Saturday, 18 August 2012

1MDB muscles into power sector

THE entry of 1Malaysia Development Bhd (1MDB) into the power sector will only intensify the already competitive bidding process for re-negotiations of power purchase agreements (PPA).

“At the end of the day, it is an open tender. Whoever offers the lowest rate and better value propositions wins. I don't think they'll be any advantage for 1MDB in the re-negotiation of its PPAs,” an analyst with Maybank Kim Eng says.

Realistically speaking, 1MDB has relatively deep pockets and access to borrowings to offer a competitive rate, providing its competitors with a challenging bid, according to the analyst.

Etiqa Insurance and Takaful head of research Chris Eng concurs with Maybank that 1MDB's ability to raise funds and the instruments which were likely to be guaranteed by the Government will provide a competitive advantage for 1MDB in providing an attractive rate for its PPAs.

He believes 1MDB will put in a very competitive bidding to garner market share by way of contract expansion.

The first-generation independent power producers' (IPPs) PPAs, which will expire between 2015 and 2017, are not being renegotiated and the competitive tender exercise will replace these as the country plans for future energy demand. A total of 4,500MW of power is up for bidding in stages. The first-generation IPPs had a combined capacity of 4,150MW.

The IPPs under the first-generation PPAs are YTL Power International Bhd, Segari Energy Ventures Sdn Bhd (a subsidiary of Malakoff), Port Dickson Power of the Sime Darby group, Powertek Bhd and Genting Sanyen Power Sdn Bhd.

Originally, the first-generation IPPs were supposed to negotiate for their PPA extensions on a one-on-one basis. However, Tenaga Nasional Bhd (TNB) stood firm on that point, saying these IPPs had already made a lot of money.

In view of the potential rise in the price of gas, which will be imported soon, the pressure to cut costs has intensified.

Getting into the energy sector is one of 1MDB's mandates. So far, the government entity has two major power assets under its portfolio.

On Monday, Genting Bhd announced it was disposing its power generation business for RM2.3bil to state-owned 1MDB. Genting says the group and its indirect wholly-owned subsidiary Genting Power (M) Ltd was selling its entire 97.7% shareholding interests in Mastika Lagenda Sdn Bhd to IMDB for RM2.11bil. Asia Trade Investments Ltd, which owns the remainder 2.3% stake in Mastika Lagenda, will also sell its entire stake to IMDB for RM49.6mil.

On July 30, Genting Sanyen submitted a competitive bid to the Energy Commission (EC) under the “Track 2 Renewal of Existing Power Generation Facility” process, proposing a 10-year extension to the PPA beyond its current expiry based on a set of proposed terms.

This is 1MDB's second major power asset acquisition this year after the RM8.5bil deal to buy the power assets of Tanjong Energy Holdings Sdn Bhd in March.

Certainly, this purchase has made 1MDB the second-largest IPP in the country after Malakoff. Genting Sanyen has a capacity of 720MW, while Malakoff has a capacity of 7.9GW.

Apart from the acquisition of Genting Sanyen, it is also one of the bidders for the new 1,000MW combined-cycle gas turbine (CCGT) Prai power plant. This plant is expected to cost about US$1bil (RM3.1bil).

Nine consortia and sole bidders have been shortlisted by the Energy Commission to participate in the tender process for the Prai CCGT power project.

Etiqa's Eng says first generation IPPs' PPAs would be given an extension if they could produce electricity that was cheaper or comparable with the Prai plant. “The new rates for new PPAs will not be higher than the rates of the Prai CCGT plant,” he says.

Engs adds that there are indications that 1MDB has put in the lowest bid for the Prai power plant.

Meanwhile, Maybank Kim Eng's analyst points out that the Government currently controls some 75% of capacity available. He says TNB currently controls 50% of the capacity generated while 1MDB about 25%.

While analysts say the entrance of 1MDB would intensify the competitive bidding, TNB would also benefit given the potentially substantially lower capacity payments, going forward.

“It seems generation assets are moving into public hands, which we think is positive for TNB as the new owners will have lower hurdle rates,” CIMB Research says.

Maybank Kim Eng's analyst says TNB had been rather unlucky that it has to balance up the country's social agenda with its commercial benefits. He says that with the new PPAs, TNB's burden would be eased somewhat and capacity payments should not be an issue for the utility giant.

Given the tight supply of subsidised natural gas, which is used to generate most of the country's power, Petronas has built a regassification plant in Malacca which will import natural gas at world market rates.

TNB has said the impact on higher natural gas will have no effect on its financial as the higher costs will be past through.

The Maybank Kim Eng analyst says it was undeniable that electricity prices would rise in the future. “You can expect a price increase but hopefully the quantum will be small.”

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