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Band aid but structural problems remain

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Band aid but structural problems remain  Empty Band aid but structural problems remain

Post by hlk Mon 05 Dec 2011, 18:43

Tenaga Nasional Bhd (TNB) has been given a lifeline by the government and Petroliam Nasional Bhd (Petronas) in order to deal with its mounting fuel bill. Much has already been reported about TNB’s fuel worries, with Petronas curtailing gas supplies during the maintenance of its plants.

Last Thursday, TNB announced that it had received a letter from the government outlining a fuel cost sharing mechanism in order to address the increased cost borne by the national power provider. In the announcement, it was stated that TNB, the government and Petronas would equally shoulder the RM3.1 billion additional fuel burden.

Earlier on, TNB CEO Datuk Seri Che Khalib Mohamad Noh had hinted about a possible cost sharing mechanism between the national power player and Petronas as the utility sank deeper into the red. This was the result of higher operational costs incurred due to the need to run its gas-powered plants on more costly fuel oil and distillate as well as importing power from Singapore and Thailand.

Although there is no question that this will help alleviate TNB’s troubles somewhat, it is just a band aid. It is clearly a short-term measure, which does not fix the underlying weaknesses plaguing the sector.

The main issue that still remains to be resolved is a pass-through formula. As long as TNB is not allowed to pass the increasing cost of fuel to its customers, this issue will keep cropping up time and time again. Even raising tariffs is not the solution as it, like the fuel cost sharing mechanism lifeline, is only a stopgap measure.

Another question that should be asked is the role of the independent power producers (IPPs) in all of this. When it became clear that the gas shortage was getting to a critical stage, in an unprecedented move, TNB and the IPPs sent a joint letter to the government asking for a solution.

This likely stemmed from the fact that running their gas turbines on fuel oil and distillate in the long-term would shorten the life of their machines, which would mean higher maintenance costs down the road.
One question that arises is why the independent power producers have not been asked to share the burden of increased fuel costs.

But why have the IPPs not been asked to share the burden of increased fuel costs?

According to an industry observer, the cost sharing arrangement was probably undertaken because the situation had got to the point where immediate action was needed.

“Going to the IPPs may slow the process down since they are all in the private sector and some of them are listed companies. Since this plan is between government entities, it would get implemented faster,” said the industry observer.

The national power provider acknowledged how critical the situation was in its announcement to Bursa Malaysia, stating: “In view of the urgency of the matter and the critical financial situation facing TNB, the company will be liaising as soon as possible with the relevant parties to implement this mechanism.”

Earlier on, Che Khalib had warned that if nothing is done, TNB would be facing a possible full-year loss for FY12, the first time that has happened in more than a decade.

However, once the pressure on TNB has been eased somewhat, perhaps the government might explore the possibility of asking the IPPs to foot part of the bill as well.

In the end, given that TNB is still the sole offtaker for all the power produced in the country, it would be in the interest of the IPPs as well to keep the country’s power machinery going.

However, sceptics will undoubtedly point out that some of the IPPs may bristle at paying because they feel TNB is inefficient.

Hence, one of the proposals being floated is for MyPower Corp, an entity set up by the government to facilitate change in the power industry, to unbundle TNB’s accounts.

The argument goes that by separating out the generation, transmission and distribution units, it would help to improve transparency as well as identify the problem areas.

However, all of this will not happen if there is no political will to back it.

While analysts are positive on the move by the government, most acknowledge that it is a short-term measure. OSK Research pointed out that while the three parties would share the costs for the period between January 2010 and October 2011, there is no mention whether the cost sharing extends forward.

“We believe TNB will still have to generate power from alternative fuels up to January 2012,” said OSK. The research house also estimated that as a result of the fuel sharing, there would be a one-off writeback of RM1.73 billion, which would mean that TNB’s “other” fuel costs in FY12 would drop from RM1.1 billion to RM368 million.

There is some good news on the horizon for TNB. According to a report by AmResearch, it is expecting gas supply, while not fully back to normal, to be 10% above the 950 mmscfd registered during 2HFY11.

“Notwithstanding the ongoing gas shortage, the Economic Planning Unit had earlier given assurance that TNB will secure 1,250 mmscfd in 2008 to 2011 and 1,350 mmscfd next year onward. Hence, we expect Petronas, which will now share a third of the additional fuel cost, to speedily resolve its upstream problems,” said AmResearch.

While TNB has now been given some breathing space, it is uncertain how long this measure will help to keep the company’s head above water.

One thing is for certain, the government should not be complacent and wait too long before finding a more permanent solution.
hlk
hlk
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