Subsidies masking IPP ‘inefficiencies’, says think tank

By Lee Wei Lian

Malaysian Insider, 13 June 2011

Without subsidies, IPPs would need to charge more than what Singapore consumers now paid for power. — Reuters pic

KUALA LUMPUR, June 13 — Independent Power Producers (IPPs) would have to charge much more than their Singapore counterparts if natural gas were sold to them at market rates, due to their bloated and inefficient cost structures, claimed Research for Social Advancement (Refsa) today.

The think tank estimated that local IPPs would need to raise their average prices from 25 sen/kWh to 74 sen/kWh if subsidies were removed and gas prices were allowed to rise from RM10.70/mmBTU to the present market price of RM47.42/mmBTU.

In comparison, Singapore power producers charge 41 sen/kWh.

“Put simply, if the gas subsidy in Malaysia is completely removed, the IPPs generation cost would be 80 per cent higher than that of power generators in Singapore,” said Refsa executive director Teh Chi Chang, noting that in Singapore fuel prices are market based.

“In fact, the IPPs would not be able to survive in Singapore at all, because Singaporeans pay only 52 sen/kWh for their electricity, compared to the (estimated) Malaysian IPPs cost of 74 sen/kWh.”
He added that the IPP’s cost structure appeared to be “bloated” and suffering from “substantial inefficiencies”.

Refsa’s estimates come following statements from the Association of Independent Power Producers (Penjanabebas) that savings in gas costs — the difference between international gas prices and fixed price set by the government — are passed on directly to consumers through lower tariffs.

Teh also called for the IPP contracts to be made public, pointing out that even toll concession agreements that were previously classified have been made public, following which several toll freezes and abolishments were announced.

IPPs and their perceived lopsided purchasing power agreements with Tenaga Nasional Berhad have come under renewed scrutiny following the recent government’s decision to hike electricity prices.

The Najib administration yesterday formed a Cabinet committee comprising Minister in the Prime Minister’s Department Tan Sri Nor Mohd Yakcop; Energy, Green Technology and Water Minister Datuk Seri Peter Chin; and Second Finance Minister Datuk Seri Ahmad Husni Hanadzlah to look into IPP related issues.