4,500 onstream by 2016
By Choong En Han [ THE STAR ONLINE], December 31, 2011

PETALING JAYA: While Tenaga Nasional Bhd (TNB) still faces an erratic gas supply problem, a silver lining may emerge with the coming onstream of 4,500 megawatts (MW) by 2016.

In fact, it might be boom years again for the power engineering business in the second half of 2012 and 2013, said OSK head of research Chris Eng.

“The replacement of the first generation power purchase agreements (PPAs) with new contracts should be positive in the longer term for both the independent power producers and TNB, although the impact would only be felt in 2016,” he said.

“With the gas price hike postponed and gas supply still erratic, we have cut TNB's earnings forecast in the short term. However, the new PPAs coming into force may lead to its capacity payment rates dipping in the long term,” he said.

“TNB is a clear-cut post election play as it will likely get to enjoy more tariff hikes and most importantly, a coal cost pass-through after the general election,” he said.

While the official reserve margin still stands at above 35%, the shortage of gas and the aging the power plants mean that the country's actual reserve margin is probably significantly lower.

“As the first generation PPAs expire from 2015 to 2017, it would be crucial to start the competitive bidding process now to ensure that the new plants are ready by 2016. Without these new plants, Malaysia's reserve margin is likely to drop to 10% by August 2017,” he said.

According to him, re-negotiation of the first generation PPAs had ground to a halt because TNB did not see the need to offer the first generation independent power producers (IPP) a discounted cash flow positive deal.

There is, therefore, some 4,105MW of first generation capacity expiring between 2015 to 2017. Even with the expansion of 1,000MW at Janamanjung and another 1,000MW at Tanjung Bin, the country is short of 2,105MW of power, not to mention the expected growth in electricity demand.

“With Bakun power in no way headed for Peninsular Malaysia, it would appear that we are on the cusp of a power plant building frenzy. This is reminiscent of 1993 when the first generation PPAs were first awarded and it was contracts aplenty for power engineers in Malaysia,'' he said.

While all five first generation IPPs had actually submitted proposals for renegotiation of their PPAs, Eng viewed that Genting Bhd and Sime Darby Bhd might be less interested this time around, given the cessation of talks and the invitation for fresh PPA bids.

“Genting has indicated that it is keen to sell its power assets and is left with only the 720MW Genting Sanyen CCGT in Malaysia while Sime Darby only owns the 440MW open cycle gas turbine (OCGT) peaking plant in Port Dickson.

“The more serious bidders are likely to be MMC (with an effective generation capacity of 5,020MW of 23% of the peninsular's generation, Tanjong (440MW via Powertek and 720MW from Panglima Power) and YTL Power (1,202MW in Paka and Pasir Gudang),” he said.

Overall, the industry is still faced with a shortage of gas supply but an erratic supply of gas had been flowing through the Bekok C bypass platform since September.

Eng noted that there were days when TNB received less than 1,000 million metric standard cubic feet per day. Factoring in these issues, TNB's earnings forecast has been pared down by 13% for 2012 and 4% for 2013 by the research house.

Meanwhile, Maybank Investment Research said there would still be challenges as gas supply was still low, which meant that TNB would still incur a hefty alternative fuel cost bill in the first quarter of 2012 for the supply shortfall.