Solve the Independent Power Producer Mess


Recently, Putrajaya announced its plan to liberalise the retail electricity market from TNB. Putrajaya should instead focus on dismantling the fixed Independent Power Producer (IPP) contracts with TNB for Peninsular Malaysia.

The current IPP known as IPP 2.0 differs from the IPP 1.0. Under IPP 1.0, TNB was forced to buy a minimum amount of electricity at a fixed cost. But IPP 2.0 is similar to car rental services where the user (TNB) pays a fixed rental amount (capacity payment) to car rental companies (IPPs). The user (TNB) pay for their own petrol (energy payment) for each mile travelled (electricity demand).

IPP 2.0 may better than IPP 1.0 but it is not sustainable in the long term. The fixed income for IPPs, known as capacity payment, is draining the country’s financial resources. Hence to keep the electricity price affordable, plenty of subsidies and protectionist policies have to come in to support the IPP.

In 2016, 53% of natural gas power station in Peninsula was owned by IPPs. Between 2009 and 2016, gas power station had received a total RM84.6 billion worth discounts for natural gas as Gas Petronas was forced to sell at a fixed lower price to power producers. Putrajaya could have potentially earned approximately RM30 billion in taxes, enough to pay PTPTN debts.

Additionally, IPP 2.0 promotes inefficiency across the board. IPPs have higher generating cost compared to TNB power plants as fixed payments tend to eliminate incentives to monetise the IPPs’ waste fluids, or to increase their efficiency. In other countries, waste hot fluids from power stations are sold to industries with hot water requirements.

The low electricity prices due to subsidies, such as zero tariff on coal and fixed natural gas pricing are enjoyed by large industries and businesses rather than B40. The low electricity price further disincentivizes businesses and industries from adopting energy efficiency practices hampering the development green technology industry.

Putrajaya should eliminate the single buyer (SB) system to allow IPPs to sell directly to large consumers. The IPPs could pay small fees for using TNB’s transmission assets. TNB must be retained as the sole transmission and distribution network operator (GSO). The transmission and distribution should be kept under a single entity under Putrajaya’s control for efficiency and for national security’s sake.

Effectively, IPPs are forced into competition to reduce their prices to attract large consumers and to improve their efficiency. IPPs could work with state governments to develop industrial parks around power stations to monetise their waste hot fluids instead of dumping the wastes into the sea.

For this mechanism to work, more competition must be allowed and TNB must transition away from its fossil fuel-based power plants. TNB should offload its fossil fuel power plants to different entities to induce competition. TNB could explore open tenders or real estate investment trusts (REIT) to sell its fossil fuel based thermal power plants.

Entities with large electricity needs such as KTMB, RapidKL, steel factories, cement industries and the government could consider buying TNB power plants to generate their own electricity. In Japan and India, railway corporations have their own power plants to supply electricity for their railway operations.

TNB should still cater for residential and small commercial buildings, as their demand is too low to negotiate with IPPs. TNB could develop a stock exchange like system in which IPPs could bid in real time to provide electricity needed by TNB. Effectively, TNB would become a grid service operator (GSO). TNB could utilise the capital from the sales of power plants to develop smart-grid system.

The current IPP 2.0 is purely a rent-seeking business draining the nation’s economic resources, preventing the nation from reaching its full capacity. Putrajaya should dismantle the single buyer system and put IPPs into the retail electricity sector. Consequently, Putrajaya could eliminate the subsidies, grants, forgone-taxes and zero-tariffs for power sectors.

Issued By
Sharan Raj
PSM Central Committee Member.

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