Tuesday, September 20, 2011

Get ready for higher tariff

Source: Maybank IBThis report aims to quantify the impact of

importing liquefied natural gas (LNG) when PETRONAS’ re-gasification
plant (LEKAS) is ready (expected July 2012). The imported LNG will be
costlier than Tenaga’s current gas supply – which is subsidized –
hence, power tariff must rise to reflect this. On the flip side, Tenaga will
have greater certainty of supply and avoid further incidence of having to
burn costly oil and distillates, like the episode experienced in 3QFY11

Gas is Tenaga’s only alternative. Tenaga’s primary power generation

mix is via gas, coal and hydro. Coal and hydroelectric power plants are
effectively at maximum capacity, and therefore, Tenaga has to rely on
its natural gas plants to satisfy the demand growth. Unfortunately, gas
supply from PETRONAS is limited due to the maturity profile of the
domestic gas fields. With the upcoming new LNG terminal, Tenaga
should have ample supply of gas and no longer face gas curtailments.

LNG import to be 1.8-2.2x times costlier, we estimate. We think that

the imported LNG will be priced according to the European and North
Asia benchmark prices. This means that it will be 1.8-2.2x higher than
the RM13.70/mmBtu that Tenaga currently pays for its natural gas
supply from PETRONAS.

Tariff to increase by 1.4%-1.7% p.a., to fully recoup the cost increase

from FY13-15. This is assuming a constant coal price of USD110/mt,
imported LNG price of USD10.0/mmBtu and a power demand growth
assumption of 4.0% p.a.. This has yet to consider the RM3/mmBtu
scheduled rise in domestic gas prices every 6 months announced in
May 2011. This is in-line with our CPI forecasts, which suggest the
people should be able to absorb this tariff increase fairly comfortably.

A clear cost pass-through policy is imperative. The recent fuel cost

past-through mechanism implemented by the Government should
enable Tenaga to manage the situation effectively. However, the review
period is once every six months (next review in Dec 2011) whilst the
price of LNG fluctuates daily. This may suggest for Tenaga to buy
forward and lock-in prices in order to mitigate risk and volatility.

Projek Lekas has not been ‘lekas’ (quick) enough. Our analysis

confirms that using imported LNG is feasible and a worthy solution.
However, it is two years late as Tenaga has already incurred the wrath
of insufficient gas supply. In the past nine months (9MFY11), Tenaga
has burnt RM1.7b by burning oil and distillates to generate power due
to gas curtailment issues. This is more than half the total cost of Lekas.

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