The trappings of power

Posted on March 26, 2011. Filed under: Energy |

-The Star-

DO you remember the feeling of relief that sweeps over you when the lights come back right after a power outage? Now, imagine this. Millions of Japanese are on tenterhooks, bracing themselves for the exact opposite to be blanketed by darkness as the country grapples with the after-effects of a series of catastrophes which have led to a hair-raising power crunch.

In Malaysia, not unlike many other countries, Japan’s Fukushima nuclear fallout has slammed the brakes or so it appears on the plan to harness nuclear power. Safety over climate appears to be the realisation that has set in, throwing a wet blanket over the so-called global nuclear renaissance.

Shelve the nuclear plan and move on, you say? Sadly, it’s not that simple. Definitely not when it comes to managing the country’s energy supply.

The gas-sing game

Status check currently, 52% of electricity in Peninsular Malaysia is fired up by natural gas, 40% coal, 5% hydro and the rest from diesel, fuel oil and renewables. But that’s not to say all’s fine even with the current mix.

Gas is supplied by the national oil company Petroliam Nasional Bhd to the power sector at a pegged price of RM10.70/mmbtu (million British thermal unit) with an allocation of 1,250 mmscfd (million std cu ft per day). On the other hand, Tenaga Nasional Bhd (TNB) buys its coal at market prices, which means the utility is vulnerable to the volatile prices of coal in the international market. Hydro power in the peninsula, unlike its abundance in Sarawak, remains largely limited as it is almost fully tapped.

Here’s the headache. Gas and coal are traditional fossil fuels, which means they will one day run out (note: not soon, but sometime in future).

For as long as Petronas has to subsidise the price of gas it supplies to the power sector, the supply will likely remain capped. “Petronas cannot afford subsidising to the tune of about RM19bil every year in gas subsidy alone. That’s a huge amount,” its president and chief executive officer Datuk Shamsul Azhar Abbas had said late last year.

“A significant issue is how best to allocate scarce energy resources between competing users. Competition for resources exists between the power sector and non-power sector. The current situation whereby some fuels are made subject to price control while others are subject to free market prices has led to inappropriate allocation of fuels within the energy sector,” Energy Commission chairman Tan Sri Ahmad Tajuddin Ali points out.

In a nutshell, for as long as Petronas can reap healthy margins by exporting natural gas at international prices (LNG is largely exported to East Asia namely Japan and South Korea), there is really no appeal to raise the gas supply to the power sector as that would mean more subsidies, hence further eroding the oil company’s margins.

It is widely known that both TNB and Petronas have held talks on gradually raising the purchase price for gas but divergent views on what those levels should be have led to a stalemate.

That’s not to say the Government has not indicated that subsidies would have to eventually be cut. In fact, Pemandu, an agency that is driving major reforms in the country, has crafted out a plan to gradually cut subsidies and raise the price of natural gas provided to the power sector on a half yearly basis to eventually close the gap with international benchmarks.

The inevitable consequence is that end-users will have to brace themselves for the ascent of electricity bills. For a Government working on winning voters’ hearts, raising electricity rates is largely viewed as political suicide. So, that plan is on hold.

The impact is far reaching. “It is very difficult to determine the future balanced/optimal energy mix for power generation given the huge subsidy element on gas which distorts consumer preference to buy cheapest energy source,” says an industry analyst.

“Only when the subsidy is removed, will market forces determine consumer choices,” he adds.

Gas crunch?

Meanwhile, the power industry is facing a gas crunch of sorts. According to industry observers, the volume of gas allocated to the power sector is sliding despite the fact that demand has been rising. There’s data to back that up.

Based on a 2010 Grid System Performance Report posted on the Energy Commission’s website, the average daily gas off-take by the power sector slipped from 1,270 mmscfd in 2008 to 1,224 mmscfd in 2009. Last year, it fell further to 1,139 mmscfd due to higher gas curtailment.

Consequently, the energy generated by gas plants slipped from 61.7% in 2009 to 52.8% in 2010. This year, the supply of gas to the power sector is expected to further fall to 1,100 mmscfd.

“There is a lack of indigenous supply. For the industry to use gas from other sources, it has to be priced to the market. Otherwise someone has to bear the difference and if it is negative, it will impact Petronas’ bottomline, which is not fair. Is it tenable to the system that someone has to sell below the cost? Gas pricing is not just about the impact on voters but also the economy,” says Ahmad Tajuddin.

To meet the burgeoning demand, Petronas is building its maiden LNG regasification facility in Malacca to import LNG which is expected to be available by April 2012.

“Once that’s done, we can start buying LNG from Qatar or other markets and pump into the Peninsular Gas Utilisation pipeline network,” he says. But, as an analyst points out, this will be market driven. In other words, TNB has to be prepared to pay market prices for imported natural gas.

Coal conundrum

Meanwhile, to make up for the gas shortfall, coal utilisation is expected to rise. In fact, it has already from 32% in 2009 to 42% in 2010.

Tajuddin says a shift to coal may appear to improve fuel diversification, but “relying on more imported fuel might not be the right decision” and this it is inconsistent with Malaysia’s commitment to reduce its carbon intensity by 40% in 2020.

With the nuclear emergency still being played out in Japan, the prices of conventional fuels have been steadily rising. That’s bad news for TNB, which earnings are highly sensitive to the swings in coal prices. Worst still, as it stands now, it has no wiggle room to pass the extra cost on to the independent power producers it buys electricity from, nor to the end-users.

That’s a big headache. According to TA Research, every US$1/tonne change in coal price could shave 1.9% off TNB’s earnings.

Furthermore, if nuclear is struck out of the list of sources for future energy supply, that would mean Tenaga has no option but to expand its gas and coal capacity.

With that, industry analysts are not holding their breath for a possible upward re-rating. If anything, there’s grave concern.

“… we are concerned about the current high coal prices and lack of clarity on a tariff hike that is undermining TNB’s earning potential,” says Maybank IB Research.

Renewing the commitment

On the back of that, it appears that the siren call for the country to join the race to tap renewable sources of energy is also growing louder. “Our RE agenda can no longer just be about rhetoric. We have to seriously start planning for this in a big way,” says an industry observer.

The climb has to start from somewhere and for Malaysia, the starting point is way low.

Back in 2001, the Four-Fuel Strategy (oil, gas, hydropower and coal) was expanded to to a Five-Fuel Strategy which included renewable energy into the mix. The target, on hindsight, was rather lofty for 5% of electricity generated to be tapped from renewable sources by 2005 or some 500MW-600MW of installed capacity.

Currently, there’s merely 500MW of power that stems from renewable sources. Here’s the crunch only 50MW is connected to the grid while the rest are owner-consumed. This is, needless to say, way below the target.

As the pursuit of RE is relatively new, there are kinks that need to be sorted out. The subsidy element in the power sector is one.

The other involves the daunting cost factor. “At what price will it (RE) become competitive is something we have got to manage and adjust, so it becomes a real option. At the moment, at current prices, there are many who say that it is still not economically feasible,” says Ahmad Tajuddin.

A good starting point is the Feed-In-Tariffs which is expected to be implemented by the second quarter of the year. Essentially, the tariffs, a mechanism for energy producers to sell their power at guaranteed prices which in turn provides some form of financing support for new investments, are meant as incentives to woo industry players to get in on the country’s renewable realm. (more on page 22).

Meanwhile, until large-scale power from solar panels or wind turbines are deployed to the grid, energy consumers are likely to remain apathetic.

Game changer

Naturally, like all things new, scepticism abounds. Some say that the country’s stand on renewable energy and climate change, at this point, is powered by near-empty rhetoric. Others say, the potential may be there but sadly, the political will is weak. Lest you forget, the renewable agenda is still work in progress for many major developed nations in the world.

Rattling the new-fangled clean and sustainable energy drive is Japan’s nuclear meltdown which has forced many key countries

to re-assess their stance on carbon-free civil nuclear energy. It helped little too that nuclear energy has long been a heated divisive issue.

OSK Research’s Chris Eng puts it succintly: “It’s just a matter of which is the worse devil fossil or nuclear.”

Still, not all is lost. There’s hope yet and it’s wrapped up in two words new technology.

“Safe nuclear does exist” screams the headlines in UK’s The Telegraph over the week. There’s a safer and cleaner nuclear “Wonder Fuel” called thorium, which has much lower radiation than uranium. India and China, the two countries with the most ambitious nuclear plans in the world, are leading the pact with this new system.

Indeed, it if works, that’s great news for the world’s energy landscape. For Malaysia, it would be an unexpected game changer.

Thorium is present in the ores of rare earth elements. The theory is that rather than bury it underground in concrete, thorium could be bred into a nuclear fuel.

Now, remember the controversial rare earth refinery – the world’s largest and the first outside China being built by Australia’s Lynas Group in Kuantan, which potential environmental hazard has been the root of much public scorn in Malaysia?

Indeed, these are interesting times …

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