PenjanabebasPenjanabebas

The role of Independent Power Producers The role of Independent Power Producers (IPPs) in Malaysia(IPPs) in Malaysia

Editor Briefing Editor Briefing -- 20062006

Programme

1. Penjanabebas Historical Perspective

The Penjanabebas Council

Our Members

Penjanabebas today

2. Power Purchase Agreements The structure of the PPAs

Different types of PPA

Fuel Supplies

IPPs Risk exposure

3. Contribution to socio-economic development

4. Future Challenges The reserve margin

Fuel price dynamics & maintaining low energy tariffs

Ensuring long term sustainability of Malaysias Independent Power Production sector

Penjanabebas Penjanabebas

Penjanabebas Formed in June 1995 Persatuan Nasional Penjanakuasa Bebas Malaysia or "Penjanabebas" in

short, is the Association of the Independent Power Producers (IPP) of Malaysia.

All member IPPs had effected contracts, Power Purchase Agreements (PPAs), with TenagaNasional Bhd. (TNB) for the sole purpose of funding, building, maintaining and operating their power stations.

The associations charter calls for the promotion of efficient, reliable and sustainable power-generation in Malaysia

The associations members meet often to exchange and share knowledge and experiences gained in the field and to further promote the development of the industry, conducting briefings on developments and emerging opportunities for members abroad, and as a central focal point to coordinate members corporate social responsibility programmes.

The terms of each of the individual PPAs are entirely exclusive and between the IPP and TNB. As such the Association is not in a position to discuss or negotiate matters relating to the PPAs on behalf of their members.

The Association does, however, coordinate on behalf of the member, discussions with the Energy Commission and TNB in relation to technical engineering standards employed in Malaysia and common issues faced by the members.

CouncilPenjanabebas Office Bearers for the 2006/2007

Panglima Power Sdn Bhd

Teknologi Tenaga Perlis Consortium Sdn Bhd

1. Mr. Ng Chee Wah

2. Mr. Ti Chee Liang

Honorary Auditors

Segari Energy Ventures Sdn Bhd

Jimah Energy Ventures Sdn Bhd

Port Dickson Power Berhad

Powertek Berhad

YTL Power Generation Sdn Bhd

Tanjung Bin Power

Kapar Energy Ventures Sdn Bhd

GB3 Sdn Bhd

1. En. Mohd Radzuan Yahya

2. YBhg. Dato Zulkifli Ibrahim

3. En. Yahya Yunus

4. Dr. Ong Peng Su

5. Mr. Woo Chee Yan

6. En. Azhari Sulaiman

7. En. Abdul Rahman Marhaban

8. En. Habib Husin

Council Members

Prai Power Sdn BhdEn. Ahmad Ali Honorary Treasurer

Pahlawan Power Sdn BhdEn. Mohd Wafa Abd RahmanHonorary Secretary

Individual Founding MemberEn. Ahmad Jauhari YahyaHonorary Vice

President

Genting Sanyen Power Sdn BhdDr. Philip TanHonorary President

Historical Perspective In 1992, following a nationwide power blackout, and a series interruptions and

rationing caused the government to conduct an immediate assessment of the nations power generation industry. As a result of rapid development of the national economy in the preceding years, it appeared the country was unable to cater for the parallel growth in demand for power.

To narrow this widening gap, and under its successful privatization agenda, the Government identified the Independent Power Producer (IPP) model, whereby the capital-intensive development of new generation assets could be outsourced to the private sector. This was to become the initiative that would deliver the immediate national power security needed to maintain GDP growth whilst not putting unnecessary pressure on Tenaga Nasional Berhad (TNB) resources.

The initial IPPs were awarded licences to pursue the IPP model under power purchase agreements (PPAs) that would span periods of up to 21 years and govern how the IPP would construct, purchase and/or use of fuel, operate and sell energy produced.

The terms also incorporate very large and real exposure to financial damages in the event that the IPPs fail to perform to their contractual obligations such as for the late delivery of the plants, inability to maintain operational performance standards as specified, inability to capacity declared and others. The ultimate possible penalty incorporated into the PPAs would also allow for their termination.

Our Members

The first five IPPs, often referred to as the 1st generation were awarded their licences for gas-fired power plants from April to December 1993, these IPPs include;

YTL Power Generation Sdn Bhd- Paka & Pasir Gudang Power Plants

Genting Sanyen Power Sdn Bhd- Kuala Langat Power Plant

Segari Energy Ventures Sdn Bhd- Lumut Power Plant

Powertek Bhd- Teluk Gong Power Station

Port Dickson Power Sdn Bhd- Port Dickson Power Plant

These companies invested over RM10 billion into these ventures, adding a combined generating capacity 4,105MW to the national system.

Our Members contd

Licenses for the second generation of IPPs were issued for gas-fried power plants from1998 to 2004.

The PPAs were granted on a two-tiered based payment mechanism, whereby after a pre-determined period the rates at which power was purchased from these companies would step down to a lower rate.

This change in PPA policy reflected the developing industry maturity and growing confidence in the sector by the government, regulators, investors and importantly, the financial community.

These IPPs include:

Teknologi Tenaga Perlis Consortium Sdn Bhd- Perlis Power Plant

Pahlawan Power Sdn Bhd- Tanjong Kling Power Station

Panglima Power Sdn Bhd- Telok Gong Power Station

GB3 Sdn Bhd- Lumut Power Plant

Prai Power Sdn Bhd- Prai Power Plant

Kapar Energy Ventures Sdn Bhd- Kapar Power Station

Our Members contd

1st Generation PPA 2nd Generation PPA

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The payment structure for the first two generations of PPA

One CRF throughout term of PPA

YTL- single energy pricing throughout the term of the PPA

Scheduled and forced outages are lumped together as one measurement for monitoring purposes

Two-tier CRF (except for TTPC)

Forced and scheduled outages are monitored separately

Our Members contd

Third generation licensees were awarded to private coal-fired power plants.

These PPAs further reflect the growing national confidence that had developed in the industry and also the shift in the national energy policy to move the country away from the dependence on a key industrial resource, gas.

The PPA for the private plants maintained the two tiered structure of the second generation, but significantly vary in they adopted a degree of demand risk sharing of up to 15%.

These PPAs were awarded to:

Tanjung Bin Sdn Bhd- Tanjung Bin Power Plant

Jimah Energy Ventures Sdn Bhd- Jimah Power Plant

PPAs incorporating a Demand Risk Sharing mechanism:

85% of CRF is payable subject to the usual performance guarantee;

balance 15% is subject to Maximum Demand Capacity (MDC)

MDC is determined by taking the highest dispatched capacity in any

30-minute interval on a given day

80% 90%

0.850

1.000

1.025

100%

CRF Factor based on Weekday Dispatch Profile

MDC

Full

CRF

Guaranteed

CRF

Bonus CRF

0%

Our Members contd

Our Members contd

First Generation: YTL, SEV, GSP, PDP,

Powertek

One CRF throughout term of PPA

YTL- energy only, take or pay basis

Scheduled and forced outages are lumped together as one measurement for monitoring purposes

Second Generation: Pahlawan, TTPC, Panglima, GB3,

Prai Power

Two-tier CRF (except for TTPC)

Forced and scheduled outages are monitored separately

Third Generation: Tg Bin & Jimah

3rd generation has Demand Risk Sharing 15% of CRF is payable on dispatch

Our Members contd

IPPs in Sabah & Sarawak

IPPs awarded to licences outside the Peninsular are not typically examined in the same manner as those discussed above.

In these PPAs, the contracting parties in the agreements would comprise the respective IPP and Sabah Electricity Sdn Bhd (SESB), a subsidiary of TenagaNasional Berhad or Sarawak Electricity Supply Corporation (SESCO).

Members operating outside the Peninsular include:

ARL Tenaga Sdn Bhd- Melawa Power Plant

Ranhill Power Sdn Bhd- Ranhill Power Plant

Penjanabebas Today

Since formation, Penjanabebas membership has grown and now stands at 16 IPPs with a combined generation capacity of over 12,000 MW, which represents investments of over RM42 billion in the industry.

Last year, our members generated approximately 60% of the power consumed in the peninsular.

Through the Electricity Supply Industry Trust Fund, our members have participated in the countrys rural electrification programme by contributing 1% of annual electricity sales (less fuels costs) to the fund.

To date, our members have provided scholarships to more than 180 scholarships to students pursuing technical studies in local universities such as Uniten.

Our members operate power generating and desalinisation facilities in over nine countries and have expanded their scope to also include operations of the electricity grid in southern Australia and water facilities in the UK.

Penjanabebas Today

Simple cycle plant76 MWNanjing Coastal Xingang Cogen Power Plant

Simple cycle plant42 MWWuxi Huada Gas Turbine Electric Company

CCGT109 MWSuzhou Coastal Cogeneration Power Plant

Thermal plant724 MWFujian Pacific Electric Company LimitedChina

CCGT113 MWABAN Power Company Ltd

CCGT368 MWLanco Kondapalli Power Pte Ltd IndiaGenting Sanyen Power

Dhofar Power Company SAOGOman

Desalination plant200,000 m3/dayAlgeria

Crude oil power plant and desalination plant900 MW/194 MIGDShoaiba Phase 3 Independent Water and Power ProjectSaudi ArabiaMalakoff

Thermal coal plant1220 MWPT Jawa PowerIndonesia

Regional water and sewage Wessex Water LimitedEngland

Transmission line ElectraNet Pty LimitedSouth AustraliaYTL Power

Thermal plant682.5 MWSuez GulfSuez Gulf, Egypt

Thermal plant682.5 MWPort SaidPort Said, Egypt

Thermal&CCGT and desalination plant969 MW/68 MIGDTaweeelah B (extension)Abu Dhabi, UAE

Thermal&CCGT and desalination plant1069 MW/92 MIGDTaweeelah B (existing)Abu Dhabi, UAEPowertek

Co-generation170 MWLaem ChabangThailandPD Power

Type of plantCapacityPlant NameCountryIPP company

The Power Purchase Agreements The Power Purchase Agreements

IPP Contractual StructuresIPP Contractual Structures

Power Purchase Agreement (PPA)

A PPA is a contract between TNB (Purchaser) and an IPP (Seller).

They commence with the awarding of an IPP license, TNB enters into a PPA with the licensee.

These long term agreements encompass the construction of a power plant, the financial obligations this will entail, fuel supply to the IPP, operational requirements, maintenance of the facility, the dispatch of electricity and the rates of payment for electricity generated.

All three generations of power purchase agreements have been drafted to ensure that all commercial, operational and performance risks are borne solely by the IPP.

These risks are explored further later in the presentation, however, they include but are not limited to changes in foreign exchange rates, interest or financing rates.

Subsidiary agreements flowing from the PPAs therefore include:

Financial Agreements

Designing & construction of the power plant - EPC

Operation & Maintenance Agreement O&M

Fuel Supply Agreement

IPP

Shareholders

TNB

EPC

Contractor

Operator

Financial

Institutions

Fuel Supplier

Shareholders

Agreement

Power Purchase

Agreement

EPC

Contract

Operation &

Maintenance

Agreement

Financing

Agreement

Fuel Supply

Agreement

Power Purchase Agreement (PPA)

Structures of PPAs

There are two types of structures in PPAs used in Malaysia today.

Take or Pay, where seller and buyer are contractually bound to supply and to purchase a fixed amount of energy (kWh) over a specified period of time.

As with the other form of PPA, the IPP is still bound to ensure performance of

the facility to high standards of efficiency, whilst exposing the IPP to very high

penalty payments for any failure in performance.

Capacity & Energy Charges, where the buyer purchase a fixed quantum of capacity at a pre-determined performance standard. The actual quantum of

energy dispatched is dictated by the buyer and market demand.

This forms the most common structure applied to Penjanabebas members.

In these agreements energy sale and purchase of electricity are further

divided into categories:

- Capacity (MW) capacity payment

- Energy (kWh) energy payment

Structures of PPAs

1. CAPACITY PAYMENT

Capacity Rate

Financial

Fixed Operating

Rate

2. ENERGY PAYMENT

Fuel Variable Operating

Rate

Capacity Payment This entails payments to the IPPs at rates determined during the PPA negotiation to

enable to IPP to meet financial obligations and payments for Fixed Operating Expenses.

An analogy representing this part of agreement could be described as a leasing

agreement for the facility or a vehicle.

Energy Payment This would entail the operational cost and expenses of operating a facility and for the

fuel consumed by the plants in generating electricity.

The same analogy here would apply to the fuel, spare parts and maintenance of the

vehicle.

Fuel SuppliesFuel costs represent a major cost centre in our members operations. Fuel supplies, gas or coal are supplied directly to Penjanabebas members by TNB Fuel Supplies for coal, or for gas supplies allocated through TNB from Petronas. Supplies are provided on the internationally standard pass-through basis for the production of electricity.

In the Malaysian IPP model, fuel pricing under the pass through had originally been calculated through a pegging mechanism where the price was pegged to the price of oil.

In September 1997, however, due to increasing international oil pricing, the Government took the decision to fix the gas supply price at RM 6.40/million British Thermal Units (MMBTU), to limit the potential destabilising effects on national electricity pricing.

Under the PPA model, all IPPs are contractually obligated to perform to international efficiency and availability standards, referred to as Heat Rate and Availability Guarantees. Failure to fulfill these standards will affect the commercial viability of the IPP.

Our members PPA fuel supply agreements carry a with TNB carry a pass-through provision relating to fuel costs.

Fuel Supplies contd

Theoretically, under this pass through mechanism, IPPs transfer the fuel cost

component to TNB who then passes it down to the end users via tariff adjustment.

As such, the IPPs derive no commercial benefit from the gas pricing as set by

Petronas and the government.

As depicted in the energy value chain, it is noteworthy that in essence, Petronas

(and the government) subsidise the power sector (not Tenaga or IPPs) to ensure low

electricity tariffs.

IPPsPETRONAS TNB

Energy

Conversion

Electricity

ConsumerTariff

Single Supplier PASS-THROUGH COST

Gas

CoalTNB Fuel Supplies

Fuel Supplies contd

Currently the national energy mix is predominately fuelled by gas, 70.2%

of the national energy mix is gas based, coal accounts for 23.3%

The Government in the Ninth Malaysia plan has declared that by 2010,

coal utilisation in the nations energy mix should account for 36.5%.

Amongst our members, Tanjung Bin, Malaysias first private coal fired

plant and upon completion, Jimah Power station, will be responding to

this call and adding 3,600MW of capacity.

The coal supplies to these facilities are secured from TNB Fuel Supplies

only, and at no time are these or other IPPs able to secure supplies

directly from international markets.

IPPs Risk Exposure

1.Delays in construction and commissioning of facility.

Increase in interest charges arising from a delay

Liquidated damages for failure to deliver on schedule:

Tg Bins exposure is RM300,000/day of delay.

Kuala Langat Power Plant exposure was RM500,000/day of delay.

2.Changes in foreign exchange rates:

During the construction phase

Throughout the life-span of the facility

3.Changes in interest rates:

During the construction phase

Throughout the life-span of the facility

The four major sources of risk exposure common to all our members

include:

IPPs Risk Exposure contd

Capacity Payment/Year (%)

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

90.0%

100.0%

0102030405060708090100

Availability (%)

R

M

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y

e

a

r

4. Failure to meet one of initial the IPPs PPA availability performance conditions.

Capacity Payment vs Availability

Contribution to SocioContribution to Socio--economic economic

developmentdevelopment

Contributions of IPPs

Through participation in the Malaysian IPP programme, some of the benefits our members have contributed include:

1. The improved availability and efficiency of the Malaysian power generation sector whilst shielding TNB from burdening their balance sheet.

2. Providing investment opportunities for private investors to participate in the many supporting sectors of the Malaysian and international power generation industry.

3. Driving the evolution of the local financial institutions, particularly in the lending, bond and insurance markets. Bonds issued by our members are currently valued at over RM20 billion.

4. Through EPFs investments in our member companies, we continue to contribute positively to the pensions of the nation.

5. Through the introduction of new benchmarks and standards to the industry, thus establishing world standard operating parameters for the development of power plants and project financing.

Future ChallengesFuture Challenges

Future Challenges

1. Reserve Margin

2. Fuel price dynamics and maintaining low energy tariffs

3. Ensuring the long term sustainability of Malaysias independent power

production sector

Reserve MarginMedia reports on the national reserve margin

Total plant capacity at system (SC)

Total load available to system

Load connected to grid system

Peak Demand (PD)

Spinning Reserve (SR)

Reserve Margin

EXAMPLE ONLY FOR 24 HOURS PERIOD

Reserve margin (%) = SC PDPD

Spinning reserve (%) = SRAt peak demand PD

Spinning reserve (%) = Spinning reserve at time tAt time t Maximum demand at time t

Base demand (BD)

Base to Peak (%) = BDPD

x 100%

x 100%

X 100%

x 100%

System Load

Factor (%)

24

MW dt x 100Peak demand x 24

=

Load connected at time x

Spinning reserve at time t

Maximum demand at time t

12 6 12 6 12

Fuel Prices & Maintaining Low Tariffs

$5.00

$5.50

$6.00

$6.50

$7.00

$7.50

$8.00

$8.50

1995

1996

1997

1998

2006

Gas price for fuel supplied to IPPs 1995 today.

Fuel Prices & Maintaining Low Tariffs

23.2725.4 26.2

29.7 30.4931.31

35.9

42.51

50.29

65.93

0

10

20

30

40

50

60

70

Indonesia Taiwan Malaysia Thailand Korea China Singapore Hong Kong Phillippines Japan

sen/kWh

Regional overall tariff comparison

Ensuring long term sustainability of Malaysias

Independent Power Production Sector

TNB Revenue vs IPP Contracted

Capacity Payment

2,646 2,800 2,7873,285 3,965

4,254 4,280 4,7665,735

6,703 6,704 6,715 6,718 6,719 6,721

40,467

13,719 14,36315,375

16,45817,712

18,978

20,926

22,973

25,121

27,377

29,746

32,234

34,845

37,588

-

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014Year

RM million

Capacity Payment

TNB Revenue

Revenue Forecast at 5%pa beginning 2006 Post tariff increase

Capacity Payment (est.)Tg BinJimah

Pahlawan

GB3Panglima

PraiTTPC

Ensuring long term sustainability of Malaysias

Independent Power Production Sector

Penjanabebas, the association of 16 independent power producers,continues to discuss ways and means of accommodating the changing needs of the country in order to create an efficient and reliable industry to ensure sustainable energy supply.

Our role is to coordinate the views and position of the individual IPPs with the government with regards to the various Power Purchase Agreements. This includes discussions from time to time with theEnergy Commission and other stakeholders in exploring win-win solutions for all.

Thank youThank you