How PPA renegotiations equal power tariff hikes

POWER Purchase Agreement (PPA) was a famous phrase in 1990s with first generation Independent Power Producers (IPPs) smiling left to right even when they sleep. This “Get Rich Quick Scheme” had a more important topping for an innovative businessman, “Take or Pay” clause.

Lately, there has been a number of misleading statements on PPAs. Did renegotiation of PPA really save millions of ringgit as claimed by certain parties irresponsibly? Does takeover of existing PPA(s) by another party saves cost?

Let’s burst the bubbles of myths spewed by irresponsible individuals.

When a PPA is signed, the payments charged for the power plant operation in sen/kWh unit are fixed. This churns out as revenue for the power plant owner to pay for operational expenditure and their profit. If a new entity buys over the power plant(s), the rate remains the same. There cannot be any upward revision. In normal circumstances, the new owner will never want to revise the price downward. Generally, there will be no change.

Does PPA renegotiation save cost in the long run? If a 21 year PPA is revised downward before 15th year of operation, it may save costs for the remaining years. However, what was carried out by Energy Commission (ST) does not really save cost, as extensions of tenure were given as part of the renegotiation plan. There was also a case of an old power plant with land dispute, being extended despite having sufficient generation capacity. Unfortunately, when you are allowed to operate an old junk compared to more efficient power plant, we will pay more cost due to higher fuel cost.

Let us compare the fuel cost of a new and efficient Combined Cycle Gas Turbine (CCGT) that operates with 60% efficiency with old CCGT that operates at 35% efficiency. By taking piped gas price as RM 21.20 per mmBTU from January 2017 to June 2017 and RM 22.70 per mmBTU from July 2017 to December 2017 as well as normalised generation capacity of 1000 MegaWatt (MW), the new CCGT will use natural gas worth RM 1.068 billion and the old junk will use natural gas worth RM1.423 billion for 2017. Since fuel cost is a pass through, we will pay additional fuel cost estimated at RM355 million for 2017 if the old junk is allowed to operate. Allowing extension of old power plants will increase impact to electricity tariff. Does it really save cost in the long run?

We need to take note that ST and Ministry of Energy, Green Technology and Water (KeTTHA) failed to implement competitive bidding as stipulated in 10th and 11th Malaysia Plan. Let’s look at the estimated additional cost that will be passed on to electricity tariff. The slowest “fast track” project in Pasir Gudang (Track 4A) with 1440MW capacity will pass on estimated RM7.036 billion beginning year 2020. Track 4B (2242.131 MW), a project that was awarded far earlier than necessary and now owned 100% by a China owned company will pass on estimated RM15.84 billion. Finally, an unnecessary award of power plant project to Tadmax in Pulau Indah (1000MW) is estimated to pass on additional RM4.86 billion to tariff once they fix their offer in 2018. Is this cost saving? Why should Malaysians pay for this inanity by ST and KeTTHA?

Why should we pay for the failure of ST and KeTTHA to implement competitive bidding and other steps to minimise cost impact to electricity tariff? Clearly, the system under ST and KeTTHA is causing higher impact to electricity tariff while increasing cost of living, by failing to abide by Electricity Supply Act and Energy Commission Act. After all, electricity cost is a “pass through” to goods and services price.

This article was contributed by Piarapakaran S., president of the Association of Water and Energy Research Malaysia (Awer), a non-government organisation involved in research and development in the fields of water, energy and environment.