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  1. 1. THE DYNAMICS OF THE ELECTRICITY SUPPLY INDUSTRY (ESI) A PUBLIC LECTURE BY TAN SRI LEO MOGGIE AT THE INAUGURAL DISTINGUISHED SPEAKERS’ PROGRAMME BY THE ENERGY MARKET AUTHORITY OF SINGAPORE 29TH APRIL 2011 -------------------------------------------------------------- Ms Chan, Distinguished Guests, Ladies and Gentlemen, Introduction 1. It is a pleasure to be in Singapore again. But first, I would like to thank the organizers, the Energy Market Authority of Singapore (EMA), for inviting me to speak in this inaugural Distinguished Speakers’ Programme. I appreciate this privilege of sharing my thoughts on the dynamics of the Electricity Supply Industry (ESI), with respect to the countries of ASEAN and within the context of current developments and realities. My comments are made in my personal capacity as someone who has been involved in the industry for many years, not as Chairman of Tenaga Nasional Berhad.
  2. 2. 2 2. With regard to issues of energy, we are all aware of global concerns with carbon emission and climate change, and the significant role of the mitigating steps the energy industry can take. That aside, there has been a great deal going on around the world lately which are worthy of our attention because of their profound impact on the dynamics of the energy and electricity supply industry today – the floods in Australia earlier this year, the on-going instability in the Middle East and North Africa, the triple earthquake / tsunami / nuclear tragedy in Japan. 3. It will be some years yet before the world fully recovers from the effects of these events. But, among the important lessons learned is the reality of how globally and economically connected we have become and how profoundly vulnerable the industry is to the vagaries of nature and the multiple crosscurrents in the global economics. And as an immediate reaction, these events will lend to some adjustments in the way the electricity industry carries on with its business. Ladies and Gentlemen,
  3. 3. 3 Dynamics of the ESI 4. The Electricity Supply Industry (ESI) of ASEAN, which serves as the backdrop of what I am discussing today, faces multi- dimensional challenges in fulfilling its responsibility to deliver reasonable, affordable and reliable electricity supply to consumers and in support of national development objectives of the respective countries. These include depleting indigenous energy resources, high demand growth in the electricity sectors, huge investments that are needed, increasing and volatile fuel prices, vocal public demands on the issues of environment at a time when customers’ expectation are also increasingly sophisticated. On the part of the utilities, this calls for prudent management and planning to be put in place, which involves finding a balance between project development and its associated risks, and exploring alternative supply options and technologies. 5. The utilities will have to manage a delicate balance among the primary elements which drives and determines the dynamics of the industry, namely Energy Supply Security, Competitive Costs, Green Energy and Environmental Sustainability and the assurance of Safety. 6. For example, Green Energy goals of reducing the level of carbon emission and mitigating climate change are much desired. However, the cost of available technology for Green Energy today is still very high and therefore not cost efficient. And also current technology on renewable energy is still not dependable in terms of
  4. 4. 4 security and stability of supply. It is almost necessary to have a replicate generation capacity for base-load supply. 7. Similarly, industrialization policy that encourages the setting up of heavy industries runs contrary to the objective of reducing carbon emissions, as it is also contrary to the objective of encouraging efficient use of energy. The question is should high-energy consuming industries, which are likely to be highly polluting be allowed to be set up? Those tasked with framing a country’s industrial policy cannot ignore the impact such a policy will have on the country’s energy supply.
  5. 5. 5 Ladies and Gentlemen, Energy Supply Security 8. Since power plants require fuel to generate electricity, obviously fuel supply security is critical to ensuring the ability of a power utility to fulfill its responsibility of delivering safe, secure and reliable electricity to its consumers. 9. Generally, the ASEAN countries are or may seem to be in a comfortable position with regard to the current position of supply security. The majority of the countries of ASEAN utilize natural gas as the main source of electricity generation. Currently, for example, Brunei, Malaysia, Thailand and Singapore are largely dependent on natural gas for power generation. Natural gas is relatively abundant within the ASEAN region, with proven reserves of about 4% of global reserves. 10. In the North ASEAN region encompassing the Mekong Basin, in particular Lao PDR (People’s Democratic Republic) Myanmar and Vietnam, power generation is mostly derived from hydropower. 11. Even though presently the role of renewable energy is still very small, renewable energy is already part of the generation mix, for example geothermal for both Indonesia and the Philippines, biomass and geothermal in Thailand and biomass in Malaysia.
  6. 6. 6 12. This level of comfort in energy supply security is however compromised, even in the short term, by the rising trend in energy prices that we are seeing now. What is clear is that there will be increased challenges in ensuring supply security in the longer term. Fuel supply security within the region revolves primarily around three fossil fuels, i.e. oil, natural gas and coal. Brunei, Indonesia, Malaysia and Vietnam are countries in the region with oil reserves at 1.1, 4.4, 5.5 and 4.5 thousand million barrels respectively. These reserves are however finite and fast depleting due to the high regional demand, as well as increasing demand for export revenue. 13. It is the same for gas. ASEAN countries have a proven reserve of 4% of global reserves, and accounts for about 6.6% of the world’s production. We are already seeing some strains in gas supply. In Malaysia, for example, the development of natural gas is also further hampered in that it involves smaller fields containing CO2 and the increase in exploration and production costs. 14. In the case of coal, while the Asia Pacific region is reported to have the second largest proven reserves in the world, after Europe and Eurasia, most of the coal within the region is found in Indonesia, though there are some smaller quantities in Thailand, Vietnam and Malaysia (Sarawak). 15. At the same time, Asia Pacific is also the largest consumer of coal. In addition, most of the coal produced and consumed within the
  7. 7. 7 region is of lower calorific value coal or lignite used at mine-mouth coal plants within the region. Ladies and Gentlemen, 16. The response adopted by individual countries in ASEAN to mitigate the risk of supply security is very much influenced by available resources. Most adopt a general policy of fuel diversification. There is however some focus on a dominant particular fuel choice, especially where such a resource is obtainable domestically. 17. For instance, Brunei’s energy supply is relatively secure. Brunei has an abundant domestic natural gas supply and gas will continue to be dominant in its generation mix. Even so, Brunei is examining the possible sourcing of future long term capacity from Sarawak’s hydro power projects to complement its gas-based plants. 18. Meanwhile, Indonesia’s current high economic growth also means high demand growth for power. In order to meet this demand, Indonesia is focusing on fast track projects of coal-fired plants and reinforcing its transmission network, including grid interconnection projects for energy transmission from coal-fired plants to load centres and grid connections between its main islands. The Philippines is diversifying its generation fuel mix. So does Thailand, which has formulated quite a comprehensive fuel diversification strategy, ranging from Renewable Energy (RE) sources and fossil fuels,
  8. 8. 8 augmented by its hydro imports from neighboring countries. Singapore will continue to be highly dependent on gas powered plants, and in order to manage its supply security, Singapore will diversify its sourcing of gas and is investing in infrastructure for LNG imports. 19. For Peninsular Malaysia, where 40% of generation mix is from coal, which is primarily sourced from Indonesia, Australia and South Africa, the risk of fuel supply is a real challenge to Tenaga Nasional. In an effort to manage the increased risks in fuel security and, in particular the worrying prospect of having too much coal in the generation mix, Malaysia is also investing in infrastructure for LNG imports as an alternative for gas from domestic supply. In Malaysia’s diversification policy, natural gas will continue to be one of the major fuels for base-loan electricity generation. The first LNG import facility is under development in Malacca and is expected to be ready in August 2012 20. Malaysia also has a large hydro potential of approximately 28,000 MW in Malaysia’s State of Sarawak. The actual capacity that can be developed is likely to be much less, but still substantial. As may be recalled, the original plan for the development of the 2400 MW Bakun hydro project in Sarawak, was for part of the power to be transmitted via submarine HVDC cable to Peninsular Malaysia. Power from Bakun is now totally reserved for use in Sarawak.
  9. 9. 9 21. The development of major hydro power has its own challenges, which requires proper planning of the future livelihood of affected local communities in a comprehensive way. The implementation of hydro power projects has to be part of extending the development process encompassing the economic future and welfare of the communities that are affected. As long as such issues are properly addressed, the prospect of transferring hydro power capacity from Sarawak should be revived, particularly as there will be serious concerns on the development of nuclear power post Fukushima. 22. As can be appreciated, the investments that will be needed in the future to meet the demand for power infrastructure in the region are huge. According to some industry experts, ASEAN, with 601 million in population and current total generation capacity of about 130,000 MW, will require more than USD 100 million in investments in the next 10 – 15 years (ACE & IEEJ, 2006) to meet its rapidly growing electricity demand, which is at an average of 3.8% per annum until 2030. 23. Let me also comment on the role of nuclear power generation in ASEAN. A number of countries in the region have made some early preparations to include nuclear power in their respective generation mix. Vietnam is perhaps more advanced in its preparation to build its nuclear power plant, as compared to other countries in ASEAN.
  10. 10. 10 24. However, what happened in Fukushima Daichii, Japan is likely to raise new concerns on the future of nuclear power. Those in the nuclear industry continue to be convinced of the technical safety of modern nuclear reactors with their stringent safety features. They will point out that the Fukushima reactor is outdated and was in fact expected to be decommissioned soon. Also the main argument supporting the use of nuclear power is because it is seen to be the only viable technology that will address the issue of global warming and climate change. Then came the March 11th tragedy. The supporters of nuclear power will also point out that as a result of Fukushima, there will be more stringent regulatory rules and design criteria are going to be further tightened. The challenge, post Fukushima, however, is not strictly technical but one of public acceptance. With all the images of the Fukushima nuclear plant meltdown fresh in their minds, together with footage of what happened in Chernobyl as Ukraine commemorated the 25th Anniversary of the tragedy three days ago, it is unlikely that, at least in the short term, public opinion can be persuaded to support the use of nuclear power. For a number of countries in ASEAN that have factored in the use of nuclear as part of its generation mix, Fukushima meant these plans will need to be revisited. It will also encourage pressure of public opinion for governments and utilities worldwide to focus more on the development of renewable energy and green energy technologies. Cost Competitiveness
  11. 11. 11 25. As to Cost Competitiveness, we know that electricity pricing policy varies from country to country, depending on a number of considerations, such as fuel price subsidy, availability of indigenous resources, economic multiplier and the country’s generation mix. Electricity tariffs in Singapore and the Philippines, for example, are based on full market price of fuels and, therefore, are higher compared to tariffs in other countries in ASEAN. In cases where the electricity supply industry is still government-controlled, even if by proxy, and where there are some moderate natural resources per capita, elements of subsidies are often embedded in pricing. This results in relatively lower tariffs in countries such as Indonesia, Malaysia and Thailand. For countries which are rich in natural resources for their electricity generation, the consumers are able to enjoy relatively cheaper tariffs, since fuel inputs are predominantly domestically-based – e.g. natural gas for Brunei and hydropower for Lao PDR (People’s Democratic Republic). 26. Price volatility is an accepted feature of fossil fuels. As we know, prices of natural gas and coal often move in tandem with prices of crude oil. This presents a great challenge where spikes in oil prices occur, typically during events of crisis such as the current political instability in several North African and Middle East countries. As is expected, the main fossil fuel (gas, coal) prices used for the power sector in ASEAN are directly linked to and move in tandem with the movement of international oil prices. This is now compounded by increased coal generation due to the reduction in electricity from nuclear plants in Japan and Europe, particularly
  12. 12. 12 Germany, as a result of Fukushima. Demand for coal from Japan and Germany have increased, putting pressure on coal prices worldwide. Ladies and Gentlemen, 27. It has often been commented that micro managing of the activities of the power supply industry by government will result in inefficiency. From the industry’s perspective, utilities should be free to manage their own operations. In an ideal electricity supply industry environment, government intervention in the operation of the industry should be avoided. However, we are living in a world where, according to the International Energy Agency (IEA), around 1.5 billion people still have no access to electricity. Of relevance to us in this room is the fact that 10% of them reside in the ASEAN region. 28. There is a real disconnect between the uses of electricity in advanced economies and the population in the less developed areas. There are areas where companies can come in, supply electricity and do a perfectly viable business, such as in Singapore. There are also areas where proactive intervention and subsidies are necessary to promote increase in the rate of electrification. 29. We also need to remind ourselves that electricity is essential for socio-economic development and that access to it is a basic need for the general population. So, whilst many of us talk about advanced issues on the electricity supply industry such as market liberalization,
  13. 13. 13 renewable energy and new technologies like Smart Grid and Carbon Capture and Storage (CCS), the basic need to supply electricity remains an issue in many parts of the world, including parts of the ASEAN region. It is in cases such as these that government intervention is necessary to ensure that electricity supply can be delivered to all at affordable prices. 30. Energy pricing can be a complicated issue. For example, one aspect which countries that produce resources (oil, gas, coal) are constantly engaged in is to determine the optimum prices of the indigenous fuel resources for domestic use, as opposed to maximizing revenues through exporting it at market prices. Countries such as Indonesia, Malaysia and Thailand subsidize their fossil fuel prices for use in the domestic power sector. This is seen as appropriate and as a necessary support for domestic industry, with its components of value added activities. 31. Let me say this is not peculiar to the region. In 2009, USD 312 billion was spent on worldwide fossil fuel subsidies. As far as ASEAN is concerned, Indonesia spent USD 12.5 billion, while Malaysia and Thailand spent USD 4 – 5 billion, according to the World Economic Outlook 2010 published by the IEA. 32. Those in the industry will point out that fuel subsidies create artificially lower energy prices, encourage wasteful consumption, distort market signals and undermine the competitiveness of renewable energy. They are right. However, there are many reasons
  14. 14. 14 why governments continue with the policy of subsidizing energy prices - primarily for social-economic and affordability purposes. For example, Indonesia’s end use electricity prices are heavily subsidized. Subsidy restructuring programs, while absolutely compelling on economic ground, need to be carefully crafted and judiciously implemented, not only to ensure sustainability of the energy sector, but also to sustain the stability of the economy. Elective governments are sensitive to public opinion, even if at times, at the cost of being seen to compromise economic management. Green Energy and Environment Sustainability 33. Yesterday, at Universiti Tenaga Nasional, we had Professor Dr. Rajendra K. Pachauri, Chairman of the Inter-Governmental Panel on Climate Change speak to us and clearly showing how urgent global action is required to mitigate the march of climate change. ASEAN Governments generally recognize environmental sustainability as their national agenda. Malaysia, Singapore and Thailand have taken initiatives to incorporate green energy strategies in their generation plan. Singapore has also advanced its CO2 reduction initiatives with the promotion of energy efficiency and renewable energy, as well as other green energy projects, such as the waste-to-energy power plant and intelligent energy system pilot projects in Pulau Ubin. The Government of Thailand also promotes renewable energy production and usage in its long term development plan, with its current RE installed capacity of 405 MW (i.e. 1.4% of Generating Capacity). I
  15. 15. 15 understand Indonesia is planning to harness substantial capacity from its geothermal potential. 34. In Malaysia, Tenaga Nasional is aligning its green energy initiatives with the green energy agenda and the 40% carbon intensity reduction voluntary pledge made during the Conference of Parties 15 in Copenhagen in 2009. The policy focuses on driving for operational efficiency and encouraging Energy Efficiency among its consumers. Tenaga Nasional is also improving the generation thermal efficiency of its power plants, reducing Transmission and Distribution Losses and working on Demand Side Management. 35. The promotion of a culture of Energy Efficiency and Demand Side Management, unfortunately, has not been given much attention by the industry in the past. Now, it is what we must emphasise and focus on. For example, incorporating energy efficiency in building plans. The Malaysian Government will introduce the Feed-in-Tariff (FIT) this year as part of the initiatives to promote power generation from renewable energy sources. The FIT will help accelerate the development of renewable energy and covers technologies such as solar, biomass, biogas, mini-hydro and municipal solid waste projects. 36. Going by comments in the media, there is a lot of interest in renewable energy usage. It should however be recognized that while there is encouraging emphasis on promoting the development of renewable energy for electricity, its application in the near future will
  16. 16. 16 remain restricted to fulfilling specific roles. In addition, consumers are likely to be more responsive to energy efficiency initiatives when they are required to pay rates that reflect actual cost of production. Ladies and Gentlemen, ESI Structure and Development 37. As we have seen, the dynamics of the electricity supply industry of ASEAN is such that while member countries share common issues in ensuring the region’s long-term energy security, each country faces different sets of challenges and corresponding mitigating strategies. The structure of the electricity supply industry of ASEAN member countries also differs from one country to another. 38. Let’s take the case of the liberalized market structure. Liberalization of the electricity supply industry, where generation, transmission and distribution are decoupled, is expected to bring about efficiency gains and also will open up the industry to a greater number of investors. In theory, there is a strong basis for this – competition encourages efficiency. But the global scorecard on the liberalization of the electricity supply industry, and where electricity is traded through the operation of a pool market is somewhat mixed. In general, prices to consumers have increased. As far as the ASEAN electricity supply industry is concerned, the degrees of liberalization differ from one country to another. Singapore has done relatively well. Singapore’s experience and the role of its Energy Market
  17. 17. 17 Authority (EMA) can be a useful case study for countries of the region. Others, such as Malaysia and Thailand, retain incumbent vertically integrated utilities with the participation of the IPPs in the generation sector. 39. As a personal observation, let me say that it is necessary to take into account the gaps between the existing and the liberalized structures. These gaps must be addressed. In particular, the rules of the market has to apply to the whole chain of supply right to the consumer, for full liberalization and the operation of the electricity pool market to work. 40. Many of the pre-requisites for liberalization to work are matters of policy that are in the hands of national governments. For example, the removal of cross-subsidies in tariffs, institutionalizing the tariff review process, establishment of a fuel pass-through mechanism and a robust regulatory process with clear structure of accountability assigned to stakeholders in the industry. Ladies and Gentlemen, Cross Border Potential 41. I would also like to mention the potential area of cooperation among the power utilities of ASEAN – that pertains to the power
  18. 18. 18 system interconnections between the neighboring countries of ASEAN, namely the ASEAN Power Grid. 42. The ASEAN Power Grid has been a subject of discussion in the forum of Heads of ASEAN Power Utility Association (HAPUA) for some time now. With the ASEAN Power Grid, there can be cross border electricity trading between interconnected power systems. The ASEAN Power Grid can also facilitate alternative supply options for emergency assistance during crisis situations, and functions as an economic exchange of transactions between utilities. These exchanges are technically feasible and commercially viable, as demonstrated by the existing interconnections between Tenaga Nasional and the Electricity Generating Authority of Thailand, which was achieved through bilateral agreements between both utilities and between Tenaga Nasional and SP Power Asset Limited of Singapore (originally signed between National Electricity Board (LLN) of Malaysia and Public Utility Board of Singapore). In addition, the sharing of spinning reserves amongst neighboring countries’ grid systems will also, to some extend, help to reduce or defer addition of new capacity plant-up requirements. This cooperation among power utilities of ASEAN can gain momentum with more push from the Governments of the countries of ASEAN. Conclusion 43. On that note, and by way of conclusion, let me summarize what have been discussed:
  19. 19. 19 (i) The electricity supply industry of ASEAN faces multi- dimensional challenges in fulfilling its responsibility to deliver reasonable, affordable and reliable electricity supply to meet the needs of consumers and help support the regions’ national socio-economic goals and objectives. (ii) For utilities, prudent risk management and planning is necessary, where there has to be a balance between project development and its associated risks. Managing the interactions of the dynamics of supply security, cost competitiveness, environmental concerns and the overriding assurance of safety, will determine the choice of supply option and technologies. For example, new concerns with nuclear energy as a result of Fukushima will increase pressure on renewable energy and give new focus on Energy Efficiency and Demand Side Management. (iii) For some countries in ASEAN, policy intervention continues to be necessary for socio-economic reasons. But for it to be sustainable, the electricity supply industry needs to be allowed to gradually reduce the elements of subsidy and for the industry to be subjected , over time, to the commercial discipline of the market. (iv) The countries of ASEAN have an opportunity for regional co- operation through the ASEAN Power Grid or grid interconnection. It can serve as an avenue to optimize the use
  20. 20. 20 of energy resources among member countries, including the sharing of spinning reserve, as well as emergency and economic exchanges of power. 44. Once again I thank the Energy Market Authority of Singapore and I thank you for your kind attention. LEO MOGGIE