I note that with the anticipated electrical tariff hike, there has been another round of IPP bashing by all and sundry. I work with one of the IPPs and I have an insider's view of the whole affair and it is my contention that most of the criticisms levelled at the IPPs are uncalled for.

It may be true that some of the earlier IPPs make excessive profits, etc, and all that but you have to remember that the government-of-the-day then had to resort to privatising power producers in order to get private investment to take up the initial huge capital costs of building power plants. Then again, they had to simulate local participation in these projects so that the local citizenry build up their know-how in the heavy engineering required in building power plants.

They might have done all these using TNB as the vehicle but for various reasons decided to opt for the private sector. I do not know the reasons for this but I would hazard a guess that it is mainly because the private sector is more efficient in matters like these as compared to TNB which is still an offshoot of the civil service.

One of the most important factors in the cost of electrical power generation, which most people are ignorant off or pretend to be unaware of, is that electrical power is not like other commodities like water or fuel. It is not possible to store it in a storehouse and use it only when a customer requires it. As a result of this major difference, to maintain a nationwide power grid which can deliver power at any time to customers, the grid authority (in our case TNB) has to ensure that a margin of power should be on hand.

Most power consumption occurs during the day and at night it is quite possible that up to 30 to 50 percent or more of the power plants have to be shut down as their power is then not required. However, the huge initial investment cost to build power plants remains the same whether the plant concerned is used 24 hours a day or 12 hours a day. Obviously then, if power production profits are tied to actual energy generated, no one will be interested in having a plant which operates 12 hours a day in contrast to one that operates around the clock as they would have to wait twice as long to recoup their original investment.

Time is money, and this is true in any area where initial investment costs are likely to be in the billions. As such, throughout the world in all large countries with a nationwide grid, the electrical power industry establishes its unit energy costs based on two factors. One is the actual energy cost and the other is what is known as the capacity cost (or to end consumers as maximum demand). The capacity charge is intended to pay the costs of building new power plants and to finance plants (known as peak-load plants) which only operate for a certain portion of the day. In Malaysia, TNB collects this capacity charge, or maximum demand, from all commercial or industrial customers where usage exceeds a certain small fixed amount of power.

Domestic consumers are not charged maximum demand as in view of their small consumption on average, it will be impractical to install the meters necessary to monitor maximum demand for all households. Instead, normally the costs per unit energy imposed on domestic consumers are usually higher then those imposed on commercial or industrial consumers meaning that in actual fact, domestic consumers do end up paying in a roundabout way for their capacity portion.

Now if you listen to the media or some of the politicians talk on this issue, it seems as if costs of electrical power generation is solely related to fuel costs and the costs of converting fuel to energy. This is simply not true. Mention is made of how TNB is paying so much for per unit energy to IPPs and only collecting so much per unit energy from their own customers. This is a gross misrepresentation of the facts as electrical power generation costs are not solely decided by fuel costs.

Mention is made of how TNB is paying so many billions to the IPPs for capacity but no mention is made of the fact that TNB also collects capacity charges from all its own customers. As far as I know, I am not sure how much TNB collects annually from its customers on energy and separately for capacity and I am not sure if this information is freely available.

In any case, the capacity portion of TNB's collection should be utilised (as that is what it is intended for) to ensure that there are sufficient peak-load plants which do not operate at full capacity but which are still needed to ensure that the grid does not collapse just because of a minor surge in consumer power demand.

As a result of all the above misrepresentations, the IPPs get a bad press and are made to look like ogres feeding on the general public. It may be true that some are (although that too has to be verified impartially) but the fact of the matter is that if there are any major increases in generation costs and subsequent pricing, the buck stops at the door of TNB and the Economic Planning Unit of the Prime Minister's Department. Most of the inefficiencies which result in a higher-end price to the end customer are normally caused by insufficient planning of future power generation needs, by providing too much or too little power margins, by wasteful and inefficient expenditure, etc.

The IPPs have to bypass fuel costs as no amount of planning can guarantee stability in this area and even the largest most profitable IPP will be dead meat if fuel costs shoot up appreciably. This is an area which only the government is large enough to cope with but even for the government, they can only bear with it to a limited extent beyond which they will have to pass the costs on to the consumers. One might argue that we are a fuel-exporting nation and so should see better times ahead when fuel prices go up, but that is a separate issue for government decision and has no bearing on the IPPs directly.

The IPPs do not have the whole picture of the nation's power needs as that can only be adequately seen by the government through its instruments like TNB and EPU (Economic Planning Unit). As far as the IPPs are concerned, they have in good faith signed power purchase agreements with the respective parties and then delivered what they have promised, failing which stringent financial action could be taken against them. Obviously, the private sector is not simply going to sign such agreements without first ensuring they make a certain amount of profit for their efforts.

If the government, or TNB, is unsatisfied about the terms and conditions of the Power Purchase Agreements or deem that the profits of the IPPs concerned are excessive, then they should not have signed such agreements in the first place since it is they who hold the trust of the rakyat. Why then are the IPPs blamed when those responsible, and ultimately those in control of the entire situation, are the government and TNB?