A StarBizWeek report last Saturday said the EnergyCommission (EC) has shortlisted 9 consortia and sole bidders to participatein  the tendering for the Prai CombinedCycle Gas Turbine (CCGT) power project. Sources said the EC hoped to announcethe winner of the bid by October or November, with final approval from theGovernment. The tender this time would be for a capacity of 1000MW to 1400MW.Among the shortlisted are all the 5 Independent Power Producers (IPPs) bound bythe 1^st generation Power Purchase Agreements (PPA).

Some surprisebidders. Among the surprises from the latest announcement is that 9 bidderswere shortlisted instead of the earlier expected 5 or 6. Also, some of the namesthat made it to the  list arenon-traditional power players such as CI Holdings and Petronas. While we hadexpected a  wide  range of bidders, we also expected many of the non-traditional power players tobe  dropped. Nonetheless, these non-traditionalplayers are teaming up with traditional power players, as shown in Figure 1below. CI Holding's participation is also a surprise as  the company had earlier indicated that it intends to take over an ailing businesswhich it would turn around instead of entering a green field business.

But a Long RoadAhead. Despite this development, we note that the award is only expected inOctober or November. This too is surprising as we had expected the award to beout by July. As such, it will take some time before the winner of this powerplant is identified. Also, while another 1000MW of new  capacity should be tendered out, we areuncertain of the rest of the 4500MW as this would depend on whether or not any1^st Gen PPAs are re-negotiated.

Putting it all intocontext. We understand from our sources that negotiations on the 1^stGen PPAs have reopened between the Government and the 1^st Gen IPPs.The 1^st Gen IPPs have been invited to submit proposals whereby thecapacity payments  for the PPAs can bereduced immediately in exchange for an extension of some 10 years in theirPPAs. The benchmark for these submissions is that the cost of electricity inthe renegotiated PPAs must be lower than that from the new Prai Power Plant. Also, the EC may not accept all the4105MW of renegotiated 1^st Gen IPP capacity. Instead, indicationsare that only 2500MW of renegotiated 1^st Gen capacity will beaccepted for extension. This ensures that there is competition between the 1^stGen capacity and the upcoming new power plants as well as among the 1^stGen IPPs so that only the most efficient get to extend their PPAs. We believethat these steps are the right approach in ensuring that the most efficientparties (whether new plant ups or 1^st Gen extensions)  earn the right to generate more power in the future.

Not as positive forTNB as some would expect. While the renegotiation of the capacity paymentsby some of the 1^st Gen IPPs will be beneficial to TNB, it may not beas bottomline-enhancing as some would expect.This is because:

Maybe minimallypositive  for IPPs. Given that the 1^stGen IPPs have to compete with both the new Prai power plant as well as againsteach other, we do not expect any renegotiated PPAs to be lucrative. Hence IRRsmay be in the high single digits, or just over 10%. As such, we do not expectthe 10-year extension on PPAs to be particularly value enhancing for the IPPs,especially given that the upfront profit will drop with the cut in capacitypayments.

Neutral for PetronasGas too. Whether the 1^st Gen PPAs are renegotiated or new CCGTplants are set up, both will require gas supply. As such, this development isbottomline Neutral  for Petronas Gas,which only acts as a transporter of gas.

Maintain NEUTRAL onthe sector. As such, we remain NEUTRAL on the sector, with MMC (FV: RM3.70)remaining as our sole Trading BUY.  Thattoo because of its non-power catalysts such its role in the upcoming MRT aswell as the impending listing of its subsidiary Gas Malaysia. Certainly, wethink that MMC has a good chance of securing the Prai Power Plant given itsproximity to MMC's existing 350MW Prai Power Plant, on top of its partnershipwith Mitsubishi Corp ensuring Japanese financing for the new plant.

Source: OSK188