Letters

Privatization and regulation in TWh. Malaysia’s coal reserves are about 977 million ton-
nes.
Malaysia’s power sector The installed capacity for electricity generation in-
creased at an average annual rate of 9.2% in the 1980s,
Francis Xavier Jacob mainly in the form of oil- and natural gas-powered plants.
The average annual growth rate in consumption during
Electricity Regulation Division, Department of Electricity this period was 9.1%. The industrial sector accounted for
Supply, 19th floor, Menara Haw Par, Jalan Sultan Ismail, a major share of the growth, and in 1990 it was also the
5068 Kuala Lumpur, Malaysia major consumer (46%), followed by the commercial
(31%) and residential (20%) sectors respectively. As a re-
1. Overview of the power sector sult of government emphasis on rural electrification pro-
Malaysia has considerable energy resources, in the form grammes, over 82% of households had access to
of oil, natural gas, hydroelectric potential and coal. It has electricity by 1990.
about 4.4 billion barrels of recoverable reserves of oil. Of Electricity supply in Malaysia is currently being under-
the 1.92 trillion standard m3 of natural gas discovered in taken by the Tenaga Nasional Berhad (TNB) in peninsular
Malaysia, 325 billion standard m3 is associated gas. The Malaysia, the Sabah Electricity Board (SEB) in the state
hydroelectric potential in the country is estimated to be of Sabah and the Sarawak Electricity Supply Corporation
about 29,000 MW with an annual energy output of 123 (SESCO) in the state of Sarawak. TNB, which used to be

Figure 1. Malaysia: network of Tenaga Nasional Berhad (TNB).

80 Energy for Sustainable Development l Volume III No. 6 l March 1997

 Letters

a wholly government-owned public utility, was incorpo- economy is targeted to grow at 7% per annum in the dec-
rated in 1990 as a private company with the Government ade of OPP2. In view of the targets set under Vision 2020,
of Malaysia owning over 70% of its equity. All three utilities it is important to ensure that energy does not become a
carry out generation, transmission and distribution of elec- constraint for growth and that this sector develops on a
tricity in their operating areas. least-cost basis.
In May 1995, TNB had an installed capacity of about Recognising this importance of the availability of en-
7,400 MW, which is supplemented with about 2,000 MW ergy at economically acceptable cost and in sufficient
of capacity from independent power producers (IPPs) to quantity, three key objectives constitute the framework for
meet a maximum demand of about 5,900 MW (see Figure present and future programmes in the energy sector:
1). In its financial year ending on August 31, 1994, TNB 1. a supply objective, to provide adequate and secure en-
generated 33.984 TWh of electrical energy of which about ergy supplies;
42% was from natural gas, 30% from oil, 13% from coal 2. a utilisation objective, to promote efficient energy util-
and 15% from hydro. TNB currently serves about 3.53 isation and to discourage non-productive and wasteful
million consumers (3.0815 million domestic; 429,800 patterns of energy consumption; and
commercial; 11,400 industrial; 11,200 public lighting; and 3. an environmental objective, to ensure that, in achiev-
100 mining). ing the previous two objectives, the environment is
At the beginning of 1994, SESCO had an installed ca- not neglected.
pacity of 524 MW for a maximum demand of about 245 The four-fuel policy identifies four main fuels: oil, gas,
MW. In 1993, it generated about 1,456 GWh of energy hydro, and coal. The strategy is to cut down on the use
of which 56% was from natural gas, 29% from hydro and of oil and to promote the use of non-oil indigenous re-
15% from oil. SESCO currently serves about 211,700 sources such as gas, hydro, and coal. In this respect, the
consumers (177,100 domestic; 32,300 commercial; 500 1990s will mark the nation’s entry into an era of greater
industrial; and 1,800 public lighting). utilisation of natural gas. Apart from being the least-cost
At the beginning of 1994, SEB’s installed capacity was option for power generation expansion in the medium
454 MW and catered for a maximum demand of about term, its development will be the basis for downstream
280 MW. In the 1,540 GWh of energy generated in 1993, activities in energy-related industries to provide an added
the mix of sources was 49% oil, 26% hydro and 25% catalyst to accelerate industrial growth.
natural gas. It currently serves about 192,700 customers On the utilisation side, demand management policies
(161,300 domestic; 27,500 commercial; 3,100 industrial; will focus on promoting efficiency in energy use. Appro-
and 800 public lighting). priate measures will be introduced to eliminate waste.
At present, the tariff structure for TNB, SEB and These include incentive tariff schemes and the promotion
SESCO ranges from about RM 0.07 to RM 0.46 (1 Ma- of efficient end-use equipment and appliances. Efforts are
laysian ringgit or RM1 = US$ 0.39), with off-peak indus- being made to ensure effective and well-coordinated en-
trial use being charged the lowest rate and public lighting forcement of environmental protection programmes, apart
the highest. Electricity tariff for sale of energy by the from the mandatory requirement of conducting environ-
utility to the public has to be approved by the government. mental impact assessments (EIAs) for all energy projects.
The mechanisms for tariff adjustment for Tenaga Nasional Pricing policies will be directed at ensuring that energy
Berhad have been put in place on the basis of the formula prices reflect the economic cost or true cost of supply,
CPI - M + Y + K that they raise revenues for the sector’s development and
where CPI is the consumer price index, M is a factor that the sector remains competitive while making greater
which takes into account the inefficiency of operation of use of indigenous energy resources. With regard to elec-
the utility and its capital investment needs, Y is the fuel tricity pricing, the availability of electricity in adequate
cost pass-through and the factors to take into account the quantity and quality and at reasonable prices is necessary
purchase of energy from IPPs and K is a correction factor for the promotion of industrial development. Towards this
to take into account forecasting errors. The formula has end, efforts will be made to ensure stability in electricity
been operationalised since September 1993 and in the first tariffs at acceptable and internationally competitive levels.
and second reviews of the electricity tariff, reductions of At the same time, the needs of power utilities to generate
3.3% and 5% were made. The tariff is to be reviewed sufficient revenues for future development plans will be
every 3 months, to take into account regularly the changes taken into account.
in fuel prices. This tariff mechanism has made prices of 2.1. Growth forecast
electricity more transparent and predictable. Electricity demand projections for the future are pervaded
by uncertainty and a variety of scenarios, making it dif-
2. Perspective planning ficult for decision-makers to prepare concrete plans. The
The Malaysian Vision 2020 envisages a doubling of its challenge is to incorporate these complexities into strate-
economy every ten years for the next three decades. The gic developments without causing inaction to result. The
Second Outline Perspective Plan 1991-2000 (OPP2), also power sector, as is widely recognised, forms part of and
known as the National Development Policy (NDP), will interacts with a more complex system that includes eco-
set the pace for Malaysia to become a fully developed nomic, demographic, financial and environmental ele-
nation by the year 2020 in all respects. The Malaysian ments. Population growth, resource endowments, energy

Energy for Sustainable Development l Volume III No. 6 l March 1997 81

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Table 1. Projections of maximum demand (MW) for Peninsular Malaysia, Sabah and Sarawak

Annual demand in MW

Scenario 1990 1995 2000 2010 2020

(a) Low growth (business as usual)

Peninsular Malaysia 3477 6444 9912 19087 26796

Sabah 199 352 521 1109 2206

Sarawak 194 357 547 1100 2231

(b) Moderate growth (business as usual)

Peninsular Malaysia 3447 6444 9930 19388 31511

Sabah 199 352 522 1126 2594

Sarawak 194 357 548 1117 2623

(c) Moderate growth (energy efficient)

Peninsular Malaysia 3447 6130 8937 15513 25191

Sabah 199 335 470 901 2073

Sarawak 194 339 494 894 2097

(d) Targeted growth (energy efficient)

Peninsular Malaysia 3447 6332 9726 18705 34760

Sabah 199 346 512 1087 2861

Sarawak 194 350 537 1078 2894

prices, terms of trade, etc., are among the parameters the load is forecast with the economy projected to
which affect this system directly or indirectly through grow at 7% per annum over the OPP2 period. This is
other systems. the growth necessary to enable the target of eight-fold
Electricity requirements are also affected if energy ef- increase in GDP to be achieved.
ficiency measures are adopted. Thus, two scenarios are A population growth from 18 million in 1990 to 34.7 mil-
possible. lion in 2020 is assumed. The medium- and targeted-
1. A business-as-usual (BAU) case without any serious growth scenarios are assumed to lead to a three-fold and
attempts to make the system energy-efficient four-fold increase in per capita income respectively. The
2. An energy-efficient (EE) case with greater emphasis demand projections for the various scenarios are shown
on energy efficiency improvements. Energy efficiency in Table 1.
gains are assumed to reach 5% in 1995, 10% in 2000 2.2. Financial requirements
and 20% in 2010 and thereafter. Based on the electricity requirements as shown in Table
For the purpose of this paper, the electricity requirements 1, the financial requirements to provide for the generation,
are considered for four scenarios. transmission, and distribution capacities and other expen-
1. A low-growth, BAU scenario. Here the load is forecast diture are as shown in Table 2 for the targeted-growth
with the economy projected to grow at 5.3% per an- energy-efficient scenario[1].
num over the three decades to 2020.
2. A moderate-growth, BAU scenario. Here the load is 3. Privatization policy
forecast with the economy projected to grow at a rate With a view to finding new sources to finance the expan-
of 6% per annum over the same period. This is the sion of the energy sector that would be required even un-
projection given in the Sixth Malaysia Plan and the der the energy-efficient scenario, the Government of
Outline Perspective Plan 2 (OPP2). The share of Malaysia has commissioned a number of studies on power
manufacturing in the gross domestic product (GDP) sector privatization. Peninsular Power carried out a study
will increase from 27% in 1990 to about 37% in 2000. on privatization of the National Electricity Board. Sub-
Manufacturing exports are projected to account for sequently, Price Waterhouse Associates was hired to study
about 81% of the value of total exports in 2000 from and develop and operationalize the regulatory framework
60.4% in 1990, while agricultural exports will decline for the electricity supply industry in Malaysia. British Co-
to 6% from 10% in the same period. lumbia Hydro then conducted a study to identify how
3. A moderate-growth scenario again but with energy ef- competition in the electricity supply industry in Malaysia
ficiency measures in place. is to be further pursued. All these indicate serious com-
4. A targeted-growth, energy-efficiency scenario. Here mitment on the part of the government to ensure carefully

82 Energy for Sustainable Development l Volume III No. 6 l March 1997

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Table 2. Financial requirements for targeted-growth energy-efficient scenario projects

Period 1991-1995 1996-2000 2001-2010 2010-2020

New capacity required (MW)

Peninsular Malaysia 3578 4577 11155 19067

Sabah 288 274 174 0

Sarawak 242 382 2120 6776

Total 4108 5233 13449 25843

Financial requirements (billion $)

Generation expenditure 7.19 10.47 33.62 77.53

Transmission expenditure 3.59 5.23 16.81 38.76

Distribution expenditure 2.88 4.19 13.45 31.01

Other expenditure 0.72 1.05 3.36 7.75

Total expenditure 14.38 20.93 67.25 155.06

designed and smoothly implemented steps towards priva- amounted to over RM 10 ($3.9) billion by the end of
tization of the power sector. 1994.
In September 1990, the Government of Malaysia Privatization will promote competition and sub-
enacted the Electricity Supply Act and, with this, started sequently improve efficiency and productivity in the elec-
a chain of events towards privatization of the electricity tricity sector. The improved efficiency is expected in the
supply industry in Malaysia. First, the National Electricity economic, financial and technical fields and the consum-
Board was corporatized as Tenaga Nasional Berhad, or ers can expect to receive better and improved services at
TNB. The corporatized utility was then privatized in Feb- reasonable prices. Privatization will also stimulate private
ruary 1992 with the Government of Malaysia owning entrepreneurship and investment. This will accelerate the
about 73%. rate of growth of the economy consistent with Malaysia’s
In February 1991, the government released the Privati- Vision 2020 in which the government envisages the pri-
zation Masterplan which details, among other issues, the vate sector to be the prime engine for growth. The objec-
privatization of ‘‘new projects’’. These ‘‘new projects’’ are tives of the New Economic Policy (NEP) are also
projects which traditionally have been developed by the expected to be met through privatization. This policy, now
public sector and include electricity supply projects. Ac- replaced by the National Development Policy (NDP), has
cording to the Sixth Malaysia Plan (1991-1995), ‘‘... pri- the objective, besides others, of the creation of a local
vate sector participation will be promoted to encourage commercial and industrial community.
competition in the (power) sector. Towards this end, the 3.2. Regulatory framework
concept of build-operate-transfer, particularly in power The privatization of the electricity industry places an es-
generation, will provide avenues for private sector par- sential service in the hands of the private sector. Regula-
ticipation.’’ tory mechanisms are thus necessary and are already in
To follow through on its promise, the government de- place. The Electricity Supply Act 1990 provides the leg-
cided to introduce competition in the generation field by islative framework for the regulation. Two important regu-
inviting IPPs to build, own and operate generation plants. lations made under this Act are:
The IPPs that have been licensed so far are in the form 1. Licensee Supply Regulations 1990, and
of locally-led consortiums having foreign members, the 2. Electricity Regulations 1994.
ratio of local and foreign shares being generally about In addition, the Malaysian Grid Code is being introduced
75:25. By 1997, the power generated by IPPs will be over as a set of comprehensive technical and operational re-
4000 MW and will account for about over 30% of total quirements for all plants connected to the national grid
generation. At present, IPPs are expected to sell their en- to ensure:
ergy only to the utilities, which will continue their tradi- 1. safe, secure, reliable and economic electricity supply
tional role of generation, transmission and distribution. system, and
3.1. Objectives of privatization 2. access to it of all users without discrimination.
The Government has several objectives in privatising the The licence terms and conditions also forms part of the
electricity supply industry in Malaysia. The main objec- regulatory framework.
tive is to relieve the government of the administrative and
financial burden of providing electrical power for the 4. The process of becoming an IPP
country. This will release more funds for other socio-eco- The following is a brief account of the actual approval
nomic projects. In fact, with the already licensed IPPs, process for IPPs under the new arrangements. Potential
power generation investment by the private sector interested parties should first forward their proposals to

Energy for Sustainable Development l Volume III No. 6 l March 1997 83

 Letters

the government through the Economic Planning Unit CP=DC × (CRF + FOR) × F × (AF/AT)
(EPU). Once the government gives its approval, the can- where
didate IPP will negotiate the fuel purchase agreement and CP = Capacity payment in ringgit for such capacity bill-
the power purchase agreement with the relevant parties. ing period
Upon successful conclusion of these two agreements, a DC = Average of the dependable capacity (net) of the fa-
licence will be issued by the Director General of Elec- cility for such capacity billing period in kilowatts
tricity Supply after being approved by the Minister of En- weighted by the number of hours attributed to each
ergy, Telecommunication and Posts. The licence is period of differing dependable capacity of the fa-
normally for a period of 21 years. All the IPPs to date cility in such capacity billing period
have agreements based on the build, operate and own CRF =Capacity rate financial for such capacity billing pe-
(BOO) model. riod in RM/kW/month.
4.1. Players involved in approval process FOR =Fixed operating rate for such capacity billing pe-
Apart from the Department of Electricity Supply and the riod in RM/kW/month. This will be adjusted every
Ministry of Energy, Telecommunications and Posts, under 4 years by an adjustment factor based, among other
which the former operates, the Economic Planning Unit things, on the consumer price index for Peninsular
of the Prime Minister’s Department, the Treasury and the Malaysia.
Department of Environment are also involved in the ap- F = The factor set at 1.0 if AF is greater than or equal
proval process of IPPs. Of the five major IPPs at present, to 80%, at 0.95 if AF is greater than or equal to
only the project of Segari Power Sdn Bhd has foreign 65% but less than 80%, at 0.9 if AF is greater than
participation. Here Asea Brown Boveri Holdings Sdn Bhd or equal to 50% but less than 65% and at AF/AT
has 25% equity in the project. At present there are no tax if AF is less than 50%.
breaks or concessions given to the IPPs. AF = For each capacity billing period, AF equals the
Some of the other players involved in IPPs include: arithmetic average of the monthly equivalent avail-
l project contractors; ability factor for the previous 12 capacity billing
l plant equipment suppliers; periods (including such capacity billing period),
l fuel suppliers (for most of the IPPs, Petronas supplies expressed as a percentage.
the natural gas); AT = The availability target set (1) at 87% if AF is less
l operating and maintenance contractors; than 87%, and (2) equal to AF for values of AF
l operating and maintenance spares suppliers; equal to or greater than 87%, except that, for each
l financiers and those who arrange the financing capacity billing period for which AF is greater than
packages; 94%, the availability target is set at 93% if (a) the
l insurers; monthly equivalent availability factor for each of
l providers of freight services; and the previous six capacity billing periods is also
l legal and technical consultants. greater than 94%, and (b) for each such capacity
4.2. Power purchase agreement (PPA) billing period and the previous six capacity billing
The following are the salient features of the PPA between periods, DCU for each unit is not less than 92.7%
TNB and one of the IPPs. of the plant nameplate capacity, and (c) such ca-
l Sale and purchase obligations pacity billing period is occurring at least 12 months
Sale and purchase of electric energy: The IPP shall de- after the commercial operations date for the unit.
liver and TNB shall purchase and accept the net electrical As used herein, ‘‘DCU’’ means, for each unit, the
output from each unit as such unit is dispatched by the average of the dependable capacity of such unit for
Control Centre. such capacity billing period in kilowatts weighted
Sale and purchase of generating capacity: The IPP shall by the number of hours attributed to each period
make available and TNB shall pay for the dependable ca- of differing dependable capacity of such unit in
pacity of each unit up to but not exceeding the site rating such capacity billing period.
of the unit. 4.4. Energy payments
During system emergencies the IPP shall, at TNB’s re- This will be done in accordance with the following for-
quest and subject to provisions of the Grid Code, make mula
all reasonable efforts to provide electric energy or gener- EP = (E × H × NEO) / 1,000,000 + VOR × NEO + S
ating capacity above the dependable capacity of each unit where
then in effect and shall, at TNB’s request, make all rea- EP = Energy payment in ringgit
sonable efforts to delay any relevant scheduled outages, E = Weighted average cost of fuel (in RM/MMBTU)
maintenance outages and major outages. This should be paid by the IPP under the fuel supply contracts and
done consistent with design limits and prudent utility used at the facility during such energy billing pe-
practices. riod, calculated by dividing the aggregate amount
l Purchase price and other charges (in RM) paid by the IPP for such fuel by the ag-
4.3. Capacity payment gregate MMBTU of such fuel. For purposes of the
This will be done in accordance with the following for- preceding sentence, ‘‘fuel’’ means (1) during any
mula: distillate period occurring (a) prior to the start-up

84 Energy for Sustainable Development l Volume III No. 6 l March 1997

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date and (b) after natural gas is first available to l Interconnection

the facility, distillate fuel oil, and (2) at any other l Metering
time (whether natural gas or alternative fuel is l Representation and warranties
being used), natural gas. The IPP shall provide l Taxes; fines
TNB with a written statement showing the method l Insurance
of calculation thereof, together with supporting l Force majeure event
documentation, including copies of all statements l Default and termination
under the fuel supply contracts, within three days l Indemnification and liability
after the end of each energy billing period. If any l Dispute resolution
alternative fuel is consumed by the facility at any 4.5. Risk factors
time during such energy billing period when natu- The PPA requires the following of the IPP.
ral gas is available, such alternative fuel shall, for 1. The IPP shall have provided to TNB evidence dem-
purposes of calculating E, be deemed to be natural onstrating that the IPP has obtained all applicable gov-
gas consumed in a quantity having (1) the same ernmental authorizations, including the IPP licence,
BTU content as the BTU content of the alternative other than (1) any governmental authorizations that
fuel actually consumed and (2) a price (in could not materially affect the ability of the IPP to
RM/MMBTU) equal to the average price for natu- perform its obligations under this agreement, the fuel
ral gas under the fuel supply contracts for such supply contracts or the EPC contracts, or (2) any such
energy billing period. other governmental authorizations that (a) are not nec-
H = Assumed net heat rate (in BTU/kWh) set at 12,108 essary for the IPP to commence generation of electric
BTU/kWh based on (1) higher calorific value of energy from the facility and (b) the IPP could not rea-
natural gas at assumed conditions, and (2) the rele- sonably be expected to have obtained prior to the in-
vant unit operating at a continuous load of 100% itial operations date given the practice and procedures
of the net generating capacity of such unit available of the relevant governmental entities issuing such re-
for dispatch by TNB. For purposes of calculating spective governmental authorizations.
the energy payment for any energy billing period, 2. Each of the fuel supply contracts shall have been exe-
such net heat rate shall be adjusted (in accordance cuted and delivered by each of the respective parties
with the heat rate adjustment table set forth in thereto, and the form and substance of each provision
given exhibit) to reflect any dispatch by TNB at thereof which could reasonably be expected to have a
part load operations (determined as a percentage material effect on the ability of the IPP to perform its
of the net generating capacity of the relevant unit obligations, or the rights of TNB, under this agreement
available for dispatch by TNB) during such energy shall be reasonably satisfactory to TNB.
billing period. 3. The interconnection facilities shall have been de-
NEO = Net electrical output (in kWh) of all units for such signed, engineered, manufactured, supplied, con-
energy billing period. structed, installed, tested and commissioned in
VOR = Variable operating rate for such energy billing pe- accordance with the requirements of this agreement
riod in sen/kWh. This will be adjusted every 4 and prudent utility practices and shall be able to op-
years by an adjustment factor based, among other erate safely with the TNB system.
things, on the producer price index for Peninsular 4. The fuel facilities shall have been designed, engi-
Malaysia. neered, constructed and installed, tested and commis-
S = The quotient obtained from dividing (1) the prod- sioned in accordance with the requirements of this
uct of (a) the number of start-ups requested by agreement and prudent utility practices to enable the
TNB during such billing period (excluding any ad- facility to receive, replenish and utilize supplies of dis-
ditional start-ups caused by the IPP or the facility, tillate fuel oil under the fuel supply contracts in quan-
e.g., tripping or outage of the facility, or failure of tities sufficient to permit the facility to operate
the facility to start up after a start-up request by continuously at full load dispatch.
TNB), (b) 15.4 MMBTU/start-up, and (c) E (as de- 5. The IPP shall have provided to TNB a certificate from
termined above) by (2) 1,000,000. the independent engineer stating that the facility has
l Compensation, billing and payment been designed and constructed in accordance with pru-
l Liquidated damages and maintenance reserve dent utility practices, the design drawings submitted
l Pre-operation period to TNB.
l Operation and maintenance The above provisions thus reflect the responsibilities
-- Operation and maintenance of facility and the risks borne by the IPP in terms of the offtake,
-- Dependable capacity; testing of capacity rating completion, operation, fuel, transport, environment
-- Schedule and despatch of generation and other laws or regulations which may affect its
-- Schedule outages, major overhaul outages and main- operations. However, the IPP can transfer some of
tenance outages these risks to the parties with whom it enters into
-- Access to facility and site contracts for these requirements. For example, it can
-- Operation committee transfer the risk completion and start-up dates to the

Energy for Sustainable Development l Volume III No. 6 l March 1997 85

 Letters

project contractor, the fuel risks to the fuel supplier, etc. Notwithstanding the foregoing, in case of any such
For risks it has to bear itself, it may mitigate the risks by adjustments to the fixed operating rate and the variable
takinginsurances. operating rate (if applicable) to reflect any such
4.6. Insurance increase in costs or decrease in revenues of the IPP,
The PPA requires the IPP to have coverage for the fol- (1) such adjustments shall not be made until after the
lowing: receipt by TNB of the written approval of the Depart-
l comprehensive general liability or third party liability ment of Electricity Supply of (a) the amount of such
insurance; increase in costs or decrease in revenues of the IPP,
l workers’ comprehensive insurance; and (b) such adjustments to the fixed operating rate
l comprehensive automobile liability or motor vehicle and the variable operating rate (if applicable) so de-
liability insurance; termined by the parties.
l contractor’s all risks insurance and boiler and 4.8. Finance
machinery insurance; and The private power projects are generally financed through
l excess umbrella liability of excess layer liability single financing. The financial structure involves debt of
insurance. the private power projects with part of it as a bond issue
4.7. Future laws at a fixed interest rate and the remaining as floating rate
The PPA has a change-in-law adjustment clause as fol- loan facility. The equity continues to be owned by the
lows: IPPs, who bear the entire development expense them-
1. If there is a change-in-law which requires the IPP to selves. At 4000 MW, the 5 private power projects consti-
make capital improvements or other modifications to tute the largest exercise anywhere in Asia. It is also
the facility in order to comply with any law, the IPP Malaysia’s largest debt financial package at a total of
shall submit to TNB a certificate setting forth in detail RM10 ($3.9) billion. All this is financed locally, relieving
reasonably satisfactory to TNB the actual costs of such the 5 IPPs of foreign exchange risks.
capital improvements and the calculations for such 4.9. Market for the power produced
amount. The IPP and TNB shall determine, in good Only one of the IPPs has a minimum take-or-pay provi-
faith, any necessary adjustments to the capacity rate sion. The rest of the IPPs will sell their energy as des-
financial to reflect such costs. After the receipt by patched by the National Load Despatch Centre. Recently
TNB of the written approval of the Department of one of the IPPs has expressed interest in selling electricity
Electricity Supply of (1) the amount of such costs and to Singapore and a potential IPP has expressed interest in
(2) such adjustments to the capacity rate financial, the selling electricity to Thailand.
capacity rate financial shall be adjusted in the manner 4.10. Policies and laws on energy and environment
so approved by the Department of Electricity Supply. The Environmental Quality Act 1974 provides the legis-
2. If there is a change-in-law (other than in respect of lative framework for regulation and policies with regard
taxes) which the IPP or TNB believes in good faith to the environment. The following are some of the sec-
will (1) increase the costs or decrease the revenues of tions of the Act that will have an effect on electric power
the IPP in connection with the operation or mainte- plants.
nance of the facility, or other conditions affecting the Section 21: Power to specify conditions of discharge
performance by the IPP of its obligations under this Section 22: Restrictions on pollution of the atmosphere
agreement or affecting the timing of the incurring of Section 23: Restrictions on noise pollution
such costs or the receipt of such revenues, or (2) de- Section 24: Restrictions on pollution of the soil
crease the costs or increase the revenues of the IPP in Section 25: Restrictions on pollution in inland waters
connection with the operation or maintenance of the Section 27: Prohibition of discharge of oil into Malay-
facility, then the IPP (in case of such increase in costs sian waters
or decrease in revenues) or TNB (in case of such de- Section 32: Need to maintain and operate equipment
crease in costs or increase in revenues) shall (a) de- Section 34A: Report on impact on environment resulting
termine the amount of such increase or decrease in from prescribed activities
costs or revenues, (b) submit to the other party a cer- One of the conditions in the PPA is for the IPP to obtain
tificate setting forth in detail reasonably satisfactory all government authorizations. Thus, only after the EIA
to such party the basis of and the calculations for such has been approved by the Department of Environment
amount, and (c) jointly with the other party, determine will the licence to operate the power plant be given by
the applicable adjustments to the fixed operating rate the Department of Electricity Supply. As such, it can be
and the variable operating rate to reflect such increases assumed that the IPP will meet the requirement of the
or decreases in costs or revenues with the intent that environmental laws and regulations and the conditions
the financial position of the IPP shall remain unaf- imposed by the Department of Environment.
fected by such change-in-law. Each party shall in good
faith cooperate with the other party in connection with 5. The impact of privatization in the electricity
such determinations. The fixed operating rate and the supply industry
variable operating rate (if applicable) shall be adjusted The privatization of TNB has been successful. The
in the manner so determined jointly by the parties. Government of Malaysia is now less burdened with

86 Energy for Sustainable Development l Volume III No. 6 l March 1997

 Letters

capital-intensive generation programmes to ensure the well as the consumers.

country’s economic development. By 1997 Malaysia will
have a comfortable margin in generation capacity of 30% 6. Salient issues in promotion and
as planned and this will ensure security and availability implementation of IPPs
of supply. Various challenges have to be faced as the privatization
The response of the private sector to this privatization of the Malaysian electricity supply industry is being un-
programme of the government has been very encouraging. dertaken. First of all there are very few examples or mod-
This can be seen from the fact that more than 100 pro- els to follow. The advantages and disadvantages of the
posals have been received from potential IPPs. The various models of privatization have to be studied care-
knowledge and expertise in the electricity sector is be- fully and suitably modified to apply in this country. In
coming more widespread now. Whereas previously this this respect, the introduction of IPPs is actually more an
was concentrated in the 3 utilities, it has at present spread exercise in financial engineering than anything else. Each
out to other parties. Apart from IPPs, consultants, banks, project needs to be analysed carefully in terms of whether
legal firms, different government agencies and consumers it can be financed, long before it can be implemented and
are now becoming increasingly aware of the varied issues operated. While the entire debt funding of the existing
involved in the electricity sector. For consumers, the IPP projects worth 4000 MW was raised locally, over the
awareness has resulted in their being more critical and next 30 years about 30,000 MW of capacity is needed.
demanding with respect to services provided to them. This To implement such a huge programme, capital invest-
is evident from the increasing number of complaints re- ments of the order of RM 100 ($39.2) billion are required.
ceived by the Department of Electricity Supply on matters The question is not only the affordability of finance, but
which they had passively endured earlier. While this puts also the availability of the funds. The scramble for scarce
pressure on the utilities, it certainly pushes them to up- funds has, in fact, become a global issue and is likely to
grade their services. become a major challenge for the electricity industry.
The breaking-up of the monopolistic situation in the The regulatory framework and the various regulations
industry and the ensuing competition has motivated those and codes have to be set up to ensure that the various
involved in the industry to improve themselves. TNB it- parties involved in the industry work in harmony with
self has been forced to improve its performance. One such each other and in an efficient and reliable manner. The
example is the establishment of a list of performance in- major portion of this framework is already in place and
dicators, thus setting a minimum level of performance the various other regulations and the Grid Code are being
customers can expect of them. This list includes, besides formulated.
other things, the maximum time-period for connection of The sourcing of the fuel necessary for the power sector
new and disconnected supplies, for responding to com- is another challenge by itself. While oil has traditionally
plaints, the minimum period of notice for planned out- played a major role in this respect, natural gas is increas-
ages, and the method of collecting deposits. Confidence ingly playing a more prominent role. Newer and better
is being generated that this will result in a better and more technologies in the use of natural gas for generation are
efficient industry as a whole. available. Notwithstanding this, the fuel diversification
Industry in general is becoming more efficient and the policy has to be maintained and achieved to improve the
business of electricity provision, in particular, more trans- security of energy availability and to reduce the vulner-
parent. This is evident in the way factories having cogen- ability of depending on only one fuel source or a group
eration potential are now beginning to avail themselves of fuel sources. In this respect, the Government of Ma-
of that facility. Where formerly they would just have to laysia fully realizes the limits to the availability of gas in
purchase all their electrical energy requirements from the future. With this, other sources such as hydro and coal
TNB and discard waste fuel and/or waste heat, they are may play greater roles in the electricity sector beyond the
now considering seriously the economics of cogeneration. year 2000.
Also, whereas earlier, decisions were taken without rea-
sons being made public, the electricity supply industry is 7. Some salient features of recent developments
becoming far more proactive. Thus, the utility now pro- Installed capacity in 1997 had reached 11,646 MW, while
vides details of how connection charges are calculated, so generation in the same year was 36,156 GWh. About 14
that the consumers know what they are paying for. independent power producers had been issued licences for
The utility has responded to the situation well by com- generation by mid-1998.
ing up with better and more services. Besides the intro-
duction of incentive schemes for users related to Suggestions for further reading
demand-side management, TNB has now started advising Environmental Quality Act 1974 (and regulations made under it)
consumers on how to improve the efficiency of their elec- Power purchase agreements of IPPs
trical equipment and to cut losses. This benefits TNB as Proposed Malaysian Electricity Masterplan (draft)

Energy for Sustainable Development l Volume III No. 6 l March 1997 87

 Letters

Appendix 1
Highlights of IPP deals

Sl. Name of IPP YTL Power Sikap Energy Genting Sanyen Powertek Sdn Bhd Port Dickson
No. Generation Sdn Ventures Sdn Bhd (M) Sdn Bhd Power Sdn Bhd
Bhd

1. Site Paka, Terengganu, Lumit, Perak Kuala Langat, Alor Gajah, Melaka Tanjung Gemuk,
Pasir Gudang, Selangor Port Dickson
Johor

2. Capacity 808 MW 1303 MW 720 MW 440 MW 440 MW

404 MW

3. Type of plant 2 Combined cycle Combined cycle Combined cycle Open cycle 4×110 Open cycle 4×110
block MW MW

4. Project cost RM 3.6 ($1.4) RM 3.6 ($1.4) RM 1.0 ($0.4) RM 719 ($282) RM 685 ($269)
billion billion billion million million

5. Licence issued 7 April 1993 15 July 1993 10 June 1993 1 December 1993 1 December 1993

6. Energy purchase 31 March 1993 16 October 1993 6 January 1994 10 December 1993 10 December 1993
agreement with TNB

7. Gas purchase agreement 15 March 1993 17 July 1993 Not signed yet Not signed yet Not signed yet
with Petronas

8. Technical consultants Tenaga Ewbank SWEC Zainal Sdn Lahmeyer KTA Tenaga Sdn Black & Veatch
Preece Bhd International Bhd International of
Missouri, USA

9. Finance Employees Malayan Banking Malayan Banking Malayan Banking Malayan Banking
Provident Fund, Bhd, Bhd Bhd Bhd
Bank Bumiputra Bank Bumiputra
Malaysia Bhd Malaysia Bhd

10. Commercial operating 31 December 1994 1 July 1996 31 December 1994 15 January 1995 15 January 1995
date1st generating unit

Last generating unit 1 July 1997 1 July 1997 31 December 1995 1 May 1995 1 May 1995

11. Shareholders YTL Corporation Sikap Power Syarikat Genting Cergas Unggul Sime Darby
Bhd Sdn.Bhd 75% Bhd. Sdn.Bhd35% Bhd.40%
Asea Brown Boveri Arab Malaysia Malaysian
Holdings Dev.Bhd 30% Resources
Sdn.Bhd. 25% Yayasan Melaka Corp.Bhd. 30%
20% Hypergantic
Dato’Dr,Mokhzani Sdn.Bhd.20%
Abdul Rahim 8% Tenaga Nasional
Lim Ewe Jin 7% Bhd.10%

Notes
1. These costs (in current terms) are calculated on the basis of the following assumptions:
Generation costs=$1.75 million per MW for period 1991-1995
=$2.00 million per MW for period 1996-2000
=$2.50 million per MW for period 2001-2010
=$3.00 million per MW for period 2011-2020
Transmission costs=50% of generation costs
Distribution costs=40% of generation costs
Other costs (e.g., equipment cost)=10% of generation costs

88 Energy for Sustainable Development l Volume III No. 6 l March 1997