PennWell AEI

A s i a n E n e r g y

INFRASTRUCTURE
2000-12 Australasia: Diversity Down Under by
Mr. Vishvjeet Kanwarpal CEO GIS-ACG
Global InfraSys - Asia Consulting Group
DECEMBER 2000
Published: December 2000 by Asian Energy Infrastructure

Australian Deregulation:
Mess or masterpiece?
 i _ \ d ~ j

A s i a n E n e r g y

December 2000 Volume 2, Issue 4

Contents
R e g u la rs
TalkBack 3
New s & Views 7
Regulatory Review 11

F e a tu r e s
Regional Focus 13
Australasia: diversity down under: Australia and
New Zealand are leaders in the electricity industry
deregulation in Asia, whilst Fiji and Papua New Guinea
are still in the preliminary stage of electricity industry
evolution. The spectrum of fuel sources in the region is wide
and the potential for growth remains encouraging in an
environment where dynamic changes are taking place.

Market Deregulation
Mixed blessings: Micro-economic reform in the electricity
sector over the last decade has led to unprecedented changes in
the industry. For Australia, one of the reform frontrunners,
the changes have brought mixed fortunes.
Fuel Focus
Coal on a roll, but fo r how long? Competition, combined
with high oil and gas prices, is putting pressure on electricity
companies to push for lower coal prices. In Australia
deregulation has provoked a rush to burn cheap coal, bringing
a windfall for local producers. But growing concern over
ballooning carbon emissions have led the country’s electricity
industry and others to call on the government for a more rapid
introduction o f penalties for polluting fuels such as coal.
Nuclear Power
Looking fo r a leading role: While there may be no nuclear
plants being built in the West, many would argue there is still a
role for nuclear power in Asia.
20
N e w s in B rief
India progresses on IPP projects
India has approved the financial closure of 16 major
power projects within the current financial year ending
26 March 31, 2001. Page 7
M usharaff approves power sale
Pakistan’s chief executive general Pervez Musharaff has
approved a proposal to put the Karachi Electric Supply Corp.
(KESC) up for sale i f the ongoing arrangements for repayment
of its loans do not work. Page 7
PL N and Paiton reach long term agreement
State-owned electricity company PLN and independent power
producer PT Paiton Energy have agreed on a long term solution
to settle their long running tariff dispute. Page 9
30
Chevron to expand energy interests
TH AILAN D - Chevron Corp. is negotiating to purchase major­
ity stakes in gas fired IPP projects in Thailand. Page 9

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A E f D ecem ber 2 0 0 0 1
 R egional Focus
A sia Consulting Group, New Delhi, India.

Australasia:
diversity down under
The spectrum o f fuels sources in Australasia is wide and the potential for growth
remains encouraging in an environment where dynamic changes are taking place.

iversity characterises Australasia

D where the race to revamp the

region’s national power sectors is
an uneven contest. Whilst Australia leads
the pack in Asia, smaller countries such as
Fiji are constrained by their national
income and have often been held back by
political instability. In this regard, the key
issues o f power sector reform in the region
remain multi-faceted. Whilst asset privati­
zation and formation of national and state
level electricity markets have been the hall­
marks o f Australia and New Zealand’s
reforms, introducing independent power
producers (IPP) and utilising alternative
fuel sources are key issues for the smaller
countries.
Australia and New Zealand have been
steadily implementing power sector
reforms with the ultimate objective of
establishing consumer contestability.
Contrastingly, Fiji is yet to witness the
Figure 1. Pacific rim nations: greenfield demand forecast
commissioning of an IPP while Papua New
Guinea had its first IPP, the 24 MW, diesel-
based Kanudi power project, commis­ opportunity for new capacity in light of the enabling liberalized economic environment.
sioned in April last year. impending power surplus situation in the Since 1991, governments of states and terri­
Operating IPPs in New Zealand and two nations. tories have progressively engaged themselves
Australia in particular, are exposed to in restructuring their energy utilities in
increased risk of contract renegotiations. A u stralia preparation for the introduction of the
This has been the result of competitive Australia’s GDP stood at US $347 billion National Electricity Market (NEM). For
pressures unleashed by the establishment of as of June 1998 while the per capita GDP more details see pages 20-24)
national level electricity markets and the as of March 1999 stood at US $4830. Victoria: In 1994, the Competitive
phased introduction of consumer contesta­ The Australian economy has belied Electricity' Market was established through
bility. apprehensions o f an economic slowdown the Victorian Power Exchange. The Office
Asset privatization in Australia has been a predicted in light of the Asian economic of the Regulator General was created in
lucrative proposition from the state per­ crisis. Historically, Australia’s economy had 1995 to oversee the regulation of the elec­
spective as borne out by the privatization of been growing at an average annual rate of tricity industry. In 1996, the first move was
Loy Yang. However the incredibly high around 1.2 per cent. GDP growth regis­ taken towards privatization with the sale of
valuations have taken a heavy toll on bid­ tered an impressive 4.8 per cent in the year Yallourn Energy. In 1997, the privatization
o f State Electricity Transmission Grid,
PowerNet Victoria was envisaged. In the
"A pioneer in electricity sector reforms in Asia, the Australian same year, the sale of Loy Yang, the world’s
market is characterized by a high degree o f com petition" biggest privatization and largest ever sale of
a single electricity generation asset was
achieved. The year 1999 witnessed the clo­
ders. This suggests that traditional models up to March 1999 at a time when most of sure of the electricity privatization pro­
of project due diligence and financial valu­ the east Asian economies were reeling gramme with the sale o f Victoria’s last
ation need to be revised. Assets must be under the impact of the crisis. asset, Ecogen Energy.
evaluated in light of the shift towards A pioneer in electricity sector reforms in New South Wales: In February 1996, two
wholesale and retail electricity markets. Asia, the Australian electricity market is char­ new state-owned generation businesses
Fiji and Papua New Guinea on the other acterized by a high degree of competition. were established from the generation assets
side of the spectrum, spell out little or no Power sector reforms have been aided by an of Pacific Power. The new companies were
 R eg io n al Focus

christened as First State Power and wholesale electricity market. In 1999, the Ltd. Subsequently in 1992, the Energy
Macquarie Generation. The distribution government announced major restructur­ Companies Act was legislated. In 1994
businesses were amalgamated into six large ing of state power industry with plans to there was a buy-out of Trans Power Ltd. by
companies. Subsequently the State wind up AUSTA Energy. Queensland was the Crown. Trans Power was separated
Electricity Market commenced its opera­ scheduled to enter into the National from ECNZ and entrusted with the sole
tions and the timetable for retail deregula­ Electricity Market in the year 2000. responsibility of the national grid. Since
tion was announced. The Cabinet finally Australian Capital Territories (ACT): In 1994, electricity consumers have had the
endorsed plans to privatize the state elec­ July 1995, ACTEW was corporatized. freedom to choose their electricity retailer.
tricity industry, in 1997. Plans were afoot to introduce retail con­ In 1995, the government signed a MoU
Western Australia: The legislation to testability in 1997. The IPP programme with ECNZ seeking to curtail ECNZ’s
deregulate the electricity industry was first commenced in 1991 and the first project monopoly. As envisaged by the MoU,
enacted in 1995. Implementation of the was commissioned in 1992. Existing IPPs ECNZ agreed to sell its hydro generation
regulations commenced in 1996. In 1997, face increased risk of contract renegotia­ stations. Moreover, the MoU restricted
plans to provide open access to transmis­ tion, decreasing creditworthiness of off tak­ ECNZ from developing new capacity till
sion and distribution systems were imple­ ers while new IPPs face merchant power such time as its market share fell below 50
mented. In March/April 2000, the state risk in an emerging market with an evolv­ per cent. In the same year, the govern­
government created more opportunities for ing industry. This is best evidenced by the ment announced its decision to establish a
business consumers to forge competitive derecognition of Loy Yang as a strategic competitive generation market.
deals for their electricity and gas needs with asset by CMS Energy which decided to sell This led the government to adopt a liber­
both Western Power, Alinta Gas and pri­ its 50 per cent stake early this year. alization policy in 1996 with a view to facil­
vate suppliers. This enabled around 118 According to CMS, Loy Yang has been itate private investors to add new genera­
customers (mostly mining companies and unable to fulfil the company’s financial tion capacity. As a result, Contact Energy
was split from ECNZ and the Wholesale
Electricity Market commenced its opera­
"Existing IPPs face increased risk o f contract renegotiation, tions under the purview of interim rules.
decreasing creditworthiness o f o ff takers" The commencement of the Wholesale
Electricity Market operations witnessed a
flurry of activity in the power sector with
hospitals), utilizing an average 1 MW of . expectations. Trans Power announcing a new pricing
electricity, to choose their supplier. As a As against official projections for green­ regime and ECNZ tendering a number of
result, one-third of Western Power’s rev­ field capacity requirement per annum of hedge contracts. The year also witnessed
enues were exposed to competition. around 1250 MW, ACG forecasts the the creation o f the Electricity Market
South Australia: In 1995, ETSA greenfield capacity required per annum in Company Ltd. to develop and provide the
Corporation commenced operations as a the period 2000-2005 to be approximately services crucial for the operation of the
corporatized entity. In the following year, 950 MW. The average consumer and IPP electricity market.
ETSA Corporation was restructured into tariffs are expected to be in the range of In 1998, as part of the Industry and
four subsidiaries to oversee generation, 5-7<C/kWh and 3-64/kW h respectively. Generation reforms, the government
transmission, distribution/retail and gas
purchasing/sales. The year 1998 witnessed
plans to privatize electricity assets by 2000
through an initial lease of 25 years. In 1999,
Parliament passed a legislation to enable the
lease of the State’s electricity generation,
transmission and distribution assets.
However, the privatization process received
a jolt when the Liberal government faced
opposition to the privatization process. As
per the privatization plan, South Australia
had identified Electranet (transmission busi­
ness), distribution and retail businesses and
Synergen, which owns the open cycle plants
in South Australia, as potential candidates.
In the current year, TXU Corp. struck a
$175 million deal to lease the state-owned
electricity generation business, Optima
Energy. Earlier in the year, Cheunk Kong
Infrastructure Holdings Ltd. and Hong Figure 2. Pacific-rim nations: progress in unbundling
Kong Electric Holdings Ltd. acquired
South Australia’s electricity and retail distri­ N e w Z ea la n d announced its plan to privatize Contact
bution assets. New Zealand has had a long history of eco­ Energy. In the same year, Trans Alta
Queensland: The power generation utility nomic reforms which resulted in the aboli­ evinced its interest in buying the energy
was divided into three different companies tion of subsidies, tariff barriers and exten­ retailing business of SouthPower while
in 1997 and were mandated to compete sive privatization of state-owned enterpris­ ECNZ announced the sale of its engineer­
against each other. Months later, the trans­ es. The privatization of the electricity ing consultancy subsidiary, Design Power.
mission and distribution sectors were split. industry was initiated in 1987. Until 1987, In April, Trans Power New Zealand Ltd,
The next year witnessed the formation of ECNZ used to operate as an integrated commenced its operations.
the Queensland Transitional Power state-owned power utility. In 1988, the ECNZ was split into three state-owned
Trading Corporation and the commence­ transmission business of ECNZ was carved Enterprises in 1999 to usher in competi­
ment of operations by the competitive out as a subsidiary company,' Trans Power tion in the Wholesale Electricity Market.

M kM si D ecem ber 2000 www.power-eng-intl.com 1 5


The restraints on the activity o f ECNZ
were proposed to be removed on the com­
pletion o f the restructuring process.
M onths later, Edison Mission Energy
emerged as the winning bidder for a 40 per
cent equity stake in Contact Energy.
Furthermore, a new metering regime was
introduced that allowed customers to
switch between suppliers without having to
incur the meter and reconciliation costs. It
has been envisaged that all power compa­
nies will have to select one of the two exist­
ing separation policies. They were sup­
posed to have either established an inde­
pendent trust to own either their distribu­
tion or retail/generation assets by April 1,
1999, or sell their ventures by December
31,2003.
O f late, concerns have been expressed by
the government that competition has failed
to translate into lower electricity prices,
especially for residential customers. An
inquiry team had been appointed in
February/M arch 2000 to recommend pol­
icy and regulatory changes. By 2005, IPPs
are projected to have a 36 per cent share of
the wholesale market.
Official projections approximate the
installed base at 10 500 MW by 2020.
According to a study conducted by Leyland
Consultants of Auckland and Advanced
Engineering Centre o f University of
Canterbury, though the long term options
for electricity' production are comfortable,
the near and medium-term capacity addi­
tion would fall short in satiating New
Zealand’s growing power demand in the
next decade.
P a p u a N e w G u in ea
Only 7.5 per cent of the population was
electrified as of 1997. Rural areas (where
the bulk o f the population resides) are
characterized by the lack of adequate infra­
structure and scattered population which
makes it economically unviable to extend
ELCOM’s grid to the majority of the rural
communities.
R egional Focus
Oil and gas constitute the major energy
reserves. P.N.Guinea has an enormous
renewable energy potential in terms of
hydro, biomass and solar sources. Biomass,
the major source o f energy in rural areas, is
still widely used in urban areas.
In 1994, the Kina was devalued and float­
ed. The Kina has continuously depreciated
against the US dollar from 0.6 Kina per
USD in 1981 to 1.5 Kina per USD in
1997. In 1998, the Kina was intentionally
depreciated to promote exports and inter­
est rates were increased sharply, compelling
commercial banks to park 10 per cent of
their deposits in non-interest bearing
accounts with the CB (Central Bank).
"Concerns have been expressed by the government that
competition has failed to translate into lower electricity prices"
The Electricity Commission Act was
enacted in 1961. ELCOM (PNG
Electricity Commission) became a com­
mercial statutory authority in 1983 and
introduced uniform national tariff for all
consumers. In 1993, the Ministry of
Mining and Petroleum was separated from
the Department of Minerals and Energy. In
1995, the Departm ent o f Energy'
Development was abolished and a new
Office o f Energy was established.
Subsequently in 1997, the government
came out with a long-term plan which
called for the privatization of ELCOM. A
review of major generation and transmis­
sion sources to port Moresby system has
been planned for 2000.
The IPP programme commenced in
1997 and the first IPP project, Kanudi, cel­
ebrated its opening ceremony in April
1999.
At the 1998 installed base level of around
300 MW, ACC forecasts a greenfield
capacity requirement of approximately
20 MW by 2005 if there is no improve­
ment over historical PLFs (33 per cent). A
10 per cent improvement over historical
PLFs, i.e. 36 per cent PLF, shall result in a
10 MW surplus by 2005 and consequendy
obliterate any greenfield capacity demand
till 2005.
Fiji
Fiji’s indigenous energy sources are hydro,
solar, biomass fuel and bagasse. The year
1987 was a cataclysmic time in the Fijian
history as it was marked by political tur­
moil. As a result, the Fiji dollar was deval­
ued by 30 per cent. The economy bounced
back with a GDP growth rate of 7.8 per
cent in 1999. Flowever, the political crisis
of this year has crippled the economy once
again. In August 2000, Moody’s
Investors Services lowered Fiji’s bond rat­
ings from Ba2 to Bal.
In order to attract foreign investments
and raise investors confidence, Fiji needs to
be politically stable, improve law and order,
reduce the cost of transacting with FTIB
(Fiji Trade and Investment Board), bring
clarity and enforceability in property laws,
rationalize regulations and remove profit
repatriation constraints. Also, fiscal imbal­
ances and inflationary pressures need to be
kept in check.
The FEA (Fiji Electricity Authority) was
established under the Electricity Act of
1966 as a wholly state-owned statutory
body. In 1994, under a restructuring con­
cept, FEA was reorganized into two
autonomous divisions: Central and
Western divisions.
Under the new public enterprise legisla­
tion, FEA was scheduled for corporatiza­
tion in 1996. However, with the nation still
in the grip of political instability, progress
in electricity reforms face the threat of a
slowdown.
The IPP programme has not yet started
in Fiji. According to ACG’s estimates of
historical demand, Fiji has had a power sur­
plus since 1995. As per ACG forecasts, Fiji
will continue to face a power surplus situa­
tion over and above the 1998 installed base
level. The surplus is expected to be around
50 MW by 2005 if there is no improve­
ment in the historical PLF of 29 per cent.
A 10 per cent improvement in the histori­
cal PLF to 32 per cent will raise the surplus
to around 60 MW by 2005. r -'
Asia Consulting Group (ACG) is a strategic
consulting firm focused on the power and
energy sectors. ACG recently completed a
nine month multi-client study of 25 countries
in Asia - Asia Power 2000 and Beyond.
Portions of this article are sourced from the
study. Contact Details Updated
Email: ceo.gis.acg@gmail.com
Website: www.gis-acg.com