Power hungry: Efforts to attract more private investment into the electricity sector

Driven by a growing industrial base and rising income levels, which are nudging up consumption levels, Malaysia’s electricity demand is expected to equal the OECD average by 2030. While the country has a comfortable supply and demand electricity buffer, with a total installed capacity of 24,257 MW compared to a peak demand of 17,316 MW in 2011, consumption is expected to increase by roughly 3% per year in the near term, according to data from the Ministry of Energy, Green Technology and Water (MEGTW).

Now that plans for an undersea power connection which would have transported the glut of Sarawak-produced hydropower to Peninsular Malaysia have been scrapped, national power utility Tenaga Nasional (TNB) is scrambling to make up any potential shortfall caused by growing demand. “We are diversifying our mix with two new brownfield coal-power plants of 1000 MW, each of which will come into operation sometime in the 2015-16 window,” Somasundram Ramasamy, the MEGTW’s senior undersecretary for the energy sector, told OBG. “Originally power from Sarawak hydro was supposed to come to the peninsula, but because that is now not on the radar, we have to compensate for that. That is why we are using more coal.”

NETWORKS: Malaysia’s power sector is divided into three distinct areas delineated by geographic boundaries of Peninsular Malaysia, Sarawak and Sabah, each of which has its own separate power network. Reflecting the population density and industrial activity of the country, the vast majority of demand is centred in Peninsular Malaysia, which posted a peak demand of 15,476 MW as of June 2011, compared to 1067 MW in Sarawak and 773 MW in Sabah. The fuel mix used in generation for 2011 was dominated by coal and natural gas, accounting for 45% (49.87m GWh) and 43% (47.7m GWh), respectively. Additional energy sources used included medium fuel oil and diesel, with 6% (7.08m GWh); hydro, also at 6% (6.27m GWh); and biomass, with less than 1% (174.2 GWh), according to data from the Energy Commission of Malaysia (ECM).

PENINSULAR POWER: TNB is responsible for the transmission, distribution and nearly half the power generation in Peninsular Malaysia. As of June 2011 the peninsula’s total installed capacity was 21,873 MW, with TNB assets accounting for 9110 MW and independent power producers (IPPs) accounting for the remainder, according to data from TNB and the ECM.

Of this, almost 45% of electricity produced in 2011 was derived from coal-fired power plants, followed by gas (42.9%), hydro (5.6%), oil (3.9%) and distillate (2.7%).

With growing domestic consumption inevitably eating away at the country’s now comfortable supply margins, TNB is in the midst of constructing new power plants to bring thousands of megawatts of new power on-line in the coming years. These include new hydropower projects such as the 250-MW Hulu Terengganu Hydroelectric Project targeted for operation by September 2015 and the 372-MW Ulu Jelai Hydroelectric Project scheduled to come on-line in December 2015.

The company has a coal-fired power plant under way in the brownfield 1000-MW Manjung Coal-Fired Power Plant Project being constructed by Alstom-CMC, adjacent to the existing Sultan Azlan Shah Power Station, which is expected to begin commercial operations by March 2015. A consortium of TNB (50%) Petronas (30%) and the Sabah State Government (20%) are also developing the 300-MW combined-cycle gas turbine at Lahad Datu power plant, expected to be completed by the end of 2015.

TNB is also looking to expand its installed generating capacity through new projects in various stages of early development. These projects include new power stations in Telom (132 MW), Tekai (156 MW), Sungai Pelus (34 MW), Talong Sengoh (200 GWh per year), Lebir (274 MW) and Nenggiri (416 MW), as well as the possibility of collaboration on new biogas-fuelled power stations with Malaysian conglomerate Sime Darby.

BORNEO: Serving smaller but more dispersed populations, Sabah and Sarawak power have experienced dynamic change in recent years. Sarawak in particular has seen robust growth in its generation capacity due to the construction of vast hydroelectric projects.

Constructed as part of the Sarawak state’s effort to promote itself as heavy industrial destination, the government's Sarawak Corridor of Renewable Energy (SCORE) strategy calls for a massive increase in capacity generation to provide plentiful and cheap electricity. These projects include the 2400-MW Bakun hydro power plant (HPP), which has already entered its first phase of operations and will achieve full output by 2013, the 944-MW Murum HPP (operational by 2014), 150-MW Limbang (2013), 1000-MW Baram HPP (2015), 400-MW Pelagus (2016) and 1400-MW Baleh (2019). Additional coal-fired thermal power plants are also in the works and include the 600-MW Balingian power plant scheduled to come on-line in 2015, as well as the 250-MW Merit Pila, scheduled for 2016.

Sarawak’s generation, transmission and distribution is mainly handled by the state-run Sarawak Energy (SEB), although there are two power plants operated by associated power producer Sejingkat Power, a joint venture between Syarikat Sesco (SESCO) and the Sarawak Enterprise Corporation. These complexes consist of the 100-MW Sejingkat Power Corporation in Kuching and the 337-MW Sarawak Power Generation in Bintulu. Similar to the fuel mixture for the country, Sarawak’s power generation is derived chiefly from coal (46.3%) and natural gas (44.6%) with hydro and diesel making up just 5.8% and 3.4% of production.

Sabah Electricity acts as the state’s primary electricity utility operator, handling all levels of business from generation to end-user. The company’s 410-MW of installed capacity is supplemented by seven IPPs operating in the state with a total combined installed capacity of approximately 630 MW. Sabah’s generation mix is dominated by gas-fired power plants, which generated 3116 GWh of power in 2011, or 63% of total electricity produced. Fuel oil and diesel followed, with 1205 GWh (24%), while renewable hydro and biomass energy sources contributed 10% and 3%, respectively.

PRIVATE EYE: Once the exclusive domain of TNB, the majority of generation in Malaysia has shifted to privately owned power plants. According to the ECM, as of 2011 there were 27 licensed IPPs operating in the country, including wholly owned TNB subsidiary TNB Janamanjung and the SESCO subsidiaries Sejingkat Power Corporation Kuching and Sarawak Power Generation Bintulu. The combined installed capacity of these power plants reached 15,402 MW in 2011.

Both the issuing process and terms of the agreements have evolved since the first generation of IPP contracts were handed out by TNB. In its haste to build up generation capability as fast as possible due to an impending supply shortage, those early private companies managed to secure favourable contracts, which reaped generous rates of return up into the mid-teens.

Since these initial contracts, the system has evolved to the point where the ECM and not TNB now holds competitive tenders for new projects, which are in the fourth generation of IPPs. As a result of corrections and modifications to the contractual process over the years, new IPPs now yield internal rates of return on average in the neighbourhood of 7-8% – enough to be enticing for the private sector but no so much as to be an excessive burden on utility operator TNB.

PRODUCER: The largest power producer operating in Malaysia is the Malakoff Corporation, 51% owned by the MMC Corporation, with a generation portfolio of 5028 MW. Its holdings include the recently awarded 1000-MW coal-fired power plant extension at the Tanjung Bin power plant in Johor, which will increase the plant’s installed capacity from 2100 MW to 3100 MW upon completion in 2016. Other assets in the Malakoff portfolio include the remainder of Tanjung Bin Power Plant (the country’s maiden IPP project), 2420-MW Kapar Power Plant, Port Dickenson Power Plant (440 MW), Lumut Power Plant (1303 MW), Prai Power Plant (350 MW) and GB3 Power Plant (65 MW).

FOREIGN OWNERSHIP: One of the more significant legislative moves made by the government recently in terms of boosting private investor interest in the power generation sector was to increase the allowable percentage of foreign ownership of IPPS from 30% to 49%. Instituted just prior to the Prai power plant tender in 2011, the shift proved a resounding success in its intent, as no fewer than 40 different companies bid on the project including many of the premier regional power players. In June nine consortiums and individual companies were shortlisted for the tender to build the first 1000- to 1400-MW stage of the 4500-MW Prai combined-cycle gas turbine project. In October 2012 TNB was awarded the RM3bn ($967.8m) contract. The ECM has also stated its intention to issue new tenders for a combined total of 3000 MW worth of projects to be commissioned from 2017-19.

In addition to the most recent round of bidding, the government is looking to rectify its past oversights by revisiting the power purchase agreement contract terms issued to the first-generation IPPS as they near expiration in 2015-17. However, according to some in the industry, only around 2250 MW of the 4000 MW contracted out by the original six contract holders will be renegotiated. If accepted at the new lower rates, the contracts would then be extended well beyond the original contract expiration dates of 2015-17, with the new rates taking effect immediately upon signing.

ALTERNATIVES: Private investment in the renewables sector is also expected to see a substantial bump in the coming years due to the implementation in 2011 of a new feed-in tariff incentive scheme (see analysis).

The once strong enthusiasm for nuclear energy as a means to diversify the country’s power mix has waned recently in the wake of the 2011 Fukushima disaster in Japan, and hard decisions on the subject have been postponed for the time being. Given the tepid public response to nuclear power, the Malaysia Nuclear Power Corporation is now leading a detailed study on the feasibility of developing nuclear power plants domestically, which is expected to be submitted to the government by 2013. Earlier proposals for nuclear deployment envisioned the construction of two 1000-MW units to be commissioned by 2021, with an additional two units coming on-line by 2029.

CROSS-BORDER RELATIONS: Already connected to the Electricity Generating Authority of Thailand (EGAT) in the north and the Singapore’s transmission system operated by SP PowerGrid in the south, SEB’s most recent foray in cross-border power transactions came in June 2012 when TNB signed a memorandum of understanding with its Indonesian state-owned counterpart Perusahaan Listrik Negara and Indonesian coal mining company Bukit Asam. The principle aim of the deal is to explore the feasibility of constructing a new coal-fired mine-mouth power plant located in Peranap, approximately 250 km south-east of the town of Pekanbaru on the island of Sumatra. The plant would be operated by Bukit Asam, with TNB buying the off-take. The study will also investigate necessary connections and support infrastructure, including an interconnection line from Telok Gong in Malacca to Garuda Sakti in Sumatra, and the development and construction of the power plant in Peranap, located at approximately 250 km south-east of Pekanbaru, Sumatra.

In order to access Sarawak-based power and make the deal work, TNB will also have to finance and build an undersea cable traversing the Straits of Malacca at a projected cost of $377.77m. The 275-KV interconnection line would link Malacca in Peninsular Malaysia to Sumatra but would transport much less power and cover a shorter distance than previous concepts explored where the output of the Sarawak-based hydropower producers would sell electricity to the peninsular grid. The high projected cost of the Bakun project – estimated at between RM8bn ($2.6bn) and RM10bn ($3.2bn) – along with interest by enough power-hungry heavy industrial consumers in Sarawak was enough to scuttle the original plan. The total cost of the mine proposal including power plant, transmission line and all associated costs has been estimated at RM7bn ($2.3bn). The crux of the concept, however, comes from the two-way electricity exchange expected to start by 2017. In order to transfer excess electricity to Sumatra by night and Peninsular Malaysia by day, a second power plant must not only be constructed in Malacca but it must also produce electricity at the same price as its Indonesian partner plant to be economically viable for both parties. This is currently not the case, and the future price of fuel will be difficult to determine due to both global energy prices and Malaysia’s heavily subsidised energy sector.

CHALLENGES: Although the government continues to take steps to liberalise and reform the power sector, there are still some hindrances to be removed. For gas-fired power plants, the main challenges with the regulatory environment stem from the stipulation that they are only able to purchase natural gas from Petronas at predetermined prices while also selling power at set rates. This caused substantial losses for TNB when Petronas experienced a supply shortage during 2011 and TNB was pushed to use more expensive distillates as an alternative fuel source. In response, the government has floated proposals to allow third-party access to the country’s gas networks, although no decision on the matter had been made at the time of press.

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The Report: Malaysia 2012

Energy chapter from The Report: Malaysia 2012