Wednesday, October 19, 2011

Why No Open Tenders for IPPs?

I raised the question in Parliament to the Minister of Energy, Green Technology and Water to explain the reason why the latest 1,000MW coal-fired power plant project was awarded in June 2011 without any open tender. I also asked for the key terms and conditions of the Independent Power Producer (IPP) concession agreement, such as the price of electricity, capacity charges etc., to be disclosed in Parliament.

In the Minister’s reply to me yesterday, it was disclosed that a closed tender was called for the award of the project because the project needs to be completed within a short period of time. Hence only 2 companies were called to take part in the “closed tender” – Jimah Energy Ventures and Tanjung Bin Power, a subsidiary of Malakoff Bhd. The new power plant is required to commence operations in 2016.

I fail to understand how a project which is only expected to commence operations in 2016, 5 years from now is so “urgent” that only 2 companies were called in a limited tender exercise. Having had more than a decade of experience with IPPs, as well as more than half-a-dozen of qualified IPPs in the country, there is little excuse for the Ministry to avoid an open and competitive tender.

What is perhaps more shocking was the Minister’s reply that the Power Purchase Agreement (PPA) has not been finalized and hence, the expected tariff rate for electricity generated to be sold to Tenaga Nasional Bhd as well as the period of concession have not been finalized. He added that the terms will only be finalized at the end of the year.

It defies belief that the Government has taken the decision to award an IPP concession without even first finalizing key terms such as tariff rates and the length of concession.

It is hence not surprising that Malaysian electricity prices remains relatively high despite the amount of subsidies the Government has allocated to the industry. The subsidies have obviously not reached the man-on-the-street, but have instead been siphoned off as super-profits for these IPPs.

For example, despite the subsidies for natural gas supplied to IPPs being much higher in Malaysia compared to Thailand, consumers and businesses in the latter pay a lower electricity tariff than in Malaysia. Natural gas is supplied to Malaysian IPPs at RM13.70 mmBtu while it is 68.6% higher in Thailand at RM23.10 mmBtu. Despite that, a consumer using 500kW of electricity a month in Thailand pays only RM129.50, or 21.4% cheaper than Malaysians at RM157.20.

The underlying reason for the lower tariff rates in Thailand is because Thailand runs an extremely competitive IPP market where the Government awards IPP concessions after a prequalification exercise, based strictly on price.

If the Government is sincere about prices low in Malaysia to relieve the burdens of the rakyat, then the manner in which privatization projects and concessions are awarded in such an opaque and anti-competitive manner must be immediately “transformed”, or the rakyat will continue to suffer from unreasonably higher cost of living.
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