There should be no power pooling market necessary.
Dato’ Fuad Jaafar,
President and CEO
We iterate that each model for power industry restructuring is an individual case in its own right, and countries would do themselves good by reviewing what would be most suitable for their own market.