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IPPs do not benefit from gas subsidy

Penjanabebas, the Association of Independent Power Producers, wishes to clarify recent reports relating to the prevailing misconception that the ‘gas subsidy’ contributes to the overall profitability of the Independent Power Producers (IPP).  

The Association wishes to reiterate that it is factually incorrect to portray our members as beneficiaries of the ‘gas subsidy’ or that any of our members in any way profits from any fuel used in the generation of electricity.

Under the Malaysian IPP model most of the PPAs between our members and Tenaga Nasional Berhad (TNB) operate on a fully despatchable basis (all capacity must be made available to the national grid at any time except during planned scheduled maintenance).

Payments to IPPs consist of two core components; Capacity Payments (fixed payments as specified under the respective PPAs to recover the costs of developing power generating facilities and fixed overheads) and Energy Payments for fuels consumed in generation and variable operating rates (to cover maintenance costs incurred during generation).

All IPPs only commence generation of electricity, and thereby incurring fuel costs or variable operating expenses upon instruction from the off-taker (TNB).  

Once instructed to despatch electricity by the off-taker, fuels consumed in generation by the IPPs are quantified and billed back to the off-taker at the predetermined rates as set by the government – in respect of gas, or at rate dictated by TNB for coal, based upon the quantum of electricity generated and at agreed upon efficiency rates.

In the event IPPs are unable to meet despatch as per TNB’s instruction, penalties will be imposed.

As such the cost of gas as a fuel to generate electricity is a component that the IPP industry does not derive any financial benefit from. Instead, the savings in gas costs (difference between international gas prices and fixed price set by the Government) are passed on directly to consumers through lower tariffs.  

Since 1997, the Government has elected to shield electricity consumers from the volatility in gas pricing by setting a fixed cost for gas to electricity generators.  Prior to this Tenaga Nasional Berhad (TNB) had been able to adjust their prices to consumers in response to market pricing, which is in essence what is meant by the term a ‘fuel cost pass-through to consumers’.  The use of a ‘fuel cost pass-through to consumers’ is an international norm.

Moreover, it’s important to note that the IPPs are in no way involved in decisions relating to electricity tariffs as we are mere contract generators to TNB, whereby our generation facilities are contractually made available to TNB. Importantly, the terms and rates contained within PPAs remains unchanged regardless of changes to electricity tariffs.

The Association and our members would like to highlight that there is a need for rational and objective discussion on the Malaysian energy generation sector, and this must be undertaken from a balanced perspective to allow the public to make informed judgments on the issues faced by the sector. Such understanding is important for engagements aimed at the development of a long-term sustainable national energy policy.

Our members would like to reiterate our commitment to engage in dialogue or discussion with members of the media and other stakeholders, with the aim of achieving understanding, support and commitment to meeting the nation’s future energy needs.