Time for the entrepreneurs?

If most of the interest in Asia is in China and India, why was the room so packed for the sessions focussed on Thailand and Indonesia? It could have been the speakers or it could purely have been that those sessions were in the popular post-lunch slot as opposed to the end of the day.

Whatever the reasons, these sessions were standing room only at this year’s Power-Gen Asia in Singapore. Certainly, outside of China and India, Thailand and Indonesia are two key market opportunities in Southeast Asia for the near future.

Indonesia’s urgent need for power has been well documented. It currently has an installed capacity of just over 25 GW and with annual GDP growing at 6.6 per cent per year, power demand will need to grow at 8-10 per cent year. Agoes Triboesono, the Indonesian government official speaking at the conference gave a more exact figure of 7.5 per cent through to 2025, calling for an additional 68 GW. He said this will cost $139.5 billion, a sum which the government cannot afford.

Commenting on the current situation and the need to attract private investment Eddie Widiono, President Director of national utility, PLN said: “With the increasing oil price, PLN will enter a crisis for a second time. Now that the 27 IPPs have been re-negotiated, we are starting the public-private partnerships again.” In 2004 IPPs owned about 13.7 per cent of total installed capacity but the government is hoping that IPPs will play a greater role in Indonesia’s future generation. “PLN has set a plan to have IPPs provide more than 50 per cent of the capacity which needs to be added over the next 10 years,” said Widiono.

Triboesono added that Indonesia would develop a more efficient and transparent policies and raise tariffs to attract investment. He said that eight IPP projects were currently being offered ranging in size from 50 MW to 1200 MW.

These may be the beginnings of a plan but we know what can happen to the best laid plans. “A concern”, said Bart Lucarelli of LP Power, “is what we don’t know. What’s the next big event? An oil crisis? A hurricane? People [utilities] are not clearing their debt. If something goes wrong, it is the IPPs that will take the hit again.”

As an expert on Thailand, Lucarelli has seen what can happen to a country’s development when the unexpected occurs. Thailand was among the worst sufferers after the financial crisis. Projects were put on hold and reserve margins have been allowed to dwindle to just 15 per cent. Further, its privatization Master Plan has not moved since 2000.

But Thailand’s power sector is on the verge of turning the corner. Annual growth in peak power demand is running at 9 per cent. Almost 21 000 MW will need to be added by 2015. Some 13 200 MW will need to be added between the 2011-2015 time period. This is around four or five power plants a year. Between 2007 and 2011, $10.8 billion will be needed for generation and transmission. Lucarelli added: “The long planned IPO of state utility, Egat, is likely to happen either late this year or early next year. The next IPP solicitation, which is sorely needed to meet demand, will follow shortly after.

But as opportunities return in Southeast Asia, many risks still remain. The unwillingness to pass fuel price through to customers is a continuing problem, and possibly the greatest challenge to greenfield development is fuel risk through price volatility.

It is also widely agreed that the industry needs a new model. Essentially Asia may not be ready for power pools but perhaps there should be a multi-buyer, multi-seller model where IPPs can sell direct to the buyer. This would bring more equity into the market and allow developers to spread risk.

The long term PPA is no longer a sustainable model. Utilities feel the PPAs were too geared towards the IPPs, while IPPs feel that they are often hard done by. But perhaps IPPs should consider: how many industries are there where you can have a 25-year contract with a guaranteed price? Nevertheless, something needs to happen to end the impasse.

So are investors ready to risk money in Asia? Equity is always at risk but some believe the market is much better off than it was ten years ago since the challenges are now more manageable and identifiable. Joe Anderson at law firm Morrison & Foerster summed it up well: “There are opportunities in Vietnam, Pakistan, Thailand. Indonesia will need additional measures to mitigate risk but there are opportunities there in oil and gas. Neverthless, now is the time for the risk-taking entrepreneur. The key is to align projects with governments’ broader development goals.”

Junior Isles
Publisher & Editorial Director

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