Many Asian countries are embarking on electricity market reform to increase sector efficiency and attract investment. But investors are more cautious following the financial crisis, and are examining market structures carefully.
Any crisis that could jeopardize the state of our energy industry could well set us back 20 years, something we cannot afford. Not now, not ever,” said Y.B. Datuk Tan Chai Ho, Malaysia’s deputy minister for energy, communications and multimedia. Speaking at the opening keynote ceremony of the Power-Gen Asia conference held in Kuala Lumpur in September, his sentiments summarized the challenges that many Asian countries are facing.
“For a growing economy like Malaysia, the aspect of reliability and security of supply is an important criterion,” he added. “Price instability and unreliable supply are risks that we cannot afford in our quest to industrialize. It is a trade off between competitive pricing and a stable and reliable supply.”
In the wake of the financial crisis and four-year market downturn, this is the challenge that the power and energy sectors of Asia must now rise to. They must attract investment to ensure that demand growth is met, but want to make sure they avoid the problems experienced in the USA, Brazil and New Zealand in the past year.
“Fluctuating prices and market volatility could pose an uncompromising risk,” said Tan. “The volatility in the wholesale electricity prices in the US … have proven to be quite a problem.”
Reform is therefore required but a new air of caution is present. Some governments seem likely to retain some level of control over their power sectors, and this may not sit well with investors.
A question of priority
Malaysia, in particular, is wavering over reform. Initially planning to take the privatization route with the introduction of a power pool by 2003 or 2004, the country now has different priorities. Speaking at Power-Gen Asia’s ‘Asia Power Summit Question Time’ panel session, Pian Bin Sukro, vice president of Tenaga Nasional Bhd’s ventures division, said that TNB and Malaysia intend to focus on maintaining the security and reliability of the power system, increasing supply chain efficiencies, improving the regulatory framework and market transparency, promoting regional power exchange, and developing sustainable resources. Security of supply and sustainable resource development appear to be of particular importance.
Under the country’s 2001-2005 plan, the government has adopted a ‘five fuel policy’ designed to reduce the country’s dependence on natural gas and diversify fuel resources. One of the government’s aims is to have five per cent of electricity supply provided by renewable energy resources by 2005, and it announced at Power-Gen that it was about to award licences for the development of four new renewable energy projects.
Nevertheless, Malaysia recognises the need to attract investment to the power sector. According to Pian, the country needs RM37 billion ($9.7 billion) over the next ten years to meet capacity addition requirements. New capacity is now likely to be met through independent power producers, with long-term power purchase agreements signed with TNB. In addition, to improve market transparency, an Energy Commission has been established and will start operating in 2002. Its role will include planning and forecasting, price regulation, and overseeing competitive bidding for new projects.
Thailand: long-term ESI structure
“An effective and firm regulating agency like [the Energy Commission] will see a robust, confident and successful industry,” noted Tan in his keynote address.
M. L. Chanaphun Kridakorn, deputy governor of policy and planning at the Electricity Generating Authority of Thailand (Egat), also highlighted the importance of encouraging investment. Speaking at the Asia Power Summit, Kridakorn pointed out that Thailand’s peak load growth would average over six per cent to 2011, and over five per cent from 2012 to 2016. By 2016, Egat forecasts that peak load will have reached 40 GW from today’s 16 GW.
Under its 1998 Privatization Master Plan, Thailand is aiming to promote competition in the energy sector and activate the privatization of Egat to achieve the efficient procurement, consumption, and supply of energy.
Egat presently dominates generation and also operates the country’s transmission lines. The new structure will see several generating companies (gencos) selling power into a pool operated by an independent system operator (ISO), with a regulated transmission company (transco) operating the high voltage network. Distribution will be carried out by a number of distribution companies (discos), and will be separated from supply. A regulator will oversee the market, and some consumers will be eligible to buy power directly from the gencos. A power pool will be established by the beginning of 2004.
The challenge of reform
Although it hardly needed saying, Kenneth W. Oberg, managing director of CLP Power International, noted how problematic power industry reform could be. Reviewing some recent work carried out by Cambridge Energy Research Associates (CERA), Oberg highlighted some important characteristics that deregulated markets should possess.
- Political support: an independent market authority is required to provide neutral and independent regulation and to create a level playing field.
- Liquidity: a link between wholesale prices and retail prices is required to pass price changes on to end users. Efficient metering, billing and collection is also required.
- Rivalry: numerous independent buyers and sellers with commercial incentives, an adequate transmission network, and a wholesale market with sufficient scale.
- Dynamic adjustment: ease of entry to and exit from the market, with an efficient and fair system of siting, permitting and construction.
Oberg believes that few Asian markets possess these, and other, criteria, and warned of the dangers of putting in place poorly-designed market structures, particularly with respect to attracting investment. He highlighted specific flaws present in some of Asia’s power markets.
Competitive power markets: an international comparison
Both Oberg and David Croft, chief executive and managing director of Transgrid, questioned whether countries like Thailand and Malaysia were ready for a power pool. “What is important is a framework where investors can be confident,” said Croft. “Is a pool model appropriate in Malaysia?”
Putting up a power pooling system is not simple,” noted Oberg. “It takes a long time to put the elements in place.” He stated that Thailand would not be ready for a pool by 2003. A particular problem here is EGAT’s dominance in generation – the utility accounts for 87 per cent of power generation – and the subsequent lack of competition. The only country in Asia ready for a pool, he said, is Singapore.
But Malaysia now seems unlikely to take the power pool option, and will instead revert to a competitive bidding process for IPPs, with long-term PPAs signed between developers and TNB. Oberg stated that this PPA model was preferable to a badly-designed pool structure, but noted that investors were now sceptical of PPAs following problems in India, Pakistan and Indonesia.
The role of the government was also debated among the panellists. Glen Casanova, executive director of Singapore Power International, noted that when entering a market, it is important to know whether your business will rely on the market, or on a regulator, for returns. Investors clearly need to know the ‘rules of the game’, and require consistent and transparent rules and regulation.
The end of the PPA?
Power market structure and the role of government and regulators naturally have implications for project finance. The panellists agreed that merchant project finance was a long way off in Asia. In well developed deregulated power markets such as the UK and Texas, USA, the link between the natural gas price and wholesale power prices allows merchant power projects to obtain project financing. The risks of merchant project financing in Asia are far too high. For the foreseeable future, the PPA will be an essential tool for investors.
According to Oberg, the financial crisis and the problems experienced with PPAs will lead to some changes in financing. Although Indonesia structured its PPAs with IPPs well, the financing was done in US dollars, while project revenues were in local currency. This, says Oberg, was not sustainable. It exposed investors fully to currency risk, and we are now likely to see more financing in local currency.
The one market that stood out among the panellists as a ‘no go’ area was India. While Tsunhisa Katsumata, executive vice president of Tokyo Electric Power Co Inc (Tepco), said that taking a long-term view was important, Oberg said that most investors would not look at India right now. Power market reforms in India are not progressing, and this, together with the problems surrounding the Dabhol project, mean that Indian banks are not willing to lend on new projects.
“It’s a potentially attractive market, but not right now,” said Casanova.
Asian countries can at least go forward with the benefit of hindsight – not just from the financial crisis, but also from deregulation by the USA and Europe.
Japan, which is gradually deregulating its power industry and allowing competition in generation and retail, was due to launch a review of the current status of deregulation in October 2001. According to Katsumata, it will look at issues such as security of supply, competition, retail choice, and would certainly take on board lessons from California.