Session 3 Dato' Razak MyPOWER
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Transcript of Session 3 Dato' Razak MyPOWER
National Energy Security Conference 2012:
MESI Reform Initiatives
Presentation by YBhg’ Dato’ Abdul Razak Abdul Majid
28 February 2012
Table of Content
1
2
Introduction to MESI Reform
Reform Initiatives
MESI Governance and Agency Roles
Accounts Unbundling
Ring Fencing of Single Buyer and System Operator
Fuel Mix Option and Supply Security
Stabilisation Mechanism
Capacity Planning and Competitive Bidding
Industry Structure
Introduction to MESI Reform
1
History of Changes in MESI Structure
Distribution
“Vertically
Integrated”
Dominated by
National Utility- TNB
Early 1990’s -
Fully Regulated
Transmission and
Distribution by TNB
Privately-owned IPPs
allowed to participate in the
generation sector
Mid 1990’s -
Multiple Generation
Players
Transmission
TNB
Distribution
Retail
Present
Franchised
Retailers
Energy
Commission Generation
Transmission
Transmission and Distribution by TNB
Privately-owned IPPs allowed in
generation and franchised retailers in
limited areas for distribution
Transmission
Distribution
TNB Generation IPPs
TNBG & TNBH IPPs
SO SB
Opinions on the Current MESI
Industry players have requested more transparency in the dispatch process
(source: PA study in 2008)
Current dispatch process is managed by System Operator within TNB
Stakeholders expressed desire to see higher efficiency in the industry
(source: PA study in 2008)
Technical performance of TNB’s supply chain has improved
(source: M&E audit report 2008)
a commonly agreed tariff setting mechanism to be established. Current method of
Revenue Requirement calculation by TNB includes non regulated activities such
as UNITEN campus and value of unutilized asset
(source: M&E audit report 2008)
Presently, there is no formal procedure of implementation of fuel pass-through;
government extended billions of Ringgit as fuel subsidies
Transparency
Efficiency
Tariff Setting
Mechanism
Fuel
Customer
Choice
TNB is sole supplier to majority of end-customers (except for small pockets of
franchised areas)
Lagging Behind ASEAN Neighbours In Terms Of Transparency
Malaysia Thailand Philippines
Tariffs by G/T/D
Fuel pass through factor
• Transparency via:• accounting unbundling for
G/T/D• published capacity planning• competitive award of PPA• ring fenced dispatch
• Institutionalized clear tariff mechanisms (base & pass through)
• Significant growth and incentives for RE supply
• Higher degree of transparency driven by implementation of a market based system with liberalization across G/T/D
• Market based tariff system
• Slow growth in RE due to lack of incentive
• However it has highest tariff in region
Additional info:• system losses • metering
charges • subsidies
charges for environmental fund
Info limited to units consumed
• Lacks transparency across key functions• performance by G/T/D• capacity planning• award of PPAs• dispatching
• Adhoc tariff setting mechanism
• Limited incentives for promotion of RE supply (eg. tariffs for RE has no price escalation)
Example:
A simple
comparison of
electricity bills
Transparency
Tariff Mechanism
Renewable Energy (RE)
x
x
x ?
?
!Source: Respective regulator websites
Project Context and Background
June - Dec 2008
Khazanah’s MESI Study
Jan - Dec 2009
KeTTHA-Khazanah Study
• Khazanah regularly carries out
reviews across industries in which
it has interest – 15 studies
conducted so far
• Study carried out during second
half of 2008:
– To assess the key issues
currently faced by the
industry; and
– To put forth recommendations
for reform
– Priority was on National
objectives, followed by
Khazanah and finally investee
company
• Extensive stakeholder
engagement (over 50 meetings
with KeTTHA, EPU, ST, TNB, IPPs,
amongst others)
• As Khazanah is NOT the natural
owner of MESI reform, outcome of
MESI reform study was handed
over to KeTTHA in early 2009
• Led by KeTTHA and supported by
Khazanah, the study was further
refined and amended to include
the design of an implementation
platform
• KeTTHA to;
• Seriously and urgently
reform MESI
• Form a cross-agency, cross
functional team to plan,
track and manage delivery
of reform recommendations
• 1st Mar 2010: MESI PMO
kickstarted operations; Dato’Abdul
Razak Majid is CEO
• 9th Mar 2011: Incorporation of
Malaysia Programme Office for
Power Electricity Reform
Corporation (MyPOWER)
4 December 2009
Presentation to Cabinet
Case to Reform MESI
Status quo Key advantages of reform
Performance driven
• Regionally competitive on cost and service
quality
• Increased transparency and efficiency
• Streamlined and credible governance
People first
• Long term supply security and quality
• Gradual transition of tariff to be sustainable
and reduce subsidy bill
• Sustainable tariff support for the poor
Congruence in policies for Energy Efficiency
and Conservation, Green Technologies and
Innovation
• Efficient use of Energy
• Flexibility to support ‘Renewable Energy’ in
a sustainable manner
• Align with new economic model
ENERGY
INEFFICIENT
ECONOMY
UNSUSTAINABLE
TARIFFS AND FUEL
UNDER-
PERFORMING
MESI
• High cost (i.e. PPAs, reserve
margins)
• Lack transparency
• Fragmented governance
• Fuel supply risks (load shedding
a real risk)
• Subsidized tariffs equivalent to
~10-15sen/kwh or RM8 to 12b
• Attract industries that competes
based on subsidized energy
Addressing the Components of MESI
G
T
D
SO
ring-fenced
SB
ring-fenced
End user
Stabilization fund
PETRONAS
Market price for
marginal gas
Pass-through
Selective subsidization
and stabilization
Govt
Accounting u
nbundlin
g
4
5
6
7
8
12
3
IPP
Renegotiate/
extension9
New IPPs
Fuel
Ensure “economic dispatch”, with marginal (orunused) gas to be bought/sold at market price, andgradual phase out of subsidies*Address security of fuel supply, with a transparentplan, including guarantee on committed volume topower sector and options to secure additional supplyof gas
7
Market structure
• Secure new capacity via transparent internationalcompetitive bidding processes
8
Tariff
• Separate G/T/D tariff formulas with automaticadjustments for fuel pass through, allowable rates ofreturns and efficiency gains
• Maintain policy-driven end user tariff, with selectivesubsidization
• Establish a stabilization fund as temporary bufferbetween G/T/D and end-user tariff
4
5
6
Governance/Policy
• Separate agency roles for policy, planning, enforcement and operations, with robust processes
• Enforce accounting unbundling of TNB’s G/T/D operations
• Ring-fence Single Buyer and System Operations** within TNB for greater transparency, strengthening supervision of regulator
1
2
3
Evaluate broader options for PPA renegotiations9
Reform Packages
2
MESI Governance and Agency Roles
Fragmented Governance and the Lack of Transparency Over Industry
Performance Further Jeopardizes the Industry’s Sustainability
New investments
Generation
New investment
T&D
Tariff
settingFuel policy Liberalization
• Incumbent utility
• Single buyer of IPP generation
• Full control over system dispatch
• Access to end users
• Formulates energy policy
• Approves and develops
recommendation on capacity expansion
for cabinet approval
• Formulates privatization policy
• Approves end user tariff
• Coordinates implementation of energy
policy
• Minister KTAK chairs JPPPET*
• Implement and enforce electricity supply
law (e.g., Grid code)
• Advisor to KTAK
• Monitors TNB's performance
JPPPET* • Chaired by KTAK Minister, includes
EPU, MoF, MITI, MIDA, ST, MTDCA***,
TNB, SESB, PETRONAS
• Discusses tariff review, plant-up
programme and service standards
Tax and
incentives
• Windfall taxes for IPPs
• Bakun project
Capacity required
PPA awards Gas subsidies
Policies
Energy Commission
PETRONAS on gas
supply
**
**
Influencer
Decision-making
Conclusion from Detailed Lab on Industry Governance and Agency
Roles
Governance
area
Rules
Regulation
Completed between Jan 16th – 20th
• Overall focus areas and key policy aspects that will be handled by single entity
• Initial organisation structure & how entity would interact with other agencies/
departments
• Process flow for policy development, impact assessment, and consultation with
clear roles and responsibilities for each step along with timelines
• Additional key data items needed to be tracked for energy policy development
• Timeline for implementation of FCPT and IBR, with proposed governance structure
• Initial options for operationalising mechanism for stabilising tariffs
• Diagnostic of current process for capacity planning and high-level transition plan of
some functions to ST
• Chapter outline, frequency of publication and key items to include in Statement of
Opportunity
• High-level stock-take of rules
• Process flow for rules development
• Details of of capabilities and skill sets needed to execute rule making process
• High level diagnostic of current regulatory capabilities against upcoming IBR
requirements
Policy
development
process
Capacity
forecast
Tariff
decoupling
& oversight
Rule
making
ST Functional
Assessment
Focus area
Single Entity
for Energy
Policy
1
Electricity
Policy
Energy
Policy
3
5
6
2
4
Accounts Unbundling End User Tariff
Accounts Unbundling End User Tariff
Base
Tariff
related
G/T/D tariffs or
Incentive Based
Regulation (IBR RIGs)
Regulatory
Accounting
Unbundling (RIGs)
Ring Fencing of
SB and SOAgency Roles
Fuel
relatedFuel Mix Policy
• Supports setting of
G/T/D tariffs
• Data for base tariff
• Promotes operational
transparency, efficiency and
competition especially with
implementation of pass-
through and intl. competitive
bidding process
• Enhance industry
governance; focus on
economic regulation
(i.e. tariff setting by ST)
• Promote an efficient and
economically sustainable
MESI via performance based
tariffs (includes cost pass
through)
• Weighted average cost of fuel
consumed for periodic
adjustment
• Pass through formula
calculation
Salient Components of Incentive Based Regulation (IBR)
• Separation of TNB’s business entities and accounts - Managed
Market Model
• Imbalance cost pass-through mechanism
• Threshold for regulator approval for imbalance cost pass-
through
• Incentive mechanism
• Determination of reasonable return to licensee
• Fix tariff determination process and decision (regulatory period)
• Stakeholders /consumers consultation for every tariff review
• Regulatory accounts and reporting
Source: Suruhanjaya Tenaga
Ring Fencing of Single Buyer and System Operator
G
T
D
SO
ring-fenced
TNB
IPPs
End user
PETRONAS
Special
Committeereporting
SB
ring-fenced
Objectives of a Ring-Fenced Single Buyer (SB) and System Operator (SO)
Objective:
– Single Buyer:
• Strengthening the planning process, increasing transparency of scheduling and dispatch, power
purchase settlements
• Establishment of arms-length relationships for power purchase agreements
• Clear separation of functions between SO and SB
– System Operator:
• to increase transparency of dispatch to enable compliance audits by regulators
• to increase stakeholder confidence that even with an automated tariff-pass through mechanism
dispatch will be at optimum cost to system
Fuel Mix Option and Supply Security
Gearing for Energy Uncertainties
• Malaysia’s energy
requirements are set to
increase as the
economy advances
towards benchmarks
seen in advanced
economies
• The ‘path’ of the
expected transition will
put significant pressure
on the energy policies
• The ‘path’ depends on
many factors which can
be modeled through
defined energy
scenarios
Fuel Security – What Do We Mean By Energy Security
Four dimensions of energy security
Accessibility
AcceptabilityAffordability
Availability
Affordability: cost to
users, and risk to the
economy (reliance)
Accessibility: barriers
and constraints (fuel
and supplier diversity)
Availability: resources
and infrastructure
Acceptability:
environmental, social
objectives
Source: Frontier Economics
Examples of Energy Security
Availability
Affordability
Accessibility
● Availability of reserves – not the immediate problem (adequate
gas reserves domestically and potential for LNG imports)
● Availability of infrastructure – first aspect of the problem:
□ Gas – current infrastructure limits gas supplies from domestic fields and
LNG terminal not yet completed
□ Electricity – availability of alternative generation has helped to manage gas
supply issues – reserve oil-fired generation capacity has ensured continuity
of electricity supply
● Gas supply issue is about physical infrastructure rather than
political, economic or technological risks
Understanding current gas supply issues using the four dimensions of energy security
Acceptability
● Greater availability
of infrastructure can
address the gas
supply issue:
□ Infrastructure for
gas supply (incl
LNG); or
□ Alternate generation
● Affordability is the second aspect of the problem:
□ Unavailability of gas means that generators have to rely on more costly oil
□ This results in an increase in the cost of electricity – currently TNB faces
this because cost increase is not passed through to customers
● Alternative ways of
addressing issue
have different impacts
on affordability (eg
LNG may be higher
cost than occasional
reliance on oil)
● Diversity of domestic
supply unlikely, itself,
to address issue
● Gas supply issue not directly related to questions of acceptability
Source: Frontier Economics
Fuel Mix Study For The Power Sector
… outputs provide information to trade-off dimensions of energy security
Fuel inputsGas (including LNG)
CoalOil , Nuclear, Hydro, Renewables, will
all be included in generation options
Generator dataGeneration options
Generation costs
Generation characteristics
Demand projections
WHIRLYGIG
modelling
(present – 2030)
Fuel mixInvestment and operation
of generation by fuel type
EmissionsTotal emissions from
electricity generation
CostsTotal cost, average cost
and marginal cost of
electricity generation
Energy security
metricsChanges in metricsPolicy constraints
Source: Frontier Economics
Frontier’s fuel mix study for the power sector
Modelling inputsElectricity market
modelling Modelling outputs
Electricity Modelling
Source: WHIRLYGIG, Frontier Economics
Example: Fuel Diversity Index (HHI)
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1981 1986 1991 1996 2001 2006 2016 2021 2026
HH
I of
elec
tric
ity
Malaysia
Australia
China
India
Indonesia
Japan
Singapore
South Korea
Thailand
Vietnam
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1981 1986 1991 1996 2001 2006 2016 2021 2026
HH
I of
elec
tric
ity
Malaysia
Australia
China
India
Indonesia
Japan
Singapore
South Korea
Thailand
Vietnam
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1981 1986 1991 1996 2001 2006 2016 2021 2026
HH
I of
elec
tric
ity
Malaysia
Australia
China
India
Indonesia
Japan
Singapore
South Korea
Thailand
Vietnam
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1981 1986 1991 1996 2001 2006 2016 2021 2026
HH
I o
f e
lec
tric
ity
Malaysia
Australia
China
India
Indonesia
Japan
Singapore
South Korea
Thailand
Vietnam
Source: Frontier Economics
Pricing Drivers and Mechanism
Gas price mechanism
Gas volume profile
Fuel mix
Tariffs and Stabilization
• Reflect value of gas to
MESI
• Maximize long run value of
gas
• Sustainability of supply• Optimize
dispatch/capacity mix
over time to minimize
overall cost
• Subject to fuel mix
constraints
• Diversify fuel mix and
source to match
benchmark HHI scores
• Pursue lowest cost
diversification strategy
• End-user tariffs that is
competitive vs. Thailand
• Industry revenues that
reflect efficient costs
• Output based subsidy
management
1
2
3
4
Current Situation of Gas Supply and Pricing to Power Sector
Pressure to increase gas price
• PETRONAS has weak incentive to maintain
or increase domestic gas supply to
Peninsular Malaysia
• Power sector incentivised to use gas for
extensive baseload generation
• Result is gas shortage, system security risk
and reliance on costly oil/distillate
What is an appropriate adjustment?
• Higher gas price provides incentive to
increase supply. There will be a risk of
excess supply if demand falls with
increasing prices
• In long run, higher gas price should
encourage power sector to shift baseload
generation toward coal (reducing demand
for gas)
Power sector willingness to pay
(alternative generation – e.g. Coal)
PETRONAS opportunity cost
(MFO or LNG equivalent)
Implications for ESI dynamics
?
What should be the gas price
for power sector
Conflicting interests between gas
supplier and power sector
Current gas price = RM13.70 mmbtu
Stabilisation Mechanism
Concept Description
• Transparent mechanism to
manage the gap between
• Market pricing
• End user pricing
• Mechanism to move subsidy
delivery from fuel input
subsides to end-user cash
subsidies
Examples
Hong Kong: Stabilization fund
managed by utility
Spain: FADE - Funding of tariff
deficit
US Maryland: Stabilization and
tariff transition plan
Process
1. Move to market pricing for fuel
2. Amounts from Consolidated /
Trust accounts transferred into
‘Stabilisation’ Fund
3. Stab. Funds channeled directly
to targeted consumers on a 6
month or 12 month basis
Remarks:
Currently MESI already has a
stabilization concept (i.e. cost-
sharing, PETRONAS fixed gas
price) – however process is
inefficient and promotes
wastages due to non-
transparent, ad-hoc and sends
incorrect pricing signals
A Stabilisation Fund is a Mechanism That Can Be Used to Manage
Impact of Electricity Tariff Increase to End Users
Stabilization
fund
Basic
Concept
Funding
Process
MESI required revenues likely to be volatile
End-user effective tariffs (TNB tariff less subsidy from stabilisation fund) needs to account for ability of consumers to adapt and government subsidy/incentive policy
System deficits/ surpluses arise when revenues collected are below/above system costs
Stabilisation mechanism required to shock absorb transition and volatility, with temporary deficits being recovered from future surpluses
Required revenues
5 4
Time (years)
Size of stabilisation facility
3
1
2
3 4
Collected
revenues
1
2
A Conceptual Example for Use of Stabilisation Fund
Capacity Planning and Competitive Bidding
Competitive Bidding
Capacity Required Status
Coal Plant
Gas Plant
Completed
1,000 MW Tanjung Bin1,000 MW
In Progress
MyPOWER is working with
Suruhanjaya Tenaga to
secure the capacity required
4,500 MW
Industry Structure
Key Drivers for Change
Government financial constraints – i.e. needs to
reduce subsidy via market pricing of commodities -
Fuel pass-though mechanism
Enhanced public trust and transparency in supply
processes (i.e. Competitive capacity plant-up, rule-
based tariff setting and billing, published customer
service level)
Motivation for private sector investment
Enhanced efficient planning and asset management
by industry
Improved management of fuel supply security
Preparation for regional integration
Environmental compliance / CO2 emissions
Environmentally
sustainable
System
security
and
reliability
Economic
viability –
reflective of
market prices
Industry / Transformation Objectives
Industry Structure for MESI and Drivers for Change
Different Paths and Timeframes
High
Medium
Degree of Generation Competition
Low
None Low Medium High
Degree of Retail Market Competition
None
England/Wales1998
England/Wales
California,Norway,Alberta
Spain1999
Australia1997
New Zealand1997
New Zealand1999
Australia2001
California 1997
Norway 1993
Alberta 1996
Argentina2000
Argentina1992
England/Wales1990
8
3
4
2
4
3
5
4
Starting Base
X Years taken for transition
Portugal,Japan1999
Different Models Experimented Elsewhere
Enhanced Single Buyer
IPP Int. RE
Direct
Regula
tor
End users
Distribution
Retail
Transmission TNB Transmission
SO
Generation TNBG
Current ESI
IPP RE
End users
EGAT Transmission
Direct
customers
TNB Distribution
Generation
Transmission
Distribution
TNB
Gen.
INT.
TNB
Transmission
Partial Competition (PC) Model
Regula
tor
IPP Int. SPP
New
DistcoTNB Distco
30%
Direct
Negotiated
Regulated tariff
End usersEnd users
Distribution
Retail
GencoGeneration
TNB TransmissionTransmission
Competitive Bilateral Contract Model (CBC)
Distco
Direct R1 R2 R3 R4
End users
Negotiated
Regulated tariff
Regula
tor
End users
Distribution
Retail
IPPs Int. SPPGencoGeneration
NewCo TransmissionTransmission
Full Competition (FC) Model
Hydro Gencos
R1 R2 R3 R4
End users
Negotiated
Regulated
tariff
Regulated
tariff
Regula
tor
System operator
Transmission
Distribution
ISO PoolSO
End users
TNB Distribution
SB
Regula
tor
SB
Thank You