P

ennWell
AEI
Asian Energy
INFRASTRUCTURE

September 2000

2000-09 Southeast Asia New Market Opportunities by

Mr. Vishvjeet Kanwarpal CEO GIS-ACG
Global InfraSys - Asia Consulting Group
Published: September 2000 by AEI PennWell

R e a p in g t h e f r u its
o f r e fo r m
PO W ER -G EN A s ia : R e s t r u c t u r in g E G AT
C E P SI: N a p o c o r ’s c h a l l e n g e
AEI
A s i a n E n e r g y

September 2000 Volume 2 Issue 3

Contents
R egu lars
TalkBack 3
News & Views 7
Regulatory Review 15
Equipment 68

S p e cia l D ep a rtm en ts
Challenges for tomorrow: CEPSI, Manila 17
EGAT restructuring: POWER-GEN Asia, Bangkok 19
Chinese language feature: Manjung Moves on 52

F ea tu res
Regional Focus 25
Southeast Asia: new market opportunities.
Market Restructuring 33 Project Focus 58
Post-crisis Asia: time for reform? A E i assesses the Captive generation cuts costs. The Amarvilas Oberoi
incentives to implement reform. Hotel in Agra, India, is close to completion. A concern of the
hotel was how to ensure reliable electricity and steam supply.
Utility IT 39 Fuel Focus 64
Stay informed: Asian energy producers and distributors In for the long haul? Asia’sfinancial crisis, high costs and
will face increased demands for information reporting. inflexibility has slowed the growth of the liquefied natural gas
A E i looks at lessons that can be learned from Sweden. trade. But production is expanding, and competition among
sellers with it. How will the market for this highly politicized
fuel shape up as market power shifts in favour of electricity
Transmission & Distribution 43 generators and other buyers?
The “1-Shape”project: a logistical challenge. A E i looks
at a project for the construction of 15 new substations for
the Provincial Electricity Authority of Thailand. N e w s in Brief
SembCorp buys into Australia Page 7
TNB sells Port Dickson units to Indonesia Page 9
IPP Projects 46 China gas moves attracts oil majors Page 11
Manjung moves on. Despite an interruption caused by the
More Indian power delays Page 13
Asian crisis, Malaysia’s Manjung project is back on track.

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 Regional Focus
Vishvjeet Kanwarpal, Asia Consulting Group

Southeast Asia: new

market opportunities
Southeast Asia needs to recapture interest in its power sector. But w ill reform ,
privatization and an interconnected transmission grid be enough to stage a recovery?

ntil the Asian crisis, over half the

U global demand for greenfield power

projects was expected to be concen­
trated in Asia. Southeast Asia in particular
was the fastest growing region within the
continent. As a consequence of the crisis,
the Southeast Asian region’s economy con­
tracted by seven per cent in 1998 after wit­
nessing a growth of four per cent in 1997.
More than $30 billion in capital fled the
region in 1997 and 1998. The crisis was
characterized by a mix of common structur­
al weaknesses in the respective economies
and some unique specific factors.
Asia’s Consulting group’s (ACG) assess­
ment o f the region suggests that the
demand forecasts for power in the region
were highly exaggerated before the crisis.
As a result, independent power producer
(IPP) capacity was aggressively encouraged
and commissioned to meet the exaggerated
projections. The impact on IPPs and new
capacity addition in the region was ampli­
fied by the crisis. Had the demand projec­
tions been realistic, IPP capacity would
have been more tempered, and the well
documented impact of the crisis on new
investments would have been mitigated.
As the region recovers, there are positive
signals with respect to power demand.
First, the risk-reward perception and reality
for IPPs in Southeast Asia has witnessed a
paradigm shift. Second, with deregulation,
privatization and power market frameworks
being developed, competition is expected
to intensify substantially. Finally, opportu­
nities in asset acquisition will far outweigh
greenfield project potential.
ACG’s forecasts of greenfield capacity
"To create a strong and viable commercial operation o f utilities,
cross-subsidies w ill have to be removed"
requirement suggest that Southeast Asia
will be in a surplus situation from 2000-
2005. It is also suggested that Thailand and
Indonesia will not have any demand for
new capacity in this time. Malaysia is pro­
jected to be in a surplus position until 2001
while Philippines will have a surplus until
2004. Only Singapore will offer the oppor­
tunity to invest in limited new capacity.
Figure 1. Asian power sector stages, 7990-2000
Reforms are critical for the recovering
Southeast Asian countries as they will
unleash the economic potential of die elec­
tric supply industry which has been bur­
dened by subsidies and political interference.
To create a strong and viable commercial
operation of utilities, cross-subsidies will
have to be removed, tariffs increased and
competition encouraged. A balance between
the interests of the electricity sector and the
interests of the consumer must be reached.
Any increase in consumer tariffs is bound to
be resisted by die consumers and have polit­
ical repercussions. Rationalization of indus­
trial tariffs at a time of economic recovery is
likely to slow industrial growth and render
energy intensive industries uncompetitive.
Balancing these issues is an extremely
challenging proposition.
The situation is compounded by the fact
that the respective governments are cash
strapped and bound by stringent IMF con­
ditions. The utilities can no longer assume
government bailouts in times of distress.
With limited options, electricity sector
reforms and privatization appear no longer
a matter of choice but inevitability.
Almost all of Southeast Asia has embarked
on power sector reforms. Leading the way is
Singapore where power pool arrangements
are already in place, though full retail com­
petition is yet to be introduced. Indonesia,
Malaysia, Philippines and Thailand are
awaiting bills to be approved which will
eventually pave the way for privatization of
major utilities. The ultimate objective of
power sector reforms in all these countries is
to move towards competition in the retail
market where the end consumer would be
free to decide the supplier of electricity.
In d o n e sia
Short-term debt in excess of international
reserves, high gearing ratio of corporates
and rapid depreciation of the Indonesian
Rupiah against the dollar since 1995, were
identified to be the principal agents behind
the onset of the economic crisis in
Indonesia. The crisis led to the plummeting
of GDP by 13.7 per cent in 1998, average
inflation rate soaring up to 58 per cent,
depreciation of the Indonesian Rupiah to its
lowest level of Rp 17 000 per $ (as of 1998),
massive capital flight and closure of business
operations. The Central Bank was therefore
forced to tighten the monetary policy which
led to an increase in interest rates.

AEi September 2000 www.power-eng-intl.com 25

 Regional Focus

The IMF recommended the creation of Currently, PLN has 50 per cent excess 5.3 per cent in 1998. Exports increased
greater transparency in the issuing of govern­ capacity over and above what it requires on from $74.3 billion in 1998 to $76 billion
ment loans, subsidies and enforcement of the main grids of Java and Bali, exclusive of in 1999. Imports however fell by $0.2 bil­
laws and regulations relating to the area of IPPs. The crisis has delayed or cancelled lion from $59.3 billion in 1998 to $59.1
procurement. The government has many ongoing projects and it seems clear billion in 1999.
announced several reform initiatives since that IPP schemes may have to operate at a The Malaysian government announced
receiving the IMF bailout package, including loss until the Indonesian economy recovers its intentions to privatize the electricity
the planned privatization of several sectors of and PLN’s financial condition improves. industry in 1990. In the same year, TNB
its economy. ACG projects that the surplus in 2005 is was incorporated under the Companies Act
To stimulate recovery, liberal trade financ­ expected to be around 1250 MW vis-a-vis and took over the liabilities of the National
ing needs to be made available to export the official forecast of around 2800 MW of Electricity Board (NEB). In 1992, TNB
companies, monetary policy should be annual new capacity requirement between was listed on the Kuala Lumpur Stock
eased to facilitate corporates in redeeming 1996 to 2005. Exchange. The year 1996 witnessed the
Ministry of Energy, Posts and Telecom­
munications urging TNB to restructure
"The Indonesian government does not expect the creation o f the into three core business units.
multi-seller, multi-buyer market in the Java-Bali grid before 2003." In 1997, TNB underwent corporate
restructuring under which two wholly
their debt obligations, the banking sector M alaysia owned subsidiaries - TNB Generation Sdn.
ought to be restructured, and the subsidy Asset liability mismatch, with regard to Bhd. and TNB Engineers Sdn. Bhd - were
on electricity needs to be brought down. maturity and currency denomination, led created. Subsequently in 1998, TNB identi­
The private sector in Indonesia was to the onset of the financial crisis in fied five power plants for divestment. As a
allowed to produce electricity under the Malaysia. As a consequence, the economy result, the 330 MW Malacca power plant
Licensed Electricity Generation Scheme in plunged into a recession, the asset portfolio was sold to Powertek in 1998. To manage
1992. In 1994, a major deregulation pack­ of the banking sector deteriorated in quali­ the hydro generation assets, which were not
age was announced and the status of PLN ty and private investment expenditure fell to be divested, TNB created TNBG Hydro
was changed from a “State Corporation” to by 30.5 per cent in 1998. Sdn. Bhd. in 1998.
a “Limited Liability Company”. In 1995, The government introduced selective In the same year, Electricity Supply
PLN established two subsidiaries for com­ exchange and capital controls in order to Department formulated the Grid Code as
mercial operations. According to the power arrest the flight o f capital and to check an operational standard for the IPPs. In the
sector restructuring policy launched in speculation on the Malaysian Ringitt. The following year, the government undertook
1998, restructuring was scheduled for first half of 1998 was characterized by strin­ a study for reorganising Peninsular
completion in 2003. PLN also embarked gent fiscal and monetary policies which Malaysia’s electricity industry to move
on a restructuring plan for the financial, were relaxed in the latter half of 1998. To towards an Electricity Pool Model.
corporate and special contracts divisions. A boost infrastructure development, the gov­ As of 2000, consultations were on for the
team was also established for restructuring ernment set up the Infrastructure design of a plan for the restructuring of
and rehabilitation. Development Fund. Malaysia’s electricity supply industry
In 1999, Asian Development Bank The National Economic Recovery Plan (MESI). The Electricity Bill 2000 and the
(ADB) sanctioned a $400 million loan has led to the appreciation in the value of Energy Commission Bill 2000 had been
aimed at power sector restructuring. The the Ringitt, increasing levels of foreign forwarded to the Malaysian Parliament for
Indonesian Directorate General of direct investment (FDI) and international approval. The IGSO task force, appointed
Electricity and Energy Development, financial assistance. GDP registered a by the Technical Group, was in the process
Department of Mines and Energy, selected growth of 0.9 per cent in 1999 and grew of preparing the MESI restructuring plan
KEMA Consulting to develop rules for a by $5.2 billion to $75.1 billion. The infla­ for approval by the Malaysian government.
competitive market for the Indonesian tion rate fell to four per cent in 1999 from In terms of asset sale to private sector, TNB
electricity supply industry (ESI).
The project, which is to be funded by
ADB, consists of two phases. Phase one
will facilitate the design of a single buyer
market which will serve as an interim
measure until the development of a
competitive multi-buyer market. Phase
two will develop tire market rules gov­
erning the multi-buyer market. The gov­
ernment however, does not expect die
creation of the multi-seller, multi-buyer
market in the Java-Bali grid before 2003.
It will, in the future, provide power to
Malaysia, the Philippines, and Singapore.
In Indonesia, the IPP programme
started in 1990 and the first IPP was
commissioned in 1997. Currently,
there are some 27 IPPs that face the
brunt of the crisis and PLN’s deterio­
rating financial position. Only three
IPPs have been commissioned while six
others are ready to start generation.
These power producers face a grave risk
Figure 2. Crisis hit nations: greenfield demand forecast
of PPA renegotiation with PLN.

Septem ber 2 0 0 0 wvAv.power-eng-intl.com 27


announced its intention of inviting bids for
the sale of Pasir Gudang (779 MW) and
Connaught Bridge (1816 MW) power
plants. TNB intends to concentrate only on
transmission and distribution activities. It
plans to sell 6200 MW of generating capac­
ity in the next three years. As of May 2000,
a consortium comprising Malakoff Bhd. and
National Power won the bid for a 40 per
cent stake in an SPV which will acquire the
2420 MW Kapar power plant from TNB.
The IPP programme started in 1992 and
the first IPP was commissioned in 1994.
Currently, there are nine IPPs in operation.
To cope with the oversupply situation, TNB
has decided to focus on selling off electricity
plants to enable it to concentrate on the rel­
atively stable areas of transmission and distri­
bution. Furthermore, the economic crisis
has led to a cost overrun and subsequent
shelving of some of the new projects.
ACG projects that the surplus in the year
2001 is expected to be around 60 MW.
The official forecast for average annual
capacity addition in the period 1996-2005
was approximately 1250 MW in contrast
with ACG forecast of around 350 MW for
average annual new capacity requirement in
the period 1999-2005.
P h ilip p in es
The high gearing ratio o f corporates, pro­
longed slowdown in the Japanese econo­
my leading to a slump in imports from
the Philippines and depressed stock mar­
kets were the principal causes o f the eco­
nomic crisis in the Philippines. GDP in
1998 contracted by 0.5 per cent, inflation
rate rose to 9.7 per cent as a result of high
import costs and net foreign assets of
commercial banks witnessed a sharp
downfall. There was a huge outflow of
portfolio investments. Philippines’ weak
industrial base and poor infrastructure
may prove as impediments in its recovery.
The Estrada government plans to channel
huge investments in the agricultural sec­
tor with a view to increasing the income
levels for the majority. Though this may
result in expanding the market for the
industry, concrete long term solutions
are needed as a solution to Philippines’
economic problems.
In 1987 the Private Power Policy was
introduced, followed in 1990 by the BOT
law, and in 1991 the Foreign Investment
Act allowed for 100 per cent foreign equi­
ty participation in power generation ven­
tures. In 1995, the government approved
measures to restructure and privatize NPC.
NPC’s monopoly over power generation
was terminated. In 1996, the Omnibus
Electric Power Industry Bill’s implementa­
tion was conceived but the bill was delayed.
In 1998, the Estrada government envisaged
NPC’s assets sales, establishment of a new
transmission company to manage the
national grid, and the establishment of
seven Gencos. Only thermal generation
Septem ber 2 0 0 0
Regional Focus
Figure 3. Southeast Asia: progress in unbundling
assets of NPC were proposed to be divest­
ed. In the same year, NPC announced plans
to privatize 80 per cent of the country’s
installed capacity.
In 1999, the President requested the
Congress to convene a special session to act
on the Omnibus Power Bill. In May 2000,
the Philippines senate approved the
Omnibus Power Industry Restructuring Bill
which intends to split the NPC into seven
Gencos which will be subsequently sold to
the private sector through public bidding.
Additionally, the Philippines government is
contemplating divesting 23 per cent stake in
Meralco. As of April 2000, four foreign
investors expressed their interest to buy a ten
per cent stake in Meralco.
The IPP programme started in 1990 and
the first IPP was commissioned in 1992.
According to ACG, the surplus in 2004 is
expected to be around 250 MW. This is in
stark contrast to the official forecast of
around 1700 MW of new capacity addition
"Singapore bucked the trend o f CDP contraction amongst the
Southeast Asian countries in the wake o f the financial crisis."
in the period 1996-2005. The ACG fore­
cast suggests that any new capacity coming
up in the period 2000-2004 will not be
viable and will face both dispatch and
payment risk.
S in g a p o r e
Singapore bucked the trend of GDP con­
traction among the Southeast Asian coun­
tries in the wake of the financial crisis. It
managed a low 1.5 per cent growth rate in
1998 compared to the eight per cent GDP
growth in 1997. Its huge current account
surplus in 1998 bolstered its foreign
exchange reserves in spite of significant
capital outflows in 1998.
The government entered into wage cut
agreements with workers and employees to
make exports competitive. To maintain its
competitive position despite rising wages
and an appreciating Singapore dollar, the
government has been promoting higher
value-added activities in the manufacturing
and services sector in addition to encourag­
ing firms to invest abroad. GDP grew by
1.4 per cent in 1999 to $93 billion from
$91.7 billion in 1998. Non-performing
loans to Southeast Asian economies and a
possible slump in demand in the near term
due to wage-cut agreements, may continue
to be a drag on Singapore’s economy.
Singapore Power and Gas Pte. Ltd.
(SPG) was incorporated in 1995 and it
took over the electricity and gas operations
of the Public Utilities Board (PUB). In
1996, the government decided to defer the
public listing of Singapore Power until
1998. SPG also created nine principal sub­
sidiaries in that year. In 1998, the electrici­
ty power pooling system was introduced.
As suggested in earlier plans, SPG was to
have lost its monopoly status in 1999.
However, the divestment of Tuas Power in
1999 was delayed to assist the government
to structure the privatization process. The
Singapore government will be divesting
Power Seraya and Power Senoko in 2001,
retaining only the electricity transmission
and distribution networks.
Singapore is the only Southeast Asian
country to offer a realistic market for
greenfield capacity between 2000-2005.
The power demand in Singapore has start­
ed to pick up and plans exist for the addi­
tion of 2300 MW of new gas-fired capacity.
ACG forecasts of average annual new
capacity requirement between 1999-2005
are around 400 MW which is quite close to
the official forecast of annual new capacity
vAvw.power-eng-intl.com 29

addition between 1996-2005. The green­
field capacity demand is likely to be
reduced by plans to purchase power from
both Malaysia and Indonesia.
Thailand
Short-term debt in excess of international
reserves, high gearing ratio of corporates
and liberal credit facilities leading to risky
investments, led to the financial crisis in
Thailand. The crisis led to the GDP plum­
meting by eight per cent in 1998, a decline
in manufacturing sector by 12.8 per cent, a
decline in private investments by 40 per cent
and a high unemployment rate of 5.3 per
cent of total labour force in 1998. The gov­
ernment countered the crisis by relaxing its
initial tight fiscal policy stance and easing the
monetary policy in the latter half of 1998 to
lower interest rates. GDP was projected to
grow by 2.5 per cent in 2000.
The process o f electricity reform in
Thailand has been active since 1992 when
the government announced the revision of
policy to encourage private sector partici­
pation in the power sector. In 1994,
Electricity Generating Public Company
Ltd., the first public subsidiary was estab­
lished. This was followed by the sale of
Rayong combined cycle plant to EGCO, a
the wholly-owned subsidiary of EGAT. In
1996, EGAT was restructured into six
operating units and five business units. In
1998, the government set out a three phase
plan for EGAT to be undertaken in three
vears. In 1999, Parliament passed the State
Enterprise Corporatization Bill under
which EGAT was to be privatized. This led
to protests by unions against privatization.
Currently EGAT has four operating units
and six business units but is to be restruc­
tured in the next four years (see page 19)
In February 2000, 53 proposals from
SPPs totalling 2134 MW had been accepted
by EGAT. Thailand’s revised Power
"As o f June 2000, the Asean electric utilities agreed on the
concept o f a regional transmission grid."
Development Plan (PDP), demands that
21 216 MW of new capacity is to be added
between 1999-2001, of which 10 443 MW
is to be developed by IPPs (4597 MW is to
be built by IPPs by 2003). To date, only two
of the seven approved IPP Phase I schemes
have been able to arrange project finance.
The other five IPPs have delayed their
projects by one to three years.
.4s of February 2000, EGAT renounced its
investment plans for the three power pro­
jects, citing unattractive returns as the rea­
son. Subsequently, it terminated its PPAs
until three SPP projects totalling 230 MW.
Thailand’s pre-crisis demand forecasts
were extremely aggressive. The official
forecast for annual capacity addition in the
period 1996-2005 was around 1500 MW
J% E S September 2000
R egional Focus
which is in sharp contrast to the residual
surplus of around 1250 MW in 2005 fore­
casted by ACG. Today Thailand officially
has a ‘large reserve margin’ instead of
‘massive power surplus’. Perhaps it is a
necessary window dressing to assist in the
successful sale o f assets.
A s e a n tr a n s m is s io n grid
For countries in the Southeast Asian
region, the availability of an interconnect­
ing grid would make eminent sense from
the perspective o f coordinated supply side
management. New capacity in the presence
of such a functional and feasible regional
grid would then be planned by mutual con­
sultations between the member countries,
taking into account the demand and supply
o f electricity for the whole region.
Such coordinated supply side manage­
ment would lead to not only better alloca­
tion o f the collective pool of resources of
the member countries, but will also serve to
satisfy the demand of local pockets of
shortages in a country which is closer to
the neighbouring country compared to the
domestic grid.
Most of the above countries already have
some form of an interconnecting network.
For example, such a network exists
between Singapore and Malaysia and
between Malaysia and Thailand. As o f June
2000, the Asean electric utilities agreed on
the concept of a regional transmission grid.
A grid interconnecting all o f the above
countries, however, needs to be tempered
with the issues o f energy securin' and the
present surplus power capacity conditions
existing in most Southeast Asian coun­
tries. For all the ‘official’ bonhomie
between the Asean countries, political and
competitive pressures may override ‘sys­
tem-sense’. Heated debates over access to
‘neighbouring power markets’, ‘power
trade barriers’ and ‘power trade negotia­
tions’ may not be be so far away. The fun­
damentals for these situations already exist
in the differences in power surplus and
tariffs among Asean nations.
In ACG’s perception, the concept of inter­
national grids are most sustainable when the
buyer and seller nations have a substantial
economic difference between them. The
projects in the supplier nation are essentially
an export industry assured of demand and
foreign export earnings. The recipient
nation is assured of reliable and competitive
power. There is little conflict of interest and
energy security issues are not as critical.
An example o f such an arrangement is the
one between Bhutan and India. Thailand’s
plans to purchase power from hydro capac­
ity in Laos is a similar proposition. By the
same token the power trade possibility
between India and Pakistan is a non-starter.
In view of the similarities between the
economies of the Asean countries, an inter­
connecting regional transmission grid faces
substantial complexities. These necessitate
close coordination between the member
countries regarding setting up of new gen­
eration capacities, quantum of load flow
and a commitment to honour purchase
agreements.
As most o f the Asean region moves
towards power pools, the interconnections
will serve to further create a more compet­
itive environment. In the future, IPPs and
privatized assets may access trans-national
opportunities but also face trans-national
competitive pressures.
ACC is a strategic consulting firm focused on
the power and energy sectors. ACC recently
completed a nine month, multi-client study
of 25 countries in Asia - Asia Power 2000
and Beyond. Portions of this article are
sourced from the study.
Contact Details Updated
Email: ceo.gis.acg@gmail.com
Website: www.gis-acg.com
www.power-eng-intl.com 31