privatization and regulation in malaysia

Privatization and regulation inMalaysia’s power sectorFrancis Xavier Jacob

Electricity Regulation Division, Department of ElectricitySupply, 19th floor, Menara Haw Par, Jalan Sultan Ismail,5068 Kuala Lumpur, Malaysia

1. Overview of the power sector

Malaysia has considerable energy resources, in the formof oil, natural gas, hydroelectric potential and coal. It hasabout 4.4 billion barrels of recoverable reserves of oil. Ofthe 1.92 trillion standard m3 of natural gas discovered inMalaysia, 325 billion standard m3 is associated gas. Thehydroelectric potential in the country is estimated to beabout 29,000 MW with an annual energy output of 123

TWh. Malaysia’s coal reserves are about 977 million ton-nes.

The installed capacity for electricity generation in-creased at an average annual rate of 9.2% in the 1980s,mainly in the form of oil- and natural gas-powered plants.The average annual growth rate in consumption duringthis period was 9.1%. The industrial sector accounted fora major share of the growth, and in 1990 it was also themajor consumer (46%), followed by the commercial(31%) and residential (20%) sectors respectively. As a re-sult of government emphasis on rural electrification pro-grammes, over 82% of households had access toelectricity by 1990.

Electricity supply in Malaysia is currently being under-taken by the Tenaga Nasional Berhad (TNB) in peninsularMalaysia, the Sabah Electricity Board (SEB) in the stateof Sabah and the Sarawak Electricity Supply Corporation(SESCO) in the state of Sarawak. TNB, which used to be

Figure 1. Malaysia: network of Tenaga Nasional Berhad (TNB).

Energy for Sustainable Development l Volume III No. 6 l March 1997

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a wholly government-owned public utility, was incorpo-rated in 1990 as a private company with the Governmentof Malaysia owning over 70% of its equity. All three utilitiescarry out generation, transmission and distribution of elec-tricity in their operating areas.

In May 1995, TNB had an installed capacity of about7,400 MW, which is supplemented with about 2,000 MWof capacity from independent power producers (IPPs) tomeet a maximum demand of about 5,900 MW (see Figure1). In its financial year ending on August 31, 1994, TNBgenerated 33.984 TWh of electrical energy of which about42% was from natural gas, 30% from oil, 13% from coaland 15% from hydro. TNB currently serves about 3.53million consumers (3.0815 million domestic; 429,800commercial; 11,400 industrial; 11,200 public lighting; and100 mining).

At the beginning of 1994, SESCO had an installed ca-pacity of 524 MW for a maximum demand of about 245MW. In 1993, it generated about 1,456 GWh of energyof which 56% was from natural gas, 29% from hydro and15% from oil. SESCO currently serves about 211,700consumers (177,100 domestic; 32,300 commercial; 500industrial; and 1,800 public lighting).

At the beginning of 1994, SEB’s installed capacity was454 MW and catered for a maximum demand of about280 MW. In the 1,540 GWh of energy generated in 1993,the mix of sources was 49% oil, 26% hydro and 25%natural gas. It currently serves about 192,700 customers(161,300 domestic; 27,500 commercial; 3,100 industrial;and 800 public lighting).

At present, the tariff structure for TNB, SEB andSESCO ranges from about RM 0.07 to RM 0.46 (1 Ma-laysian ringgit or RM1 = US$ 0.39), with off-peak indus-trial use being charged the lowest rate and public lightingthe highest. Electricity tariff for sale of energy by theutility to the public has to be approved by the government.The mechanisms for tariff adjustment for Tenaga NasionalBerhad have been put in place on the basis of the formula

CPI - M + Y + Kwhere CPI is the consumer price index, M is a factorwhich takes into account the inefficiency of operation ofthe utility and its capital investment needs, Y is the fuelcost pass-through and the factors to take into account thepurchase of energy from IPPs and K is a correction factorto take into account forecasting errors. The formula hasbeen operationalised since September 1993 and in the firstand second reviews of the electricity tariff, reductions of3.3% and 5% were made. The tariff is to be reviewedevery 3 months, to take into account regularly the changesin fuel prices. This tariff mechanism has made prices ofelectricity more transparent and predictable.

2. Perspective planning

The Malaysian Vision 2020 envisages a doubling of itseconomy every ten years for the next three decades. TheSecond Outline Perspective Plan 1991-2000 (OPP2), alsoknown as the National Development Policy (NDP), willset the pace for Malaysia to become a fully developednation by the year 2020 in all respects. The Malaysian

economy is targeted to grow at 7% per annum in the dec-ade of OPP2. In view of the targets set under Vision 2020,it is important to ensure that energy does not become aconstraint for growth and that this sector develops on aleast-cost basis.

Recognising this importance of the availability of en-ergy at economically acceptable cost and in sufficientquantity, three key objectives constitute the framework forpresent and future programmes in the energy sector:1. a supply objective, to provide adequate and secure en-

ergy supplies;2. a utilisation objective, to promote efficient energy util-

isation and to discourage non-productive and wastefulpatterns of energy consumption; and

3. an environmental objective, to ensure that, in achiev-ing the previous two objectives, the environment isnot neglected.

The four-fuel policy identifies four main fuels: oil, gas,hydro, and coal. The strategy is to cut down on the useof oil and to promote the use of non-oil indigenous re-sources such as gas, hydro, and coal. In this respect, the1990s will mark the nation’s entry into an era of greaterutilisation of natural gas. Apart from being the least-costoption for power generation expansion in the mediumterm, its development will be the basis for downstreamactivities in energy-related industries to provide an addedcatalyst to accelerate industrial growth.

On the utilisation side, demand management policieswill focus on promoting efficiency in energy use. Appro-priate measures will be introduced to eliminate waste.These include incentive tariff schemes and the promotionof efficient end-use equipment and appliances. Efforts arebeing made to ensure effective and well-coordinated en-forcement of environmental protection programmes, apartfrom the mandatory requirement of conducting environ-mental impact assessments (EIAs) for all energy projects.

Pricing policies will be directed at ensuring that energyprices reflect the economic cost or true cost of supply,that they raise revenues for the sector’s development andthat the sector remains competitive while making greateruse of indigenous energy resources. With regard to elec-tricity pricing, the availability of electricity in adequatequantity and quality and at reasonable prices is necessaryfor the promotion of industrial development. Towards thisend, efforts will be made to ensure stability in electricitytariffs at acceptable and internationally competitive levels.At the same time, the needs of power utilities to generatesufficient revenues for future development plans will betaken into account.2.1. Growth forecastElectricity demand projections for the future are pervadedby uncertainty and a variety of scenarios, making it dif-ficult for decision-makers to prepare concrete plans. Thechallenge is to incorporate these complexities into strate-gic developments without causing inaction to result. Thepower sector, as is widely recognised, forms part of andinteracts with a more complex system that includes eco-nomic, demographic, financial and environmental ele-ments. Population growth, resource endowments, energy


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prices, terms of trade, etc., are among the parameterswhich affect this system directly or indirectly throughother systems.

Electricity requirements are also affected if energy ef-ficiency measures are adopted. Thus, two scenarios arepossible.1. A business-as-usual (BAU) case without any serious

attempts to make the system energy-efficient2. An energy-efficient (EE) case with greater emphasis

on energy efficiency improvements. Energy efficiencygains are assumed to reach 5% in 1995, 10% in 2000and 20% in 2010 and thereafter.

For the purpose of this paper, the electricity requirementsare considered for four scenarios.1. A low-growth, BAU scenario. Here the load is forecast

with the economy projected to grow at 5.3% per an-num over the three decades to 2020.

2. A moderate-growth, BAU scenario. Here the load isforecast with the economy projected to grow at a rateof 6% per annum over the same period. This is theprojection given in the Sixth Malaysia Plan and theOutline Perspective Plan 2 (OPP2). The share ofmanufacturing in the gross domestic product (GDP)will increase from 27% in 1990 to about 37% in 2000.Manufacturing exports are projected to account forabout 81% of the value of total exports in 2000 from60.4% in 1990, while agricultural exports will declineto 6% from 10% in the same period.

3. A moderate-growth scenario again but with energy ef-ficiency measures in place.

4. A targeted-growth, energy-efficiency scenario. Here

the load is forecast with the economy projected togrow at 7% per annum over the OPP2 period. This isthe growth necessary to enable the target of eight-foldincrease in GDP to be achieved.

A population growth from 18 million in 1990 to 34.7 mil-lion in 2020 is assumed. The medium- and targeted-growth scenarios are assumed to lead to a three-fold andfour-fold increase in per capita income respectively. Thedemand projections for the various scenarios are shownin Table 1.2.2. Financial requirementsBased on the electricity requirements as shown in Table1, the financial requirements to provide for the generation,transmission, and distribution capacities and other expen-diture are as shown in Table 2 for the targeted-growthenergy-efficient scenario[1].

3. Privatization policy

With a view to finding new sources to finance the expan-sion of the energy sector that would be required even un-der the energy-efficient scenario, the Government ofMalaysia has commissioned a number of studies on powersector privatization. Peninsular Power carried out a studyon privatization of the National Electricity Board. Sub-sequently, Price Waterhouse Associates was hired to studyand develop and operationalize the regulatory frameworkfor the electricity supply industry in Malaysia. British Co-lumbia Hydro then conducted a study to identify howcompetition in the electricity supply industry in Malaysiais to be further pursued. All these indicate serious com-mitment on the part of the government to ensure carefully

Table 1. Projections of maximum demand (MW) for Peninsular Malaysia, Sabah and Sarawak

Annual demand in MW

Scenario 1990 1995 2000 2010 2020

(a) Low growth (business as usual)

Peninsular Malaysia 3477 6444 9912 19087 26796

Sabah 199 352 521 1109 2206

Sarawak 194 357 547 1100 2231

(b) Moderate growth (business as usual)


Sabah 199 352 522 1126 2594

Sarawak 194 357 548 1117 2623

(c) Moderate growth (energy efficient)


Sabah 199 335 470 901 2073

Sarawak 194 339 494 894 2097

(d) Targeted growth (energy efficient)


Sabah 199 346 512 1087 2861

Sarawak 194 350 537 1078 2894


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designed and smoothly implemented steps towards priva-tization of the power sector.

In September 1990, the Government of Malaysiaenacted the Electricity Supply Act and, with this, starteda chain of events towards privatization of the electricitysupply industry in Malaysia. First, the National ElectricityBoard was corporatized as Tenaga Nasional Berhad, orTNB. The corporatized utility was then privatized in Feb-ruary 1992 with the Government of Malaysia owningabout 73%.

In February 1991, the government released the Privati-zation Masterplan which details, among other issues, theprivatization of ‘‘new projects’’. These ‘‘new projects’’ areprojects which traditionally have been developed by thepublic sector and include electricity supply projects. Ac-cording to the Sixth Malaysia Plan (1991-1995), ‘‘... pri-vate sector participation will be promoted to encouragecompetition in the (power) sector. Towards this end, theconcept of build-operate-transfer, particularly in powergeneration, will provide avenues for private sector par-ticipation.’’

To follow through on its promise, the government de-cided to introduce competition in the generation field byinviting IPPs to build, own and operate generation plants.The IPPs that have been licensed so far are in the formof locally-led consortiums having foreign members, theratio of local and foreign shares being generally about75:25. By 1997, the power generated by IPPs will be over4000 MW and will account for about over 30% of totalgeneration. At present, IPPs are expected to sell their en-ergy only to the utilities, which will continue their tradi-tional role of generation, transmission and distribution.3.1. Objectives of privatizationThe Government has several objectives in privatising theelectricity supply industry in Malaysia. The main objec-tive is to relieve the government of the administrative andfinancial burden of providing electrical power for thecountry. This will release more funds for other socio-eco-nomic projects. In fact, with the already licensed IPPs,power generation investment by the private sector

amounted to over RM 10 ($3.9) billion by the end of1994.

Privatization will promote competition and sub-sequently improve efficiency and productivity in the elec-tricity sector. The improved efficiency is expected in theeconomic, financial and technical fields and the consum-ers can expect to receive better and improved services atreasonable prices. Privatization will also stimulate privateentrepreneurship and investment. This will accelerate therate of growth of the economy consistent with Malaysia’sVision 2020 in which the government envisages the pri-vate sector to be the prime engine for growth. The objec-tives of the New Economic Policy (NEP) are alsoexpected to be met through privatization. This policy, nowreplaced by the National Development Policy (NDP), hasthe objective, besides others, of the creation of a localcommercial and industrial community.3.2. Regulatory frameworkThe privatization of the electricity industry places an es-sential service in the hands of the private sector. Regula-tory mechanisms are thus necessary and are already inplace. The Electricity Supply Act 1990 provides the leg-islative framework for the regulation. Two important regu-lations made under this Act are:1. Licensee Supply Regulations 1990, and2. Electricity Regulations 1994.In addition, the Malaysian Grid Code is being introducedas a set of comprehensive technical and operational re-quirements for all plants connected to the national gridto ensure:1. safe, secure, reliable and economic electricity supply

system, and2. access to it of all users without discrimination.The licence terms and conditions also forms part of theregulatory framework.

4. The process of becoming an IPP

The following is a brief account of the actual approvalprocess for IPPs under the new arrangements. Potentialinterested parties should first forward their proposals to

Table 2. Financial requirements for targeted-growth energy-efficient scenario projects

Period 1991-1995 1996-2000 2001-2010 2010-2020

New capacity required (MW)

Peninsular Malaysia 3578 4577 11155 19067

Sabah 288 274 174 0

Sarawak 242 382 2120 6776

Total 4108 5233 13449 25843

Financial requirements (billion $)

Generation expenditure 7.19 10.47 33.62 77.53

Transmission expenditure 3.59 5.23 16.81 38.76

Distribution expenditure 2.88 4.19 13.45 31.01

Other expenditure 0.72 1.05 3.36 7.75

Total expenditure 14.38 20.93 67.25 155.06


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the government through the Economic Planning Unit(EPU). Once the government gives its approval, the can-didate IPP will negotiate the fuel purchase agreement andthe power purchase agreement with the relevant parties.Upon successful conclusion of these two agreements, alicence will be issued by the Director General of Elec-tricity Supply after being approved by the Minister of En-ergy, Telecommunication and Posts. The licence isnormally for a period of 21 years. All the IPPs to datehave agreements based on the build, operate and own(BOO) model.4.1. Players involved in approval processApart from the Department of Electricity Supply and theMinistry of Energy, Telecommunications and Posts, underwhich the former operates, the Economic Planning Unitof the Prime Minister’s Department, the Treasury and theDepartment of Environment are also involved in the ap-proval process of IPPs. Of the five major IPPs at present,only the project of Segari Power Sdn Bhd has foreignparticipation. Here Asea Brown Boveri Holdings Sdn Bhdhas 25% equity in the project. At present there are no taxbreaks or concessions given to the IPPs.Some of the other players involved in IPPs include:l project contractors;l plant equipment suppliers;l fuel suppliers (for most of the IPPs, Petronas supplies

the natural gas);l operating and maintenance contractors;l operating and maintenance spares suppliers;l financiers and those who arrange the financing

packages;l insurers;l providers of freight services; andl legal and technical consultants.4.2. Power purchase agreement (PPA)The following are the salient features of the PPA betweenTNB and one of the IPPs.l Sale and purchase obligations

Sale and purchase of electric energy: The IPP shall de-liver and TNB shall purchase and accept the net electricaloutput from each unit as such unit is dispatched by theControl Centre.

Sale and purchase of generating capacity: The IPP shallmake available and TNB shall pay for the dependable ca-pacity of each unit up to but not exceeding the site ratingof the unit.

During system emergencies the IPP shall, at TNB’s re-quest and subject to provisions of the Grid Code, makeall reasonable efforts to provide electric energy or gener-ating capacity above the dependable capacity of each unitthen in effect and shall, at TNB’s request, make all rea-sonable efforts to delay any relevant scheduled outages,maintenance outages and major outages. This should bedone consistent with design limits and prudent utilitypractices.l Purchase price and other charges4.3. Capacity paymentThis will be done in accordance with the following for-mula:

CP=DC × (CRF + FOR) × F × (AF/AT)whereCP = Capacity payment in ringgit for such capacity bill-

ing periodDC = Average of the dependable capacity (net) of the fa-

cility for such capacity billing period in kilowattsweighted by the number of hours attributed to eachperiod of differing dependable capacity of the fa-cility in such capacity billing period

CRF =Capacity rate financial for such capacity billing pe-riod in RM/kW/month.

FOR =Fixed operating rate for such capacity billing pe-riod in RM/kW/month. This will be adjusted every4 years by an adjustment factor based, among otherthings, on the consumer price index for PeninsularMalaysia.

F = The factor set at 1.0 if AF is greater than or equalto 80%, at 0.95 if AF is greater than or equal to65% but less than 80%, at 0.9 if AF is greater thanor equal to 50% but less than 65% and at AF/ATif AF is less than 50%.

AF = For each capacity billing period, AF equals thearithmetic average of the monthly equivalent avail-ability factor for the previous 12 capacity billingperiods (including such capacity billing period),expressed as a percentage.

AT = The availability target set (1) at 87% if AF is lessthan 87%, and (2) equal to AF for values of AFequal to or greater than 87%, except that, for eachcapacity billing period for which AF is greater than94%, the availability target is set at 93% if (a) themonthly equivalent availability factor for each ofthe previous six capacity billing periods is alsogreater than 94%, and (b) for each such capacitybilling period and the previous six capacity billingperiods, DCU for each unit is not less than 92.7%of the plant nameplate capacity, and (c) such ca-pacity billing period is occurring at least 12 monthsafter the commercial operations date for the unit.As used herein, ‘‘DCU’’ means, for each unit, theaverage of the dependable capacity of such unit forsuch capacity billing period in kilowatts weightedby the number of hours attributed to each periodof differing dependable capacity of such unit insuch capacity billing period.

4.4. Energy paymentsThis will be done in accordance with the following for-mulaEP = (E × H × NEO) / 1,000,000 + VOR × NEO + S

whereEP = Energy payment in ringgitE = Weighted average cost of fuel (in RM/MMBTU)

paid by the IPP under the fuel supply contracts andused at the facility during such energy billing pe-riod, calculated by dividing the aggregate amount(in RM) paid by the IPP for such fuel by the ag-gregate MMBTU of such fuel. For purposes of thepreceding sentence, ‘‘fuel’’ means (1) during anydistillate period occurring (a) prior to the start-up


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date and (b) after natural gas is first available tothe facility, distillate fuel oil, and (2) at any othertime (whether natural gas or alternative fuel isbeing used), natural gas. The IPP shall provideTNB with a written statement showing the methodof calculation thereof, together with supportingdocumentation, including copies of all statementsunder the fuel supply contracts, within three daysafter the end of each energy billing period. If anyalternative fuel is consumed by the facility at anytime during such energy billing period when natu-ral gas is available, such alternative fuel shall, forpurposes of calculating E, be deemed to be naturalgas consumed in a quantity having (1) the sameBTU content as the BTU content of the alternativefuel actually consumed and (2) a price (inRM/MMBTU) equal to the average price for natu-ral gas under the fuel supply contracts for suchenergy billing period.

H = Assumed net heat rate (in BTU/kWh) set at 12,108BTU/kWh based on (1) higher calorific value ofnatural gas at assumed conditions, and (2) the rele-vant unit operating at a continuous load of 100%of the net generating capacity of such unit availablefor dispatch by TNB. For purposes of calculatingthe energy payment for any energy billing period,such net heat rate shall be adjusted (in accordancewith the heat rate adjustment table set forth ingiven exhibit) to reflect any dispatch by TNB atpart load operations (determined as a percentageof the net generating capacity of the relevant unitavailable for dispatch by TNB) during such energybilling period.

NEO = Net electrical output (in kWh) of all units for suchenergy billing period.

VOR = Variable operating rate for such energy billing pe-riod in sen/kWh. This will be adjusted every 4years by an adjustment factor based, among otherthings, on the producer price index for PeninsularMalaysia.

S = The quotient obtained from dividing (1) the prod-uct of (a) the number of start-ups requested byTNB during such billing period (excluding any ad-ditional start-ups caused by the IPP or the facility,e.g., tripping or outage of the facility, or failure ofthe facility to start up after a start-up request byTNB), (b) 15.4 MMBTU/start-up, and (c) E (as de-termined above) by (2) 1,000,000.

l Compensation, billing and paymentl Liquidated damages and maintenance reservel Pre-operation periodl Operation and maintenance

-- Operation and maintenance of facility-- Dependable capacity; testing of capacity rating-- Schedule and despatch of generation-- Schedule outages, major overhaul outages and main-

tenance outages-- Access to facility and site-- Operation committee

l Interconnectionl Meteringl Representation and warrantiesl Taxes; finesl Insurancel Force majeure eventl Default and terminationl Indemnification and liabilityl Dispute resolution4.5. Risk factorsThe PPA requires the following of the IPP.1. The IPP shall have provided to TNB evidence dem-

onstrating that the IPP has obtained all applicable gov-ernmental authorizations, including the IPP licence,other than (1) any governmental authorizations thatcould not materially affect the ability of the IPP toperform its obligations under this agreement, the fuelsupply contracts or the EPC contracts, or (2) any suchother governmental authorizations that (a) are not nec-essary for the IPP to commence generation of electricenergy from the facility and (b) the IPP could not rea-sonably be expected to have obtained prior to the in-itial operations date given the practice and proceduresof the relevant governmental entities issuing such re-spective governmental authorizations.

2. Each of the fuel supply contracts shall have been exe-cuted and delivered by each of the respective partiesthereto, and the form and substance of each provisionthereof which could reasonably be expected to have amaterial effect on the ability of the IPP to perform itsobligations, or the rights of TNB, under this agreementshall be reasonably satisfactory to TNB.

3. The interconnection facilities shall have been de-signed, engineered, manufactured, supplied, con-structed, installed, tested and commissioned inaccordance with the requirements of this agreementand prudent utility practices and shall be able to op-erate safely with the TNB system.

4. The fuel facilities shall have been designed, engi-neered, constructed and installed, tested and commis-sioned in accordance with the requirements of thisagreement and prudent utility practices to enable thefacility to receive, replenish and utilize supplies of dis-tillate fuel oil under the fuel supply contracts in quan-tities sufficient to permit the facility to operatecontinuously at full load dispatch.

5. The IPP shall have provided to TNB a certificate fromthe independent engineer stating that the facility hasbeen designed and constructed in accordance with pru-dent utility practices, the design drawings submittedto TNB.

The above provisions thus reflect the responsibilitiesand the risks borne by the IPP in terms of the offtake,completion, operation, fuel, transport, environmentand other laws or regulations which may affect itsoperations. However, the IPP can transfer some ofthese risks to the parties with whom it enters intocontracts for these requirements. For example, it cantransfer the risk completion and start-up dates to the


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project contractor, the fuel risks to the fuel supplier, etc.For risks it has to bear itself, it may mitigate the risks bytaking insurances.4.6. InsuranceThe PPA requires the IPP to have coverage for the fol-lowing:l comprehensive general liability or third party liability

insurance;l workers’ comprehensive insurance;l comprehensive automobile liability or motor vehicle

liability insurance;l contractor’s all risks insurance and boiler and

machinery insurance; andl excess umbrella liability of excess layer liability

insurance.4.7. Future lawsThe PPA has a change-in-law adjustment clause as fol-lows:1. If there is a change-in-law which requires the IPP to

make capital improvements or other modifications tothe facility in order to comply with any law, the IPPshall submit to TNB a certificate setting forth in detailreasonably satisfactory to TNB the actual costs of suchcapital improvements and the calculations for suchamount. The IPP and TNB shall determine, in goodfaith, any necessary adjustments to the capacity ratefinancial to reflect such costs. After the receipt byTNB of the written approval of the Department ofElectricity Supply of (1) the amount of such costs and(2) such adjustments to the capacity rate financial, thecapacity rate financial shall be adjusted in the mannerso approved by the Department of Electricity Supply.

2. If there is a change-in-law (other than in respect oftaxes) which the IPP or TNB believes in good faithwill (1) increase the costs or decrease the revenues ofthe IPP in connection with the operation or mainte-nance of the facility, or other conditions affecting theperformance by the IPP of its obligations under thisagreement or affecting the timing of the incurring ofsuch costs or the receipt of such revenues, or (2) de-crease the costs or increase the revenues of the IPP inconnection with the operation or maintenance of thefacility, then the IPP (in case of such increase in costsor decrease in revenues) or TNB (in case of such de-crease in costs or increase in revenues) shall (a) de-termine the amount of such increase or decrease incosts or revenues, (b) submit to the other party a cer-tificate setting forth in detail reasonably satisfactoryto such party the basis of and the calculations for suchamount, and (c) jointly with the other party, determinethe applicable adjustments to the fixed operating rateand the variable operating rate to reflect such increasesor decreases in costs or revenues with the intent thatthe financial position of the IPP shall remain unaf-fected by such change-in-law. Each party shall in goodfaith cooperate with the other party in connection withsuch determinations. The fixed operating rate and thevariable operating rate (if applicable) shall be adjustedin the manner so determined jointly by the parties.

Notwithstanding the foregoing, in case of any suchadjustments to the fixed operating rate and the variableoperating rate (if applicable) to reflect any suchincrease in costs or decrease in revenues of the IPP,(1) such adjustments shall not be made until after thereceipt by TNB of the written approval of the Depart-ment of Electricity Supply of (a) the amount of suchincrease in costs or decrease in revenues of the IPP,and (b) such adjustments to the fixed operating rateand the variable operating rate (if applicable) so de-termined by the parties.

4.8. FinanceThe private power projects are generally financed throughsingle financing. The financial structure involves debt ofthe private power projects with part of it as a bond issueat a fixed interest rate and the remaining as floating rateloan facility. The equity continues to be owned by theIPPs, who bear the entire development expense them-selves. At 4000 MW, the 5 private power projects consti-tute the largest exercise anywhere in Asia. It is alsoMalaysia’s largest debt financial package at a total ofRM10 ($3.9) billion. All this is financed locally, relievingthe 5 IPPs of foreign exchange risks.4.9. Market for the power producedOnly one of the IPPs has a minimum take-or-pay provi-sion. The rest of the IPPs will sell their energy as des-patched by the National Load Despatch Centre. Recentlyone of the IPPs has expressed interest in selling electricityto Singapore and a potential IPP has expressed interest inselling electricity to Thailand.4.10. Policies and laws on energy and environmentThe Environmental Quality Act 1974 provides the legis-lative framework for regulation and policies with regardto the environment. The following are some of the sec-tions of the Act that will have an effect on electric powerplants.Section 21: Power to specify conditions of dischargeSection 22: Restrictions on pollution of the atmosphereSection 23: Restrictions on noise pollutionSection 24: Restrictions on pollution of the soilSection 25: Restrictions on pollution in inland watersSection 27: Prohibition of discharge of oil into Malay-

sian watersSection 32: Need to maintain and operate equipmentSection 34A: Report on impact on environment resulting

from prescribed activitiesOne of the conditions in the PPA is for the IPP to obtainall government authorizations. Thus, only after the EIAhas been approved by the Department of Environmentwill the licence to operate the power plant be given bythe Department of Electricity Supply. As such, it can beassumed that the IPP will meet the requirement of theenvironmental laws and regulations and the conditionsimposed by the Department of Environment.

5. The impact of privatization in the electricitysupply industry

The privatization of TNB has been successful. TheGovernment of Malaysia is now less burdened with


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capital-intensive generation programmes to ensure thecountry’s economic development. By 1997 Malaysia willhave a comfortable margin in generation capacity of 30%as planned and this will ensure security and availabilityof supply.

The response of the private sector to this privatizationprogramme of the government has been very encouraging.This can be seen from the fact that more than 100 pro-posals have been received from potential IPPs. Theknowledge and expertise in the electricity sector is be-coming more widespread now. Whereas previously thiswas concentrated in the 3 utilities, it has at present spreadout to other parties. Apart from IPPs, consultants, banks,legal firms, different government agencies and consumersare now becoming increasingly aware of the varied issuesinvolved in the electricity sector. For consumers, theawareness has resulted in their being more critical anddemanding with respect to services provided to them. Thisis evident from the increasing number of complaints re-ceived by the Department of Electricity Supply on matterswhich they had passively endured earlier. While this putspressure on the utilities, it certainly pushes them to up-grade their services.

The breaking-up of the monopolistic situation in theindustry and the ensuing competition has motivated thoseinvolved in the industry to improve themselves. TNB it-self has been forced to improve its performance. One suchexample is the establishment of a list of performance in-dicators, thus setting a minimum level of performance thecustomers can expect of them. This list includes, besidesother things, the maximum time-period for connection ofnew and disconnected supplies, for responding to com-plaints, the minimum period of notice for planned out-ages, and the method of collecting deposits. Confidenceis being generated that this will result in a better and moreefficient industry as a whole.

Industry in general is becoming more efficient and thebusiness of electricity provision, in particular, more trans-parent. This is evident in the way factories having cogen-eration potential are now beginning to avail themselvesof that facility. Where formerly they would just have topurchase all their electrical energy requirements fromTNB and discard waste fuel and/or waste heat, they arenow considering seriously the economics of cogeneration.Also, whereas earlier, decisions were taken without rea-sons being made public, the electricity supply industry isbecoming far more proactive. Thus, the utility now pro-vides details of how connection charges are calculated, sothat the consumers know what they are paying for.

The utility has responded to the situation well by com-ing up with better and more services. Besides the intro-duction of incentive schemes for users related todemand-side management, TNB has now started advisingconsumers on how to improve the efficiency of their elec-trical equipment and to cut losses. This benefits TNB as

well as the consumers.

6. Salient issues in promotion andimplementation of IPPs

Various challenges have to be faced as the privatizationof the Malaysian electricity supply industry is being un-dertaken. First of all there are very few examples or mod-els to follow. The advantages and disadvantages of thevarious models of privatization have to be studied care-fully and suitably modified to apply in this country. Inthis respect, the introduction of IPPs is actually more anexercise in financial engineering than anything else. Eachproject needs to be analysed carefully in terms of whetherit can be financed, long before it can be implemented andoperated. While the entire debt funding of the existingIPP projects worth 4000 MW was raised locally, over thenext 30 years about 30,000 MW of capacity is needed.To implement such a huge programme, capital invest-ments of the order of RM 100 ($39.2) billion are required.The question is not only the affordability of finance, butalso the availability of the funds. The scramble for scarcefunds has, in fact, become a global issue and is likely tobecome a major challenge for the electricity industry.

The regulatory framework and the various regulationsand codes have to be set up to ensure that the variousparties involved in the industry work in harmony witheach other and in an efficient and reliable manner. Themajor portion of this framework is already in place andvarious other regulations and the Grid Code are beingformulated.

The sourcing of the fuel necessary for the power sectoris another challenge by itself. While oil has traditionallyplayed a major role in this respect, natural gas is increas-ingly playing a more prominent role. Newer and bettertechnologies in the use of natural gas for generation areavailable. Notwithstanding this, the fuel diversificationpolicy has to be maintained and achieved to improve thesecurity of energy availability and to reduce the vulner-ability of depending on only one fuel source or a groupof fuel sources. In this respect, the Government of Ma-laysia fully realizes the limits to the availability of gas inthe future. With this, other sources such as hydro and coalmay play greater roles in the electricity sector beyond theyear 2000.

7. Some salient features of recent developments

Installed capacity in 1997 had reached 11,646 MW, whilegeneration in the same year was 36,156 GWh. About 14independent power producers had been issued licences forgeneration by mid-1998.

Suggestions for further reading

Environmental Quality Act 1974 (and regulations made under it)

Power purchase agreements of IPPs

Proposed Malaysian Electricity Masterplan (draft)


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Appendix 1Highlights of IPP deals

Sl.No.

Name of IPP YTL PowerGeneration Sdn

Bhd

Sikap EnergyVentures Sdn Bhd

Genting Sanyen(M) Sdn Bhd

Powertek Sdn Bhd Port DicksonPower Sdn Bhd

1. Site Paka, Terengganu,Pasir Gudang,Johor

Lumit, Perak Kuala Langat,Selangor

Alor Gajah, Melaka Tanjung Gemuk,Port Dickson

2. Capacity 808 MW404 MW

1303 MW 720 MW 440 MW 440 MW

3. Type of plant 2 Combined cycleblock

Combined cycle Combined cycle Open cycle 4×110MW

Open cycle 4×110MW

4. Project cost RM 3.6 ($1.4)billion

RM 3.6 ($1.4)billion

RM 1.0 ($0.4)billion

RM 719 ($282)million

RM 685 ($269)million

5. Licence issued 7 April 1993 15 July 1993 10 June 1993 1 December 1993 1 December 1993

6. Energy purchaseagreement with TNB

31 March 1993 16 October 1993 6 January 1994 10 December 1993 10 December 1993

7. Gas purchase agreementwith Petronas

15 March 1993 17 July 1993 Not signed yet Not signed yet Not signed yet

8. Technical consultants Tenaga EwbankPreece

SWEC Zainal SdnBhd

LahmeyerInternational

KTA Tenaga SdnBhd

Black & VeatchInternational ofMissouri, USA

9. Finance EmployeesProvident Fund,Bank BumiputraMalaysia Bhd

Malayan BankingBhd,Bank BumiputraMalaysia Bhd

Malayan BankingBhd

Malayan BankingBhd

Malayan BankingBhd

10. Commercial operatingdate1st generating unit

31 December 1994 1 July 1996 31 December 1994 15 January 1995 15 January 1995

Last generating unit 1 July 1997 1 July 1997 31 December 1995 1 May 1995 1 May 1995

11. Shareholders YTL CorporationBhd

Sikap PowerSdn.Bhd 75%Asea Brown BoveriHoldingsSdn.Bhd. 25%

Syarikat GentingBhd.

Cergas UnggulSdn.Bhd35%Arab MalaysiaDev.Bhd 30%Yayasan Melaka20%Dato’Dr,MokhzaniAbdul Rahim 8%Lim Ewe Jin 7%

Sime DarbyBhd.40%MalaysianResourcesCorp.Bhd. 30%HyperganticSdn.Bhd.20%Tenaga NasionalBhd.10%

Notes

1. These costs (in current terms) are calculated on the basis of the following assumptions:

Generation costs=$1.75 million per MW for period 1991-1995

=$2.00 million per MW for period 1996-2000



Transmission costs=50% of generation costs

Distribution costs=40% of generation costs

Other costs (e.g., equipment cost)=10% of generation costs


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privatization and regulation in malaysia

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