My Q&A on Malaysia Electricity Supply Market

Cost vs Reliability

Malaysian Consumers had to realize that two of their main demands regarding electricity supply are conflicting with each other. If you want to reduce the reserve margin （price pay for excess capacity) to make electricity cheap, you will risk facing the black out of 1992 again. To ensure the system as reliable as possible and avoid any black out at all, you need to keep vast amount of spare capacity which came at huge maintenance cost. 

Why Privatized? 

I can see two compelling reasons why we need to privatized the power generation business. 

The first,  we need a benchmark to see if the player(s) in the market is under/over performing. In previous state owned Lembaga Letrik Negara (LLN) era, you won't know if we are over/under performing until massive black out occured. 

The second, if a particular organization had state financial in back-up, the main drive for efficiency will be solely relying on those in controlling position for the organization. More specifically, we will rely on the good faith of the peoples in the organization, or the moral principal that they hold, to ensure we keep going to the direction of generating cheap but yet reliable electricity. Given the fact that the state-owned enterprise don't usually attracting the best talents given its lackluster remuneration structure, i wouldn't count my bet on that. 

Are we benefiting from the latest PPA tender exercise?

The answer is yes and no. 

We need to aware that any savings from latest Power Purchase Agreement (PPA) tender exercises does not directly pass to consumers.  The client for all Independent Power Producers (IPP) and even TNB generation is still TNB transmission & distribution arm. Hence, TNB transmission and distribution will enjoy the savings from PPA exercises first, before deciding whether to pass on to the ultimate customers - the consumers. 

And here is the catch. Competition for new PPA is becoming more intense between players like TNB, 1MDB, Malakoff, and other IPPs(currently left only YTL) where cut throat price war resulting in cheaper electricity generated. However, there is no competition in the electricity distribution and transmission business. TNB monopolized the market, and eventhough it is regulated, with TNB a private corporation in nature government still need to make sure TNB are making profit. 

Thus, any saving from lower cost of electricity generation can be pass on to the consumers only if TNB already making enough profit. Which to many outsider, it seems natural to try to squeeze more efficiency out of TNB transmission and distribution business. 

How can we squeezing more out of TNB transmission and distribution business?

so that end consumers will benefit more？

Well, with current structures it will be very hard, totally relying on the good faith of the managers in TNB transmission and distribution business to ensure the organization transmit and distribute the electricity at lowest cost possible. As the business is regulated but need to cater for the profit demand for a private organization, it will be more easier for TNB to come to the regulator crying for tariff hike, instead of squeezing more productivity out of its current practise. 

There are several ways to change the landscape, 

One, since the market of transmission and distribution is  monopolized, it matter less whether it is operated by government or private sectors. We could just nationalize TNB transmission and distribution business and let the generation units competing in generating cheapest electricity. 

Second, Liberalized the market by allowing IPPs to enter into the transmission and distribution market. We might not have the market size necessary to ensure efficiency of scale achieved by major players in the market (like UK). But in a industry with huge capital expenditure layout (thus high fixed cost), there is a higher chance to see price cut throat competition which ultimately benefit the consumers （think of the steel industry, aviation industry, or automobile industry, where overcapacity leads to lower price for consumers). 

Whats Wrong with 1MDB Entering the Market?

Currently it seems they are doing more benefit than harm. They are buying out 1st and 2nd generation PPAs from privates, they are among the lowest price bidder for latest PPA tender exercise (track 3B). However here is the catch, they can do so as they have a license to fail. And if they do failed, government will likely needed to bailed them out, as 

1)  They are owned by Ministry of Finance, a fail without rescue will put all other GLCs debt in doubt. 

2）Electricity generation is a matter of national interest, it dont seem likely that the government will allow the operation of the business fall into the hand of foreign bond holders. 

Now when you have the license to fail, it will be likely that you will be more aggressive, thus making more mistakes. And the mistakes will more likely to be tolerated. 

Already, 1MDB is reportedly overpaying for the power asset they acquired (read here and here). 

Then, the recent acquired of theirs, Jimah Power Plant, is a highly leveraged investment with frequent failure history this year. 

And the main reason why they want to listed their power assets, is to get enough equity to replace the costly debt financing. 

I am guessing KWSP and other government related funds (such as Lembaga Tabung Haji and Amanah Saham Malaysia)  will be directed to buy the shares of 1MDB. If it does so, it will be like consumers are subsidizing cheap electricity (track 3B for example) from their own pockets (KWSP and all other funds), probably in a less efficient way. Where in the process , Ananda Krishnan (previous major shareholder of Powertek), Genting Shareholders and Negeri Sembilan Royal Family (major shareholder of Jimah Power Plant) just get richer. 

So?

If we are to ensure 1MDB don't abuse its license to fail, and if we do view electricity generation business as a matter of national interest, that the companies operating them need to have sound financial situation to avoid any bailout request to government, we might need to regulate their financials like the way we regulate the banks. 

Few of the measures could be, 

1) prohibited companies with not enough equity to participate in any PPA tender exercises, 

2) prohibited any highly leveraged buyout for power plant assets. 

Warning : The author of this article do work in Electricity Generation Industry and hence his view could be very bias. Becareful when reading.