BASIC INFORMATION ON ELECTRICITY GENERATION, INDEPENDENT POWER PRODUCERS AND POWER PURCHASE AGREEMENTS

22 JUNE 2011

GENERAL QUESTIONS ON ELECTRICITY GENERATION

How is Electricity Generated? Conventionally, electricity is generated through a process of conversion of a primary source of energy like coal, natural gas, oil, hydro and other natural sources including nuclear, to electrical energy. There has also been ongoing development in the use of renewable energy, i.e. solar, biomass, biogas, geothermal and wind to generate electricity.

MOST COMM

SOURCE O

Renewab

What are the Fuels used for Electricity Generation in Peninsular Malaysia? Currently, the main fuels used for electricity generation in Peninsular Malaysia are natural gas (54.2%), coal (40.2%), hydro (5.2%), and oil (0.4%). Currently, energy supply from renewables is still at its infancy at less than 1% of total energy requirements. The Government is providing a number of incentives to accelerate the deployment of renewable energy technologies in the country

Diagram 1: Breakdown of main fuels used in generating electricity in Peninsular Malaysia

GENERATI - CONVERTI

What is the Current Installed Generation Capacity in Peninsular Malaysia? The total Current Installed Generation Capacity in Peninsular is 21,873MW. What is the Dependable Capacity? The load-carrying ability of a station or system under adverse conditions for a specified period of time. What is the Available Capacity? The maximum capacity that the generators can provide over a time. Available Capacity cannot be more than Dependable Capacity. What is the current Maximum Demand for electricity in Peninsular Malaysia? As the economy and population grow, the maximum demand will also increase in tandem with the increased consumption from customers. As of 9 May 2011, the Maximum Demand has reached 15,476MW. What is meant by Reserve Margin? Apart from meeting the system maximum demand, the system operator is also required to provide and secure a certain level of Reserve Margin in the system. Such Reserve Margin is to cater for plants being taken off for maintenance, sudden trip-outs of plants and transmission lines, or unexpected consumption pattern. The Reserve Margin is calculated as below: Installed Capacity Peak Demand Peak Demand x 100%

Installed Dependable Available

Based on the Peninsulars power system requirements, the recommended reserve margin is set at 25%. In a mature power system, where demand growth is small in relation to installed capacity, the reserve margin is typically set at a lower percentage.

GENERAL QUESTIONS ON INDEPENDENT POWER PRODUCERs (IPPs)

What is an Independent Power Producer (IPP)? An Independent Power Producer (IPP) is an entity, which owns and operates facilities to generate electric power for sale to utilities. Why are IPPs required in Malaysia? Malaysia experienced a rapid rise in economic development in the mid 1980s, and this led to a significant increase in the demand for electricity. Whilst LLN/TNB as the utility was obliged to meet this increase, the scenario then had stretched its capability. To meet the surge of rising demand, the Government took a bold step in the early 1990s by opening the generation sector to allow the private sector to assist in planting-up the required capacities. Five IPPs were awarded licenses to meet this increase in demand for electricity and they are known as the 1st Generation IPPs.
Diagram 2: GDP Growth & Electricity Demand Trend in Malaysia

Source: World Bank

Who are the power producers in Peninsular Malaysia? Currently, TNB contributes 53% (including their IPP plant, namely Janamanjung and Kapar Energy Venture) of capacity requirements whilst 47% comes from Independent Power Producers (IPPs) in Peninsular Malaysia. These plants have been installed over a period of 30 years and are based on different technologies. The power stations are spread over all regions in the Peninsular and connected to the national transmission system.

How many IPPs are licensed in Peninsular Malaysia? There are 14 IPPs in Peninsular Malaysia. The table below is a listing of IPPs that have been issued a license to develop and sell electricity to TNB under a Power Purchase Agreement. NO . IPP Licenced Capacity (MW) 1212 1303 762 440 440 650 334 720 640 350 2420 2100 2100 1400 PPA's Generati on 1st 1st 1st 1st 1st 2nd 2nd 2nd 2nd 2nd 2nd 3rd 3rd 3rd End of PPA (based on COD) 30th Sep 2015 30th Jun 2017 4th Dec 2015 13th Jan 2016 1st Jan 2016 30th Mar 2024 5th Aug 2020 27th Feb 2023 30th Dec 2022 19th Jun 2024 8th Jul 2029 31st Aug 2031 27th Sept 2031 31st Dec 2033 2nd Generati on = 5114 Total (MW) 1st Generati on = 4157

1 YTL Power 2 Segari Energy Ventures 3 Genting Sanyen Power 4 Powertek Berhad 5 Port Dickson Power 6 TTPC 7 Pahlawan Power 8 Panglima Power 9 GB3 10 Prai Power 11 Kapar Energy Ventures 12 Janamanjung 13 Tanjung Bin Power 14 Jimah Energy Ventures

3rd Generati on = 5600

What is so special about the 1st Generation IPPs? Being the first batch of IPPs, the risks were relatively unknown for the country as we were still low on the learning curve. Thus, the developers had to secure the best possible terms in the PPA to provide sufficient comfort for all stakeholders especially the financial institutions. The Government had recognised the fact that the IPPs were offered relatively favorable terms during the inception of the IPP program in the 1990s. But this was necessary to address the tremendous growth in demand for electricity in the early 1990s and to ensure sufficient and reliable supply of electricity in the country.

IPPs in Peninsular Malaysia and its Equity Holders

The table below lists out the current shareholders of the IPPs operating in Peninsular Malaysia: N O. 1 2 3 Licence d Capacit y (MW) 1212 1303 762 Percent age (%) 100 93.75 6.25 75 20 5 100 75 25 80 20 100 100 75 20 5 100 60 40 100 90 10 65 20 10 5

IPP YTL Power Generation Segari Energy Ventures Genting Sanyen Power Powertek Berhad Port Dickson Power Teknologi Tenaga Perlis Consortium (TTPC) Pahlawan Power Panglima Power GB3

Shareholders YTL Power International Malakoff Corporation Berhad Employee's Provident Fund Genting Group Worldwide Holdings BG Overseas Holdings Limited Tanjong Energy Holdings Sdn Bhd Sime Darby Berhad Malakoff Corporation Berhad Jati Cakerawala Sdn Bhd Tenaga Nasional Berhad Powertek Berhad Powertek Berhad Malakoff Corporation Berhad Tenaga Nasional Berhad Employee's Provident Fund Malakoff Corporation Berhad Tenaga Nasional Berhad Malakoff Corporation Berhad Tenaga Nasional Berhad Malakoff Corporation Berhad Employee's Provident Fund Jimah Teknik Sdn. Bhd. Tenaga Nasional Berhad Jimah O&M Sdn. Bhd. Kerajaan Negeri Sembilan

4 5 6

440 440 650

7 8 9

334 720 640

10 11

Prai Power Kapar Energy Ventures Janamanjung Tanjung Bin Power Jimah Energy Ventures

350 2420

12 13 14

2100 2100 1400

Who are the participants and what are the components that are involved in the construction of a Power Plant The diagram below lists out the participants and components that are involved in the construction of a Power Plant.

PARTICIPA
How does an IPP sell power to Tenaga Nasional Bhd. (TNB)?

In Peninsular Malaysia, all IPPs sell power to TNB via a Power Purchase Agreement (PPA) which is contracted over a fixed tenure depending on the economic life of the plant invested by the owner.

O&M Contractor

GENERAL QUESTIONS ON POWER PURCHASE AGREEMENT (PPA)

What is a Power Purchase Agreement (PPA)? A Power Purchase Agreement or PPA is a commercial arrangement between the IPP and the power purchaser or off-taker. It outlines the following parameters: and Commercial terms for ensuring the availability of the plant and capacity; Technical parameters for the due performance of the plant.

What is typical contract duration for a PPA? The typical contract duration for a PPA is: 21 years for gas-based power plant; and 25 years for coal-fired power plant

Why do IPPs need PPAs? A PPA is a principal document which contains all the necessary information such as the technical and financial parameters required for the development, procurement, financing, fuel supply, and operations and maintenance of plants developed by IPP. It also allocates all the risks associated with the project and is a document which is required by lending institutions to support the financing of the project. How are IPPs being paid? IPPs are paid via 2 components stipulated under the PPA, i.e., the fixed payment and the variable payment. The fixed payment contractually known as Capacity Payment in (RM/kW/Month) enables the IPPs to service the loans and pay for the cost of project development, and other fixed costs to run and maintain the plant. An allowable level of returns to shareholders is also included in this component. The variable payment known as Energy Payment covers the fuel cost incurred to generate the electricity based on demand as well as consumable expenses estimated over the running hours. Variable payment is paid based on actual energy units dispatched. Some PPA tariff follows a Take-or-Pay regime, whereby the IPP offers a minimum take level of energy yearly to the power purchaser at a fixed price. What are the improvements that have been made to PPAs? The 1st Generation PPAs were structured to meet the then prevailing market conditions and perceived risks. Over the years, there have been improvements made to the 2nd and 3rd Generation PPAs which have progressed to match risk sharing between IPPs, TNB, lending institutions and customers. The terms of the PPA have also been tightened and improved to reflect a more equitable distribution of risks to all stakeholders.

GENERAL QUESTIONS ON FUEL SUPPLY AND PAYMENT

Who are suppliers of fuel for power generation? Natural gas is supplied by PETRONAS at a price that is determined by the Government to ensure a stable and reasonable tariff to all consumers. The generators i.e TNB and IPPs do not enjoy any subsidy given by PETRONAS. Coal is procured from the international market and, for both IPPs and TNB plants, on term contracts as well as spot purchases. The supply is managed and coordinated by TNB Fuel Services Sdn. Bhd. (TNBFS) a wholly-owned subsidiary of TNB to match the projected energy requirements annually. Who pays for fuel to the fuel suppliers? Fuel is a pass-through component in the PPA. Hence it will be paid by TNB to IPPs based on contracted conversion rates at gazetted gas price by PETRONAS or indexed coal market prices by TNB Fuel Services Sdn. Bhd. (TNBFS). IPPs will pay the respective quantities of fuel consumed accordingly. Do IPPs benefit from low fuel prices? No, IPPs do not obtain any benefit from the low price of natural gas. The prevailing prices of fuel are always met by TNB first and any benefit as decided by the Government would be passed-through to the customers through tariffs that are regulated by the Government. If the price of fuel is raised, TNB will pay for the higher fuel and eventually, upon approval by the Government, electricity tariff is adjusted to reflect such increases.

Ministry of Energy, Green Technology and Water Malaysia. 22 June 2011.