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Saturday, 20 June 2015

TNB-1MDB: Shooting ourselves in the foot

These are the facts.

Bang! Ouch.

1) Among the 5 power plants whose Power Purchase Agreement (PPA) was renewed in 2012, 1MDB bid and received the lowest rate at 35.3 sen/kWh compared to 36.3sen/kWh for Segari and Tenaga Pasir Gudang's 37.4 sen/kWh.

2) 1MDB was the lowest technically qualified bidder when it won the Phase 3B IPP project at 25.33 sen/kWh (YTL was disqualified because its proposed solution was untested technically) - beating out TNB, YTL and others.

3) Even the 50MW Solar plant that 1MDB won had a rate of between 40 sen and 46 sen/kWh - which will make it the lowest price for any solar-generated electricity in Malaysia. At that time, the current Seda rate was 61.2 sen per kWh. Previous winners had rates of 90 sen/kWh to even over RM1 per kWh

4) 1MDB also bid the lowest for the Prai power plant in Aug 2012 at  34.6 sen/kWh compared to Tenaga's 34.7 sen/kWh and other bids of between 35.9 sen/kWh to sen/kWh. However, 1MDB lost this bid to Tenaga.

5) The base cost used to calculate electricity tariff (to consumers) in Malaysia is set at 38.52 sen/kWh. Any IPP able to pass a price lower than this base tariffs will results in savings that can be reflected in a negative Imbalanced Cost Pass Through (ICPT) - which then results in a lower electricity price. As at March 2015, the ICPT is at MINUS 2.25 sen/kWh.

Formula used to calculate electricity price to consumers in Malaysia
6) The reason why 1MDB could not list their IPP in May 2014 was the existing two power plants yields was less than 4% so it is not attractive for a listing. Why is these yield low? Because they bid lowest and accepted the lowest tariff rates renewal in Malaysia (point 1).

However, an extension to the PPA of all of 1MDB's Malaysia power plants would easily have allowed an increase in the valuation of the planned IPO and allowed the IPO to proceed quickly and successfully -  but Malaysia govt refused to do forcibly extend the IPPs owned by 1MDB at their pre-existing historical rates, something that the govt could easily have done and no one could question them.

A high yield for the energy assets at IPO would mean higher profits and higher valuation but at the detriment to energy cost to consumers. More money for 1MDB Energy = less money for Rakyat - this is a conflicted goal.

6) Since no extensions at good rates was allowed, what was then planned was that when Phase 3B is nearer to completion, 1MDB Energy will attract a higher valuation. However, due to extreme negative publicity and unwillingless of government to pump in any money into 1MDB to fund this Phase 3B project due to political pressure and the low tariff price that they bid for Phase 3B, 1MDB was unable to raise the RM8 billion necessary to proceed with the Phase 3B plant and consequently, the IPO.

7) Since Malaysia and TNB needs to ensure energy security and the delay to Phase 3B is a concern, TNB wanted to take over the Phase 3B plant.

This has been approved on a willing buyer willing seller basis recently in the Cabinet and revealed on Thursday 18th Jun.

TNB explained it was not a bail-out of 1MDB and said it had been offered a tariff rate of 26.67 sen/kWh instead - higher than the 25,33 sen/kWh given to 1MDB .

8) Consequently when this deal was announced, the knee-jerk reaction from the market on 18th June caused TNB's share price to fall.

“Foreign investors likely feared the association of this deal with 1MDB and sold without realising that this is, in fact, a greenfield power plant with good prospects." And a project that TNB had also bid for before. Thus negative publicity on 1MDB due to people unfamiliar with business has again hurt our interests.

The next day on Friday, when people got more rational, no longer melatah and thought "hmm.. hey, this appears to be a good deal for Tenaga", its share price staged a sharp recovery.

Tenaga share price: Sharp fall on Thursday, strong recovery on Friday

Say what you want but the above are all verifiable facts.

The end result is that soon, 1MDB will no longer be around to bid the lowest for all new power plant projects or renewal due to the unreasonable negative publicity on 1MDB .

The removal of an aggressive bidder in 1MDB who have always been bidding the lowest rate (this is undeniably a fact!) would relieve competitive pressure for future bidders - a situation that current IPP competitors would welcome! Any 1 sen/kwh higher tariffs for them would mean billions in additional profits for them over the course of their IPP concessions.

Make your own conclusions. It appears that Malaysians seem to like our IPPs charging a higher tariff and do not like lower electricity costs.

Which is why we keep sabotaging govt's attempts to restructure the IPP industry and unwind past mistakes.

Maybe shooting ourselves in the foot due to our lack of knowledge and our gullibility to be incited into hate by politicians has become the new national hobby for Malaysians?

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