IPP payments, gas price in the way

PETALING JAYA: While ministers have called for lower electricity tariffs, they can only be reduced if issues such as huge payments to independent power producers (IPPs) and the price of gas are re-negotiated, or Tenaga Nasional Bhd’s (TNB) bottomline will be greatly affected.

This is because payments to the IPPs make up 45% of TNB’s cost and fuel cost 15%, both totalling 60% of cost at the operational level. TNB paid IPPs over RM9bil in the last financial year ended Aug 31 (FY08) and, in FY09, it will swell to RM12bil.

Energy, Water and Communications Minister Datuk Shaziman Abu Mansor said on Tuesday he would request for a study to be made to determine if his ministry would propose a tariff reduction. A day before that, International Trade and Industry Minister Tan Sri Muhyiddin Yassin called for tariffs to be decreased.

If the government wants to reduce electricity tariffs, it has to address the two big components of costs. One way to bring the biggest cost down was to start re-negotiations on the power purchase agreements (PPA) with the IPPs, an industry source said.

“It would be fair to reduce electricity rates if the price of gas and the IPP payments are reduced. It does not take a rocket scientist to work out the numbers,’’ he said.

The remaining 40% is made up of staff cost (10%), interest, depreciation and general expenses.

In making tariff reductions, the other issue to consider is TNB’s rather large reserve margin of over 40%. By June, this will rise to 47% when the 700MW Jimmah plant in Negri Sembilan comes onstream.

“With demand for electricity tapering down due to an economic slowdown and a huge reserve margin, TNB is going to be stretched if a cut in tariff is not compensated by a cut in IPP payments and lower gas tariffs,’’ said the source.

The Government said it was looking at reducing electricity tariffs before June since gas and coal prices had come down from their peak. June is when a review is originally planned but that date may be brought forward.

The Economic Planning Unit has been told to revisit the gas price for the energy sector to enable electricity tariffs to be lowered.

Gas price has halved from its June peak of RM40 per mmbtu to RM20 currently. Coal price is about US$75 per tonne, excluding freight and insurance.

TNB is currently paying a lower gas price than market rates to Petronas at RM14.31 per mmbtu. Gas price was last revised from RM6.40 per mmbtu (million British thermal units) to the current levels on June 1 following the rise in diesel and petrol prices.

For coal, TNB paid US$114 per tonne in its first quarter ended Nov 30, inclusive of freight and insurance.

TNB may have its woes of having to make big payouts to IPPs but any reduction in electricity rates will benefit the public and the industrial sector in the current economic slowdown.

While some analysts do not expect TNB to do well with a hike in tariff without a reduction in the price of gas and IPP payments, one believes a tariff reduction could help spur electricity demand and increase the competitiveness of Malaysia’s industrial sector.

Any gas price reduction would also help major consumers of gas, including petrochemical, steel, rubber gloves, ceramic tiles and glass industries, said OSK Research acting head Chris Eng.

He sees a possibility of an electricity tariff cut if gas price comes down.

“Otherwise, there is no justification for a reduction and Petronas will fight tooth and nail to keep the price of gas as it is since the price at RM14.31 per mmbtu is still lower than the market price of RM20,” he said.

Gas and coal price drops might be considered but Eng also believed the winds of change might be blowing strong enough for a tariff cut to be possible, especially when a change in the country’s leadership was imminent.

“We believe that calls for a price cut would also bolster popular sentiment for the Government while easing the burden of manufacturers and the public in the ongoing economic downturn,” he said.

But the long-term solution is really a fuel cost pass-through formula. That would provide clarity to TNB’s fuel cost structure and ensure it would not be subsidising users when gas and coal prices picked up again, said an analyst. (TheStar)