TNB bogged down by fuel issue again

By YAP LENG KUEN lengkuen@thestar.com.my

Fuel cost has once again slammed Tenaga Nasional Bhd (TNB) when it announced its latest quarterly results which now begs the question what's next for the national utility? Posting a net loss of RM453.9mil for the fourth quarter, the red ink on the profit and loss statement of TNB had a lighter hue compared with the third quarter after stripping out the forex translation effect. However, the problem of continued shortage of natural gas, and expensive coal prices to a lesser extent, continues to plague the company.

Che Khalib: TNBs cash reserves are almost depleted. Theres less than RM1bil left.

At the rate the supply of gas is being choked, it will be no surprise if consumers of power in the country would have to pay a higher price for energy faster-than-anticipated to compensate for the burning of expensive oil and distillates to supplement the shortfall in gas supply. The reason for that scenario, and the problems affecting TNB, is that power production in Malaysia is heavily reliant on gas, which is a cheaper source of fuel. It costs 20 sen per kWh to generate power from gas and 30 sen per kWh from coal. In comparison, TNB spends five times more the price of gas to burn oil and distillates.

The net effect is that for its financial year (FY) ended Aug 31, 2011, TNB paid RM2.1bil more on additional fuel to generate power given the gas shortage. TNB's cash reserves are almost depleted, CEO Datuk Seri Che Khalib Mohd Noh tells StarBizWeek. There's less than RM1bil left. The problem As it stands, peak demand for electricity is 15,000MW per day and gas accounts for 60% of the fuel mix followed by coal (33%) and hydropower (7%). Due to shortage of supply, gas now makes up around 40% of the fuel mix while coal has risen to almost half or 7,000MW of the fuel mix. But resulting from maintenance works, that capacity from coal plants may not be always available. Based on its existing facilities and resources, Petroliam Nasional Bhd (Petronas) may not be able to bring back the committed volume of 1,250 million cubic feet per day (mmscfd) to the industry, unless it starts importing, says a source. It is said that Petronas was supplying only about 800 to 1,000 mmscfd. The import of liquefied natural gas (LNG) will be only be possible when Petronas' re-gasification plant is ready in July next year. Maybank Investment Bank (IB), in its recent note, estimates that the cost of imported LNG will be between British and Japan prices, which would likely be 1.8 to 2.2 times higher than the RM13.70/mmBtu that TNB currently pays to Petronas. The high cost of LNG is due to infrastructure logistics which can cost as much as US$2.60 to US$3/mmBtu, which is 57% to 66% of the current rate TNB pays for gas presently. While fuel supply for gas-fired plants remains an outstanding issue, some analysts regard spare capacity to be a potential problem by 2015.

Pricing issue If our power demand is to grow 4% to 5% per year, there will be no spare capacity by 2015, says a power analyst at Maybank IB. Noting the construction of two coal-fired plants with capacity of 1,000MW each, he adds: That is provided there is no delay (in the construction of these plants at Janamanjung and Tanjung Bin), then there will be some spare margin. As it is now, it looks like we are one step below a full-blown tragedy. According to Che Khalib, the current reserve margin is 35% (observers believe it could be 20% with maintenance works); however, the problem will not be so much of capacity as insufficient supply of gas. In resorting to coal for which usage can increase to 60% of the fuel mix, analysts caution that there should be long term planning for its supply. With more gas scheduled for import in the near future, the next question is who is going to pay for the higher prices? Can TNB absorb the difference? We are already paying RM400mil per month more to burn distillates, says Che Khalib. If it falls on the public to pay, a decision has to be made on how much to pass through. At the moment high level discussions are ongoing between TNB, Petronas, the Government and independent power producers (IPPs) on the gas shortage issue. LNG is potentially three times more expensive than piped gas, depending on the benchmark used.

Consumption of LNG will commence in FY 2013 and gradually increase with power demand growth. This will increase the aggregate fuel cost by about 4% per year, says Maybank IB. However, the research house expects TNB to offset some of this cost via higher utilisation rates that will lower unit cost from the fixed cost portion. According to Maybank IB, power tariff must increase by 1.4% to 1.7% per year from FY13 to FY15 to fully recover the cost increase from higher priced LNG exports. Against so much uncertainty, OSK Research director Chris Eng says: The best and first step forward should be the gradual removal of subsidies for the gas and electricity prices to help resolve the fuel shortage issue. This should be done via a fuel cost pass through formula. The issue is urgent. Given the subsidised prices of gas in the past, Petronas has not focused on investing in new offshore gas fields. We now face a critical scenario where gas supply is short. While the issue will be somewhat resolved by the new LNG plant in Malacca in mid-2012, Petronas has already indicated that the imported gas will be sold at market prices. Favoured option? As such, TNB will have to increase its tariff to be able to afford that gas economically, says Eng, adding that the Government must have the political will to allow for reasonable and gradual tariff hikes to reflect a fuel cost pass through. Once this is resolved, then the issue of future plant up emerges but the fuel issue is the most pressing, he adds.

To solve the problem of high gas cost, one option is to get TNB to unbundle and sell off its generating assets. Observers say this means there will be no power purchase agreement (PPA) as each generating assets will bid on an ad-hoc basis to the national load dispatch centre. The question is will investors buy into a company without a PPA? Due to the shortage of time, it appears that the most plausible option is to extend the lifespan of the first generation IPPs, says the analyst from Maybank IB. We are two years behind the curve, he says. All these alternative plans should have been finalised two years ago. The construction of two coal-fired plants is the right step forward but that, too, has been too slow. Moreover, it takes five years to plan for a new power plant from environmental impact assessment to commissioning, he says. But even within the 18-month long IPP negotiations, analysts view that they are asking for returns that are a bit on the high side.

The required equity internal rate of return (IRR) is said to be about 12% compared with the rate of over 15% that they are enjoying now. Analysts point out that countries like China and Bangladesh are paying less than 10% while their interest rates are between 10% and 12%. Malaysia has interest rates of below 4%, says an analyst. They should be able to survive with a lower IRR, of less than 10%. TNB is believed to be offering only 6%. Che Khalib thinks any decision on whether to extend or replace IPPs is a separate issue. If the price of fuel is so high, it makes more sense to plant new capacity with higher efficiency, he says. The Government is putting up competitive bids for new plants as a potentially cheaper alternative to IPPs whose chances of clinching the deals are still high, based on their availability of infrastructure such as site, track record and gas pipeline. Long-term plan There should be less fire fighting on immediate issues but more focus on a long term plan, say analysts. The plan should include construction of more coal-fired plants and re-gasification facilities while the nuclear option should still be explored. Going nuclear is still a viable means of bringing costs down but the political and social climate towards nuclear has waned following the problems in Japan. The main thing is to identify a company with the best track record for nuclear power production, says an analyst. To Che Khalib, there are three issues pricing, fuel security and pass through to consumers that need to be resolved prior to any plans regarding IPPs.

The Government should push Petronas to supply more gas so TNB can run on more gas and have a higher margin, says an observer, adding that efforts should be ongoing to obtain hydropower from the 2,400MW Bakun Dam. Sarawak Hidro, the owner and developer of the Bakun Dam project, sold power at 6.25 sen per kWh; with the submarine cable, undersea transmission may cost around 10 sen per kWh while the total landed tariff in Bentong (the converter sub-station in Peninsula Malaysia) is only 16.25 sen per kWh. This is still cheaper compared with the cost of producing electricity from gas and coal (20 and 30 sen per kWh respectively). Not all would agree to the Bakun option. We spent three to four years placing hope on the Bakun Dam project, and at the end of it, walked away with nothing, says an analyst. It is better to spend our energy on something that we can g