THE DYNAMICS OF THE

ELECTRICITY SUPPLY INDUSTRY (ESI)

A PUBLIC LECTURE BY

TAN SRI LEO MOGGIE

AT THE INAUGURAL DISTINGUISHED SPEAKERS’ PROGRAMME

BY THE ENERGY MARKET AUTHORITY OF SINGAPORE

29TH APRIL 2011

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Ms Chan,

Distinguished Guests, Ladies and Gentlemen,

Introduction

1. It is a pleasure to be in Singapore again. But first, I would like to

thank the organizers, the Energy Market Authority of Singapore

(EMA), for inviting me to speak in this inaugural Distinguished

Speakers’ Programme. I appreciate this privilege of sharing my

thoughts on the dynamics of the Electricity Supply Industry (ESI), with

respect to the countries of ASEAN and within the context of current

developments and realities. My comments are made in my personal

capacity as someone who has been involved in the industry for many

years, not as Chairman of Tenaga Nasional Berhad.

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2. With regard to issues of energy, we are all aware of global

concerns with carbon emission and climate change, and the

significant role of the mitigating steps the energy industry can take.

That aside, there has been a great deal going on around the world

lately which are worthy of our attention because of their profound

impact on the dynamics of the energy and electricity supply industry

today – the floods in Australia earlier this year, the on-going instability

in the Middle East and North Africa, the triple earthquake / tsunami /

nuclear tragedy in Japan.

3. It will be some years yet before the world fully recovers from the

effects of these events. But, among the important lessons learned is

the reality of how globally and economically connected we have

become and how profoundly vulnerable the industry is to the vagaries

of nature and the multiple crosscurrents in the global economics. And

as an immediate reaction, these events will lend to some adjustments

in the way the electricity industry carries on with its business.

Ladies and Gentlemen,

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Dynamics of the ESI

4. The Electricity Supply Industry (ESI) of ASEAN, which serves

as the backdrop of what I am discussing today, faces multi-

dimensional challenges in fulfilling its responsibility to deliver

reasonable, affordable and reliable electricity supply to consumers

and in support of national development objectives of the respective

countries. These include depleting indigenous energy resources,

high demand growth in the electricity sectors, huge investments that

are needed, increasing and volatile fuel prices, vocal public demands

on the issues of environment at a time when customers’ expectation

are also increasingly sophisticated. On the part of the utilities, this

calls for prudent management and planning to be put in place, which

involves finding a balance between project development and its

associated risks, and exploring alternative supply options and

technologies.

5. The utilities will have to manage a delicate balance among the

primary elements which drives and determines the dynamics of the

industry, namely Energy Supply Security, Competitive Costs, Green

Energy and Environmental Sustainability and the assurance of

Safety.

6. For example, Green Energy goals of reducing the level of

carbon emission and mitigating climate change are much desired.

However, the cost of available technology for Green Energy today is

still very high and therefore not cost efficient. And also current

technology on renewable energy is still not dependable in terms of

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security and stability of supply. It is almost necessary to have a

replicate generation capacity for base-load supply.

7. Similarly, industrialization policy that encourages the setting up

of heavy industries runs contrary to the objective of reducing carbon

emissions, as it is also contrary to the objective of encouraging

efficient use of energy. The question is should high-energy

consuming industries, which are likely to be highly polluting be

allowed to be set up? Those tasked with framing a country’s industrial

policy cannot ignore the impact such a policy will have on the

country’s energy supply.

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Ladies and Gentlemen,

Energy Supply Security

8. Since power plants require fuel to generate electricity, obviously

fuel supply security is critical to ensuring the ability of a power utility

to fulfill its responsibility of delivering safe, secure and reliable

electricity to its consumers.

9. Generally, the ASEAN countries are or may seem to be in a

comfortable position with regard to the current position of supply

security. The majority of the countries of ASEAN utilize natural gas as

the main source of electricity generation. Currently, for example,

Brunei, Malaysia, Thailand and Singapore are largely dependent on

natural gas for power generation. Natural gas is relatively abundant

within the ASEAN region, with proven reserves of about 4% of global

reserves.

10. In the North ASEAN region encompassing the Mekong Basin,

in particular Lao PDR (People’s Democratic Republic) Myanmar and

Vietnam, power generation is mostly derived from hydropower.

11. Even though presently the role of renewable energy is still very

small, renewable energy is already part of the generation mix, for

example geothermal for both Indonesia and the Philippines, biomass

and geothermal in Thailand and biomass in Malaysia.

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12. This level of comfort in energy supply security is however

compromised, even in the short term, by the rising trend in energy

prices that we are seeing now. What is clear is that there will be

increased challenges in ensuring supply security in the longer term.

Fuel supply security within the region revolves primarily around three

fossil fuels, i.e. oil, natural gas and coal. Brunei, Indonesia, Malaysia

and Vietnam are countries in the region with oil reserves at 1.1, 4.4,

5.5 and 4.5 thousand million barrels respectively. These reserves are

however finite and fast depleting due to the high regional demand, as

well as increasing demand for export revenue.

13. It is the same for gas. ASEAN countries have a proven reserve

of 4% of global reserves, and accounts for about 6.6% of the world’s

production. We are already seeing some strains in gas supply. In

Malaysia, for example, the development of natural gas is also further

hampered in that it involves smaller fields containing CO2 and the

increase in exploration and production costs.

14. In the case of coal, while the Asia Pacific region is reported to

have the second largest proven reserves in the world, after Europe

and Eurasia, most of the coal within the region is found in Indonesia,

though there are some smaller quantities in Thailand, Vietnam and

Malaysia (Sarawak).

15. At the same time, Asia Pacific is also the largest consumer of

coal. In addition, most of the coal produced and consumed within the

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region is of lower calorific value coal or lignite used at mine-mouth

coal plants within the region.

Ladies and Gentlemen,

16. The response adopted by individual countries in ASEAN to

mitigate the risk of supply security is very much influenced by

available resources. Most adopt a general policy of fuel

diversification. There is however some focus on a dominant particular

fuel choice, especially where such a resource is obtainable

domestically.

17. For instance, Brunei’s energy supply is relatively secure.

Brunei has an abundant domestic natural gas supply and gas will

continue to be dominant in its generation mix. Even so, Brunei is

examining the possible sourcing of future long term capacity from

Sarawak’s hydro power projects to complement its gas-based plants.

18. Meanwhile, Indonesia’s current high economic growth also

means high demand growth for power. In order to meet this demand,

Indonesia is focusing on fast track projects of coal-fired plants and

reinforcing its transmission network, including grid interconnection

projects for energy transmission from coal-fired plants to load centres

and grid connections between its main islands. The Philippines is

diversifying its generation fuel mix. So does Thailand, which has

formulated quite a comprehensive fuel diversification strategy,

ranging from Renewable Energy (RE) sources and fossil fuels,

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augmented by its hydro imports from neighboring countries.

Singapore will continue to be highly dependent on gas powered

plants, and in order to manage its supply security, Singapore will

diversify its sourcing of gas and is investing in infrastructure for LNG

imports.

19. For Peninsular Malaysia, where 40% of generation mix is from

coal, which is primarily sourced from Indonesia, Australia and South

Africa, the risk of fuel supply is a real challenge to Tenaga Nasional.

In an effort to manage the increased risks in fuel security and, in

particular the worrying prospect of having too much coal in the

generation mix, Malaysia is also investing in infrastructure for LNG

imports as an alternative for gas from domestic supply. In Malaysia’s

diversification policy, natural gas will continue to be one of the major

fuels for base-loan electricity generation. The first LNG import facility

is under development in Malacca and is expected to be ready in

August 2012

20. Malaysia also has a large hydro potential of approximately

28,000 MW in Malaysia’s State of Sarawak. The actual capacity that

can be developed is likely to be much less, but still substantial. As

may be recalled, the original plan for the development of the 2400

MW Bakun hydro project in Sarawak, was for part of the power to be

transmitted via submarine HVDC cable to Peninsular Malaysia.

Power from Bakun is now totally reserved for use in Sarawak.

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21. The development of major hydro power has its own challenges,

which requires proper planning of the future livelihood of affected

local communities in a comprehensive way. The implementation of

hydro power projects has to be part of extending the development

process encompassing the economic future and welfare of the

communities that are affected. As long as such issues are properly

addressed, the prospect of transferring hydro power capacity from

Sarawak should be revived, particularly as there will be serious

concerns on the development of nuclear power post Fukushima.

22. As can be appreciated, the investments that will be needed in

the future to meet the demand for power infrastructure in the region

are huge. According to some industry experts, ASEAN, with 601

million in population and current total generation capacity of about

130,000 MW, will require more than USD 100 million in investments

in the next 10 – 15 years (ACE & IEEJ, 2006) to meet its rapidly

growing electricity demand, which is at an average of 3.8% per

annum until 2030.

23. Let me also comment on the role of nuclear power generation

in ASEAN. A number of countries in the region have made some

early preparations to include nuclear power in their respective

generation mix. Vietnam is perhaps more advanced in its preparation

to build its nuclear power plant, as compared to other countries in

ASEAN.

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24. However, what happened in Fukushima Daichii, Japan is likely

to raise new concerns on the future of nuclear power. Those in the

nuclear industry continue to be convinced of the technical safety of

modern nuclear reactors with their stringent safety features. They will

point out that the Fukushima reactor is outdated and was in fact

expected to be decommissioned soon. Also the main argument

supporting the use of nuclear power is because it is seen to be the

only viable technology that will address the issue of global warming

and climate change. Then came the March 11th tragedy. The

supporters of nuclear power will also point out that as a result of

Fukushima, there will be more stringent regulatory rules and design

criteria are going to be further tightened. The challenge, post

Fukushima, however, is not strictly technical but one of public

acceptance. With all the images of the Fukushima nuclear plant

meltdown fresh in their minds, together with footage of what

happened in Chernobyl as Ukraine commemorated the 25th

Anniversary of the tragedy three days ago, it is unlikely that, at least

in the short term, public opinion can be persuaded to support the use

of nuclear power. For a number of countries in ASEAN that have

factored in the use of nuclear as part of its generation mix,

Fukushima meant these plans will need to be revisited. It will also

encourage pressure of public opinion for governments and utilities

worldwide to focus more on the development of renewable energy

and green energy technologies.

Cost Competitiveness

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25. As to Cost Competitiveness, we know that electricity pricing

policy varies from country to country, depending on a number of

considerations, such as fuel price subsidy, availability of indigenous

resources, economic multiplier and the country’s generation mix.

Electricity tariffs in Singapore and the Philippines, for example, are

based on full market price of fuels and, therefore, are higher

compared to tariffs in other countries in ASEAN. In cases where the

electricity supply industry is still government-controlled, even if by

proxy, and where there are some moderate natural resources per

capita, elements of subsidies are often embedded in pricing. This

results in relatively lower tariffs in countries such as Indonesia,

Malaysia and Thailand. For countries which are rich in natural

resources for their electricity generation, the consumers are able to

enjoy relatively cheaper tariffs, since fuel inputs are predominantly

domestically-based – e.g. natural gas for Brunei and hydropower for

Lao PDR (People’s Democratic Republic).

26. Price volatility is an accepted feature of fossil fuels. As we

know, prices of natural gas and coal often move in tandem with prices

of crude oil. This presents a great challenge where spikes in oil

prices occur, typically during events of crisis such as the current

political instability in several North African and Middle East countries.

As is expected, the main fossil fuel (gas, coal) prices used for the

power sector in ASEAN are directly linked to and move in tandem

with the movement of international oil prices. This is now

compounded by increased coal generation due to the reduction in

electricity from nuclear plants in Japan and Europe, particularly

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Germany, as a result of Fukushima. Demand for coal from Japan

and Germany have increased, putting pressure on coal prices

worldwide.

Ladies and Gentlemen,

27. It has often been commented that micro managing of the

activities of the power supply industry by government will result in

inefficiency. From the industry’s perspective, utilities should be free to

manage their own operations. In an ideal electricity supply industry

environment, government intervention in the operation of the industry

should be avoided. However, we are living in a world where,

according to the International Energy Agency (IEA), around 1.5 billion

people still have no access to electricity. Of relevance to us in this

room is the fact that 10% of them reside in the ASEAN region.

28. There is a real disconnect between the uses of electricity in

advanced economies and the population in the less developed areas.

There are areas where companies can come in, supply electricity and

do a perfectly viable business, such as in Singapore. There are also

areas where proactive intervention and subsidies are necessary to

promote increase in the rate of electrification.

29. We also need to remind ourselves that electricity is essential for

socio-economic development and that access to it is a basic need for

the general population. So, whilst many of us talk about advanced

issues on the electricity supply industry such as market liberalization,

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renewable energy and new technologies like Smart Grid and Carbon

Capture and Storage (CCS), the basic need to supply electricity

remains an issue in many parts of the world, including parts of the

ASEAN region. It is in cases such as these that government

intervention is necessary to ensure that electricity supply can be

delivered to all at affordable prices.

30. Energy pricing can be a complicated issue. For example, one

aspect which countries that produce resources (oil, gas, coal) are

constantly engaged in is to determine the optimum prices of the

indigenous fuel resources for domestic use, as opposed to

maximizing revenues through exporting it at market prices. Countries

such as Indonesia, Malaysia and Thailand subsidize their fossil fuel

prices for use in the domestic power sector. This is seen as

appropriate and as a necessary support for domestic industry, with its

components of value added activities.

31. Let me say this is not peculiar to the region. In 2009, USD 312

billion was spent on worldwide fossil fuel subsidies. As far as ASEAN

is concerned, Indonesia spent USD 12.5 billion, while Malaysia and

Thailand spent USD 4 – 5 billion, according to the World Economic

Outlook 2010 published by the IEA.

32. Those in the industry will point out that fuel subsidies create

artificially lower energy prices, encourage wasteful consumption,

distort market signals and undermine the competitiveness of

renewable energy. They are right. However, there are many reasons

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why governments continue with the policy of subsidizing energy

prices - primarily for social-economic and affordability purposes. For

example, Indonesia’s end use electricity prices are heavily

subsidized. Subsidy restructuring programs, while absolutely

compelling on economic ground, need to be carefully crafted and

judiciously implemented, not only to ensure sustainability of the

energy sector, but also to sustain the stability of the economy.

Elective governments are sensitive to public opinion, even if at times,

at the cost of being seen to compromise economic management.

Green Energy and Environment Sustainability 33. Yesterday, at Universiti Tenaga Nasional, we had Professor Dr.

Rajendra K. Pachauri, Chairman of the Inter-Governmental Panel on

Climate Change speak to us and clearly showing how urgent global

action is required to mitigate the march of climate change. ASEAN

Governments generally recognize environmental sustainability as

their national agenda. Malaysia, Singapore and Thailand have taken

initiatives to incorporate green energy strategies in their generation

plan. Singapore has also advanced its CO2 reduction initiatives with

the promotion of energy efficiency and renewable energy, as well as

other green energy projects, such as the waste-to-energy power plant

and intelligent energy system pilot projects in Pulau Ubin. The

Government of Thailand also promotes renewable energy production

and usage in its long term development plan, with its current RE

installed capacity of 405 MW (i.e. 1.4% of Generating Capacity). I

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understand Indonesia is planning to harness substantial capacity

from its geothermal potential.

34. In Malaysia, Tenaga Nasional is aligning its green energy

initiatives with the green energy agenda and the 40% carbon intensity

reduction voluntary pledge made during the Conference of Parties 15

in Copenhagen in 2009. The policy focuses on driving for operational

efficiency and encouraging Energy Efficiency among its consumers.

Tenaga Nasional is also improving the generation thermal efficiency

of its power plants, reducing Transmission and Distribution Losses

and working on Demand Side Management.

35. The promotion of a culture of Energy Efficiency and Demand

Side Management, unfortunately, has not been given much attention

by the industry in the past. Now, it is what we must emphasise and

focus on. For example, incorporating energy efficiency in building

plans. The Malaysian Government will introduce the Feed-in-Tariff

(FIT) this year as part of the initiatives to promote power generation

from renewable energy sources. The FIT will help accelerate the

development of renewable energy and covers technologies such as

solar, biomass, biogas, mini-hydro and municipal solid waste

projects.

36. Going by comments in the media, there is a lot of interest in

renewable energy usage. It should however be recognized that while

there is encouraging emphasis on promoting the development of

renewable energy for electricity, its application in the near future will

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remain restricted to fulfilling specific roles. In addition, consumers are

likely to be more responsive to energy efficiency initiatives when they

are required to pay rates that reflect actual cost of production.

Ladies and Gentlemen,

ESI Structure and Development

37. As we have seen, the dynamics of the electricity supply industry

of ASEAN is such that while member countries share common issues

in ensuring the region’s long-term energy security, each country faces

different sets of challenges and corresponding mitigating strategies.

The structure of the electricity supply industry of ASEAN member

countries also differs from one country to another.

38. Let’s take the case of the liberalized market structure.

Liberalization of the electricity supply industry, where generation,

transmission and distribution are decoupled, is expected to bring

about efficiency gains and also will open up the industry to a greater

number of investors. In theory, there is a strong basis for this –

competition encourages efficiency. But the global scorecard on the

liberalization of the electricity supply industry, and where electricity is

traded through the operation of a pool market is somewhat mixed. In

general, prices to consumers have increased. As far as the ASEAN

electricity supply industry is concerned, the degrees of liberalization

differ from one country to another. Singapore has done relatively

well. Singapore’s experience and the role of its Energy Market

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Authority (EMA) can be a useful case study for countries of the

region. Others, such as Malaysia and Thailand, retain incumbent

vertically integrated utilities with the participation of the IPPs in the

generation sector.

39. As a personal observation, let me say that it is necessary to

take into account the gaps between the existing and the liberalized

structures. These gaps must be addressed. In particular, the rules of

the market has to apply to the whole chain of supply right to the

consumer, for full liberalization and the operation of the electricity

pool market to work.

40. Many of the pre-requisites for liberalization to work are matters

of policy that are in the hands of national governments. For example,

the removal of cross-subsidies in tariffs, institutionalizing the tariff

review process, establishment of a fuel pass-through mechanism and

a robust regulatory process with clear structure of accountability

assigned to stakeholders in the industry.

Ladies and Gentlemen,

Cross Border Potential

41. I would also like to mention the potential area of cooperation

among the power utilities of ASEAN – that pertains to the power

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system interconnections between the neighboring countries of

ASEAN, namely the ASEAN Power Grid.

42. The ASEAN Power Grid has been a subject of discussion in the

forum of Heads of ASEAN Power Utility Association (HAPUA) for

some time now. With the ASEAN Power Grid, there can be cross

border electricity trading between interconnected power systems.

The ASEAN Power Grid can also facilitate alternative supply options

for emergency assistance during crisis situations, and functions as an

economic exchange of transactions between utilities. These

exchanges are technically feasible and commercially viable, as

demonstrated by the existing interconnections between Tenaga

Nasional and the Electricity Generating Authority of Thailand, which

was achieved through bilateral agreements between both utilities and

between Tenaga Nasional and SP Power Asset Limited of Singapore

(originally signed between National Electricity Board (LLN) of

Malaysia and Public Utility Board of Singapore). In addition, the

sharing of spinning reserves amongst neighboring countries’ grid

systems will also, to some extend, help to reduce or defer addition of

new capacity plant-up requirements. This cooperation among power

utilities of ASEAN can gain momentum with more push from the

Governments of the countries of ASEAN.

Conclusion

43. On that note, and by way of conclusion, let me summarize what

have been discussed:

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(i) The electricity supply industry of ASEAN faces multi-

dimensional challenges in fulfilling its responsibility to deliver

reasonable, affordable and reliable electricity supply to meet

the needs of consumers and help support the regions’ national

socio-economic goals and objectives.

(ii) For utilities, prudent risk management and planning is

necessary, where there has to be a balance between project

development and its associated risks. Managing the

interactions of the dynamics of supply security, cost

competitiveness, environmental concerns and the overriding

assurance of safety, will determine the choice of supply option

and technologies. For example, new concerns with nuclear

energy as a result of Fukushima will increase pressure on

renewable energy and give new focus on Energy Efficiency and

Demand Side Management.

(iii) For some countries in ASEAN, policy intervention continues to

be necessary for socio-economic reasons. But for it to be

sustainable, the electricity supply industry needs to be allowed

to gradually reduce the elements of subsidy and for the industry

to be subjected , over time, to the commercial discipline of the

market.

(iv) The countries of ASEAN have an opportunity for regional co-

operation through the ASEAN Power Grid or grid

interconnection. It can serve as an avenue to optimize the use

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of energy resources among member countries, including the

sharing of spinning reserve, as well as emergency and

economic exchanges of power.

44. Once again I thank the Energy Market Authority of Singapore

and I thank you for your kind attention.

LEO MOGGIE