Letters
Privatization and regulation in
Malaysia’s power sector
Francis Xavier Jacob
Electricity Regulation Division, Department of Electricity
Supply, 19th floor, Menara Haw Par, Jalan Sultan Ismail,
5068 Kuala Lumpur, Malaysia
1. Overview of the power sector
Malaysia has considerable energy resources, in the form
of oil, natural gas, hydroelectric potential and coal. It has
about 4.4 billion barrels of recoverable reserves of oil. Of
the 1.92 trillion standard m3 of natural gas discovered in
Malaysia, 325 billion standard m3 is associated gas. The
hydroelectric potential in the country is estimated to be
about 29,000 MW with an annual energy output of 123
Figure 1. Malaysia: network of Tenaga Nasional Berhad (TNB).
80 Energy for Sustainable Development
TWh. Malaysia’s coal reserves are about 977 million ton-
nes.
The installed capacity for electricity generation in-
creased at an average annual rate of 9.2% in the 1980s,
mainly in the form of oil- and natural gas-powered plants.
The average annual growth rate in consumption during
this period was 9.1%. The industrial sector accounted for
a major share of the growth, and in 1990 it was also the
major consumer (46%), followed by the commercial
(31%) and residential (20%) sectors respectively. As a re-
sult of government emphasis on rural electrification pro-
grammes, over 82% of households had access to
electricity by 1990.
Electricity supply in Malaysia is currently being under-
taken by the Tenaga Nasional Berhad (TNB) in peninsular
Malaysia, the Sabah Electricity Board (SEB) in the state
of Sabah and the Sarawak Electricity Supply Corporation
(SESCO) in the state of Sarawak. TNB, which used to be
l Volume III No. 6 l March 1997
 Letters
a wholly government-owned public utility, was incorpo-
rated in 1990 as a private company with the Government
of Malaysia owning over 70% of its equity. All three utilities
carry out generation, transmission and distribution of elec-
tricity in their operating areas.
In May 1995, TNB had an installed capacity of about
7,400 MW, which is supplemented with about 2,000 MW
of capacity from independent power producers (IPPs) to
meet a maximum demand of about 5,900 MW (see Figure
1). In its financial year ending on August 31, 1994, TNB
generated 33.984 TWh of electrical energy of which about
42% was from natural gas, 30% from oil, 13% from coal
and 15% from hydro. TNB currently serves about 3.53
million consumers (3.0815 million domestic; 429,800
commercial; 11,400 industrial; 11,200 public lighting; and
100 mining).
At the beginning of 1994, SESCO had an installed ca-
pacity of 524 MW for a maximum demand of about 245
MW. In 1993, it generated about 1,456 GWh of energy
of which 56% was from natural gas, 29% from hydro and
15% from oil. SESCO currently serves about 211,700
consumers (177,100 domestic; 32,300 commercial; 500
industrial; and 1,800 public lighting).
At the beginning of 1994, SEB’s installed capacity was
454 MW and catered for a maximum demand of about
280 MW. In the 1,540 GWh of energy generated in 1993,
the mix of sources was 49% oil, 26% hydro and 25%
natural gas. It currently serves about 192,700 customers
(161,300 domestic; 27,500 commercial; 3,100 industrial;
and 800 public lighting).
At present, the tariff structure for TNB, SEB and
SESCO ranges from about RM 0.07 to RM 0.46 (1 Ma-
laysian ringgit or RM1 = US$ 0.39), with off-peak indus-
trial use being charged the lowest rate and public lighting
the highest. Electricity tariff for sale of energy by the
utility to the public has to be approved by the government.
The mechanisms for tariff adjustment for Tenaga Nasional
Berhad have been put in place on the basis of the formula
CPI - M + Y + K
where CPI is the consumer price index, M is a factor
which takes into account the inefficiency of operation of
the utility and its capital investment needs, Y is the fuel
cost pass-through and the factors to take into account the
purchase of energy from IPPs and K is a correction factor
to take into account forecasting errors. The formula has
been operationalised since September 1993 and in the first
and second reviews of the electricity tariff, reductions of
3.3% and 5% were made. The tariff is to be reviewed
every 3 months, to take into account regularly the changes
in fuel prices. This tariff mechanism has made prices of
electricity more transparent and predictable.
2. Perspective planning
The Malaysian Vision 2020 envisages a doubling of its
economy every ten years for the next three decades. The
Second Outline Perspective Plan 1991-2000 (OPP2), also
known as the National Development Policy (NDP), will
set the pace for Malaysia to become a fully developed
nation by the year 2020 in all respects. The Malaysian
Energy for Sustainable Development
economy is targeted to grow at 7% per annum in the dec-
ade of OPP2. In view of the targets set under Vision 2020,
it is important to ensure that energy does not become a
constraint for growth and that this sector develops on a
least-cost basis.
Recognising this importance of the availability of en-
ergy at economically acceptable cost and in sufficient
quantity, three key objectives constitute the framework for
present and future programmes in the energy sector:
1. a supply objective, to provide adequate and secure en-
ergy supplies;
2. a utilisation objective, to promote efficient energy util-
isation and to discourage non-productive and wasteful
patterns of energy consumption; and
3. an environmental objective, to ensure that, in achiev-
ing the previous two objectives, the environment is
not neglected.
The four-fuel policy identifies four main fuels: oil, gas,
hydro, and coal. The strategy is to cut down on the use
of oil and to promote the use of non-oil indigenous re-
sources such as gas, hydro, and coal. In this respect, the
1990s will mark the nation’s entry into an era of greater
utilisation of natural gas. Apart from being the least-cost
option for power generation expansion in the medium
term, its development will be the basis for downstream
activities in energy-related industries to provide an added
catalyst to accelerate industrial growth.
On the utilisation side, demand management policies
will focus on promoting efficiency in energy use. Appro-
priate measures will be introduced to eliminate waste.
These include incentive tariff schemes and the promotion
of efficient end-use equipment and appliances. Efforts are
being made to ensure effective and well-coordinated en-
forcement of environmental protection programmes, apart
from the mandatory requirement of conducting environ-
mental impact assessments (EIAs) for all energy projects.
Pricing policies will be directed at ensuring that energy
prices reflect the economic cost or true cost of supply,
that they raise revenues for the sector’s development and
that the sector remains competitive while making greater
use of indigenous energy resources. With regard to elec-
tricity pricing, the availability of electricity in adequate
quantity and quality and at reasonable prices is necessary
for the promotion of industrial development. Towards this
end, efforts will be made to ensure stability in electricity
tariffs at acceptable and internationally competitive levels.
At the same time, the needs of power utilities to generate
sufficient revenues for future development plans will be
taken into account.
2.1. Growth forecast
Electricity demand projections for the future are pervaded
by uncertainty and a variety of scenarios, making it dif-
ficult for decision-makers to prepare concrete plans. The
challenge is to incorporate these complexities into strate-
gic developments without causing inaction to result. The
power sector, as is widely recognised, forms part of and
interacts with a more complex system that includes eco-
nomic, demographic, financial and environmental ele-
ments. Population growth, resource endowments, energy
l Volume III No. 6 l March 1997 81
 Letters

Table 1. Projections of maximum demand (MW) for Peninsular Malaysia, Sabah and Sarawak

Annual demand in MW

Scenario 1990 1995 2000 2010 2020

(a) Low growth (business as usual)

Peninsular Malaysia 3477 6444 9912 19087 26796

Sabah 199 352 521 1109 2206

Sarawak 194 357 547 1100 2231

(b) Moderate growth (business as usual)

Peninsular Malaysia 3447 6444 9930 19388 31511

Sabah 199 352 522 1126 2594

Sarawak 194 357 548 1117 2623

(c) Moderate growth (energy efficient)

Peninsular Malaysia 3447 6130 8937 15513 25191

Sabah 199 335 470 901 2073

Sarawak 194 339 494 894 2097

(d) Targeted growth (energy efficient)

Peninsular Malaysia 3447 6332 9726 18705 34760

Sabah 199 346 512 1087 2861

Sarawak 194 350 537 1078 2894

prices, terms of trade, etc., are among the parameters
which affect this system directly or indirectly through
other systems.
Electricity requirements are also affected if energy ef-
ficiency measures are adopted. Thus, two scenarios are
possible.
1. A business-as-usual (BAU) case without any serious
attempts to make the system energy-efficient
2. An energy-efficient (EE) case with greater emphasis
on energy efficiency improvements. Energy efficiency
gains are assumed to reach 5% in 1995, 10% in 2000
and 20% in 2010 and thereafter.
For the purpose of this paper, the electricity requirements
are considered for four scenarios.
1. A low-growth, BAU scenario. Here the load is forecast
with the economy projected to grow at 5.3% per an-
num over the three decades to 2020.
2. A moderate-growth, BAU scenario. Here the load is
forecast with the economy projected to grow at a rate
of 6% per annum over the same period. This is the
projection given in the Sixth Malaysia Plan and the
Outline Perspective Plan 2 (OPP2). The share of
manufacturing in the gross domestic product (GDP)
will increase from 27% in 1990 to about 37% in 2000.
Manufacturing exports are projected to account for
about 81% of the value of total exports in 2000 from
60.4% in 1990, while agricultural exports will decline
to 6% from 10% in the same period.
3. A moderate-growth scenario again but with energy ef-
ficiency measures in place.
4. A targeted-growth, energy-efficiency scenario. Here
the load is forecast with the economy projected to
grow at 7% per annum over the OPP2 period. This is
the growth necessary to enable the target of eight-fold
increase in GDP to be achieved.
A population growth from 18 million in 1990 to 34.7 mil-
lion in 2020 is assumed. The medium- and targeted-
growth scenarios are assumed to lead to a three-fold and
four-fold increase in per capita income respectively. The
demand projections for the various scenarios are shown
in Table 1.
2.2. Financial requirements
Based on the electricity requirements as shown in Table
1, the financial requirements to provide for the generation,
transmission, and distribution capacities and other expen-
diture are as shown in Table 2 for the targeted-growth
energy-efficient scenario[1].
3. Privatization policy
With a view to finding new sources to finance the expan-
sion of the energy sector that would be required even un-
der the energy-efficient scenario, the Government of
Malaysia has commissioned a number of studies on power
sector privatization. Peninsular Power carried out a study
on privatization of the National Electricity Board. Sub-
sequently, Price Waterhouse Associates was hired to study
and develop and operationalize the regulatory framework
for the electricity supply industry in Malaysia. British Co-
lumbia Hydro then conducted a study to identify how
competition in the electricity supply industry in Malaysia
is to be further pursued. All these indicate serious com-
mitment on the part of the government to ensure carefully

82 Energy for Sustainable Development l Volume III No. 6 l March 1997

 Letters

Table 2. Financial requirements for targeted-growth energy-efficient scenario projects

Period 1991-1995 1996-2000 2001-2010 2010-2020

New capacity required (MW)

Peninsular Malaysia 3578 4577 11155 19067

Sabah 288 274 174 0

Sarawak 242 382 2120 6776

Total 4108 5233 13449 25843

Financial requirements (billion $)

Generation expenditure 7.19 10.47 33.62 77.53

Transmission expenditure 3.59 5.23 16.81 38.76

Distribution expenditure 2.88 4.19 13.45 31.01

Other expenditure 0.72 1.05 3.36 7.75

Total expenditure 14.38 20.93 67.25 155.06

designed and smoothly implemented steps towards priva-
tization of the power sector.
In September 1990, the Government of Malaysia
enacted the Electricity Supply Act and, with this, started
a chain of events towards privatization of the electricity
supply industry in Malaysia. First, the National Electricity
Board was corporatized as Tenaga Nasional Berhad, or
TNB. The corporatized utility was then privatized in Feb-
ruary 1992 with the Government of Malaysia owning
about 73%.
In February 1991, the government released the Privati-
zation Masterplan which details, among other issues, the
privatization of ‘‘new projects’’. These ‘‘new projects’’ are
projects which traditionally have been developed by the
public sector and include electricity supply projects. Ac-
cording to the Sixth Malaysia Plan (1991-1995), ‘‘... pri-
vate sector participation will be promoted to encourage
competition in the (power) sector. Towards this end, the
concept of build-operate-transfer, particularly in power
generation, will provide avenues for private sector par-
ticipation.’’
To follow through on its promise, the government de-
cided to introduce competition in the generation field by
inviting IPPs to build, own and operate generation plants.
The IPPs that have been licensed so far are in the form
of locally-led consortiums having foreign members, the
ratio of local and foreign shares being generally about
75:25. By 1997, the power generated by IPPs will be over
4000 MW and will account for about over 30% of total
generation. At present, IPPs are expected to sell their en-
ergy only to the utilities, which will continue their tradi-
tional role of generation, transmission and distribution.
3.1. Objectives of privatization
The Government has several objectives in privatising the
electricity supply industry in Malaysia. The main objec-
tive is to relieve the government of the administrative and
financial burden of providing electrical power for the
country. This will release more funds for other socio-eco-
nomic projects. In fact, with the already licensed IPPs,
power generation investment by the private sector
amounted to over RM 10 ($3.9) billion by the end of
1994.
Privatization will promote competition and sub-
sequently improve efficiency and productivity in the elec-
tricity sector. The improved efficiency is expected in the
economic, financial and technical fields and the consum-
ers can expect to receive better and improved services at
reasonable prices. Privatization will also stimulate private
entrepreneurship and investment. This will accelerate the
rate of growth of the economy consistent with Malaysia’s
Vision 2020 in which the government envisages the pri-
vate sector to be the prime engine for growth. The objec-
tives of the New Economic Policy (NEP) are also
expected to be met through privatization. This policy, now
replaced by the National Development Policy (NDP), has
the objective, besides others, of the creation of a local
commercial and industrial community.
3.2. Regulatory framework
The privatization of the electricity industry places an es-
sential service in the hands of the private sector. Regula-
tory mechanisms are thus necessary and are already in
place. The Electricity Supply Act 1990 provides the leg-
islative framework for the regulation. Two important regu-
lations made under this Act are:
1. Licensee Supply Regulations 1990, and
2. Electricity Regulations 1994.
In addition, the Malaysian Grid Code is being introduced
as a set of comprehensive technical and operational re-
quirements for all plants connected to the national grid
to ensure:
1. safe, secure, reliable and economic electricity supply
system, and
2. access to it of all users without discrimination.
The licence terms and conditions also forms part of the
regulatory framework.
4. The process of becoming an IPP
The following is a brief account of the actual approval
process for IPPs under the new arrangements. Potential
interested parties should first forward their proposals to

Energy for Sustainable Development l Volume III No. 6 l March 1997 83

 Letters
the government through the Economic Planning Unit
(EPU). Once the government gives its approval, the can-
didate IPP will negotiate the fuel purchase agreement and
the power purchase agreement with the relevant parties.
Upon successful conclusion of these two agreements, a
licence will be issued by the Director General of Elec-
tricity Supply after being approved by the Minister of En-
ergy, Telecommunication and Posts. The licence is
normally for a period of 21 years. All the IPPs to date
have agreements based on the build, operate and own
(BOO) model.
4.1. Players involved in approval process
Apart from the Department of Electricity Supply and the
Ministry of Energy, Telecommunications and Posts, under
which the former operates, the Economic Planning Unit
of the Prime Minister’s Department, the Treasury and the
Department of Environment are also involved in the ap-
proval process of IPPs. Of the five major IPPs at present,
only the project of Segari Power Sdn Bhd has foreign
participation. Here Asea Brown Boveri Holdings Sdn Bhd
has 25% equity in the project. At present there are no tax
breaks or concessions given to the IPPs.
Some of the other players involved in IPPs include:
l project contractors;
l plant equipment suppliers;
l fuel suppliers (for most of the IPPs, Petronas supplies
the natural gas);
l operating and maintenance contractors;
l operating and maintenance spares suppliers;
l financiers and those who arrange the financing
packages;
l insurers;
l providers of freight services; and
l legal and technical consultants.
4.2. Power purchase agreement (PPA)
The following are the salient features of the PPA between
TNB and one of the IPPs.
l Sale and purchase obligations
Sale and purchase of electric energy: The IPP shall de-
liver and TNB shall purchase and accept the net electrical
output from each unit as such unit is dispatched by the
Control Centre.
Sale and purchase of generating capacity: The IPP shall
make available and TNB shall pay for the dependable ca-
pacity of each unit up to but not exceeding the site rating
of the unit.
During system emergencies the IPP shall, at TNB’s re-
quest and subject to provisions of the Grid Code, make
all reasonable efforts to provide electric energy or gener-
ating capacity above the dependable capacity of each unit
then in effect and shall, at TNB’s request, make all rea-
sonable efforts to delay any relevant scheduled outages,
maintenance outages and major outages. This should be
done consistent with design limits and prudent utility
practices.
l Purchase price and other charges
4.3. Capacity payment
This will be done in accordance with the following for-
mula:
84 Energy for Sustainable Development
CP=DC × (CRF + FOR) × F × (AF/AT)
where
CP = Capacity payment in ringgit for such capacity bill-
ing period
DC = Average of the dependable capacity (net) of the fa-
cility for such capacity billing period in kilowatts
weighted by the number of hours attributed to each
period of differing dependable capacity of the fa-
cility in such capacity billing period
CRF =Capacity rate financial for such capacity billing pe-
riod in RM/kW/month.
FOR =Fixed operating rate for such capacity billing pe-
riod in RM/kW/month. This will be adjusted every
4 years by an adjustment factor based, among other
things, on the consumer price index for Peninsular
Malaysia.
F = The factor set at 1.0 if AF is greater than or equal
to 80%, at 0.95 if AF is greater than or equal to
65% but less than 80%, at 0.9 if AF is greater than
or equal to 50% but less than 65% and at AF/AT
if AF is less than 50%.
AF = For each capacity billing period, AF equals the
arithmetic average of the monthly equivalent avail-
ability factor for the previous 12 capacity billing
periods (including such capacity billing period),
expressed as a percentage.
AT = The availability target set (1) at 87% if AF is less
than 87%, and (2) equal to AF for values of AF
equal to or greater than 87%, except that, for each
capacity billing period for which AF is greater than
94%, the availability target is set at 93% if (a) the
monthly equivalent availability factor for each of
the previous six capacity billing periods is also
greater than 94%, and (b) for each such capacity
billing period and the previous six capacity billing
periods, DCU for each unit is not less than 92.7%
of the plant nameplate capacity, and (c) such ca-
pacity billing period is occurring at least 12 months
after the commercial operations date for the unit.
As used herein, ‘‘DCU’’ means, for each unit, the
average of the dependable capacity of such unit for
such capacity billing period in kilowatts weighted
by the number of hours attributed to each period
of differing dependable capacity of such unit in
such capacity billing period.
4.4. Energy payments
This will be done in accordance with the following for-
mula
EP = (E × H × NEO) / 1,000,000 + VOR × NEO + S
where
EP = Energy payment in ringgit
E = Weighted average cost of fuel (in RM/MMBTU)
paid by the IPP under the fuel supply contracts and
used at the facility during such energy billing pe-
riod, calculated by dividing the aggregate amount
(in RM) paid by the IPP for such fuel by the ag-
gregate MMBTU of such fuel. For purposes of the
preceding sentence, ‘‘fuel’’ means (1) during any
distillate period occurring (a) prior to the start-up
l Volume III No. 6 l March 1997
 Letters
date and (b) after natural gas is first available to
the facility, distillate fuel oil, and (2) at any other
time (whether natural gas or alternative fuel is
being used), natural gas. The IPP shall provide
TNB with a written statement showing the method
of calculation thereof, together with supporting
documentation, including copies of all statements
under the fuel supply contracts, within three days
after the end of each energy billing period. If any
alternative fuel is consumed by the facility at any
time during such energy billing period when natu-
ral gas is available, such alternative fuel shall, for
purposes of calculating E, be deemed to be natural
gas consumed in a quantity having (1) the same
BTU content as the BTU content of the alternative
fuel actually consumed and (2) a price (in
RM/MMBTU) equal to the average price for natu-
ral gas under the fuel supply contracts for such
energy billing period.
H = Assumed net heat rate (in BTU/kWh) set at 12,108
BTU/kWh based on (1) higher calorific value of
natural gas at assumed conditions, and (2) the rele-
vant unit operating at a continuous load of 100%
of the net generating capacity of such unit available
for dispatch by TNB. For purposes of calculating
the energy payment for any energy billing period,
such net heat rate shall be adjusted (in accordance
with the heat rate adjustment table set forth in
given exhibit) to reflect any dispatch by TNB at
part load operations (determined as a percentage
of the net generating capacity of the relevant unit
available for dispatch by TNB) during such energy
billing period.
NEO = Net electrical output (in kWh) of all units for such
energy billing period.
VOR = Variable operating rate for such energy billing pe-
riod in sen/kWh. This will be adjusted every 4
years by an adjustment factor based, among other
things, on the producer price index for Peninsular
Malaysia.
S = The quotient obtained from dividing (1) the prod-
uct of (a) the number of start-ups requested by
TNB during such billing period (excluding any ad-
ditional start-ups caused by the IPP or the facility,
e.g., tripping or outage of the facility, or failure of
the facility to start up after a start-up request by
TNB), (b) 15.4 MMBTU/start-up, and (c) E (as de-
termined above) by (2) 1,000,000.
l Compensation, billing and payment
l Liquidated damages and maintenance reserve
l Pre-operation period
l Operation and maintenance
-- Operation and maintenance of facility
-- Dependable capacity; testing of capacity rating
-- Schedule and despatch of generation
-- Schedule outages, major overhaul outages and main-
tenance outages
-- Access to facility and site
-- Operation committee
Energy for Sustainable Development
l Interconnection
l Metering
l Representation and warranties
l Taxes; fines
l Insurance
l Force majeure event
l Default and termination
l Indemnification and liability
l Dispute resolution
4.5. Risk factors
The PPA requires the following of the IPP.
1. The IPP shall have provided to TNB evidence dem-
onstrating that the IPP has obtained all applicable gov-
ernmental authorizations, including the IPP licence,
other than (1) any governmental authorizations that
could not materially affect the ability of the IPP to
perform its obligations under this agreement, the fuel
supply contracts or the EPC contracts, or (2) any such
other governmental authorizations that (a) are not nec-
essary for the IPP to commence generation of electric
energy from the facility and (b) the IPP could not rea-
sonably be expected to have obtained prior to the in-
itial operations date given the practice and procedures
of the relevant governmental entities issuing such re-
spective governmental authorizations.
2. Each of the fuel supply contracts shall have been exe-
cuted and delivered by each of the respective parties
thereto, and the form and substance of each provision
thereof which could reasonably be expected to have a
material effect on the ability of the IPP to perform its
obligations, or the rights of TNB, under this agreement
shall be reasonably satisfactory to TNB.
3. The interconnection facilities shall have been de-
signed, engineered, manufactured, supplied, con-
structed, installed, tested and commissioned in
accordance with the requirements of this agreement
and prudent utility practices and shall be able to op-
erate safely with the TNB system.
4. The fuel facilities shall have been designed, engi-
neered, constructed and installed, tested and commis-
sioned in accordance with the requirements of this
agreement and prudent utility practices to enable the
facility to receive, replenish and utilize supplies of dis-
tillate fuel oil under the fuel supply contracts in quan-
tities sufficient to permit the facility to operate
continuously at full load dispatch.
5. The IPP shall have provided to TNB a certificate from
the independent engineer stating that the facility has
been designed and constructed in accordance with pru-
dent utility practices, the design drawings submitted
to TNB.
The above provisions thus reflect the responsibilities
and the risks borne by the IPP in terms of the offtake,
completion, operation, fuel, transport, environment
and other laws or regulations which may affect its
operations. However, the IPP can transfer some of
these risks to the parties with whom it enters into
contracts for these requirements. For example, it can
transfer the risk completion and start-up dates to the
l Volume III No. 6 l March 1997 85
 Letters
project contractor, the fuel risks to the fuel supplier, etc.
For risks it has to bear itself, it may mitigate the risks by
takinginsurances.
4.6. Insurance
The PPA requires the IPP to have coverage for the fol-
lowing:
l comprehensive general liability or third party liability
insurance;
l workers’ comprehensive insurance;
l comprehensive automobile liability or motor vehicle
liability insurance;
l contractor’s all risks insurance and boiler and
machinery insurance; and
l excess umbrella liability of excess layer liability
insurance.
4.7. Future laws
The PPA has a change-in-law adjustment clause as fol-
lows:
1. If there is a change-in-law which requires the IPP to
make capital improvements or other modifications to
the facility in order to comply with any law, the IPP
shall submit to TNB a certificate setting forth in detail
reasonably satisfactory to TNB the actual costs of such
capital improvements and the calculations for such
amount. The IPP and TNB shall determine, in good
faith, any necessary adjustments to the capacity rate
financial to reflect such costs. After the receipt by
TNB of the written approval of the Department of
Electricity Supply of (1) the amount of such costs and
(2) such adjustments to the capacity rate financial, the
capacity rate financial shall be adjusted in the manner
so approved by the Department of Electricity Supply.
2. If there is a change-in-law (other than in respect of
taxes) which the IPP or TNB believes in good faith
will (1) increase the costs or decrease the revenues of
the IPP in connection with the operation or mainte-
nance of the facility, or other conditions affecting the
performance by the IPP of its obligations under this
agreement or affecting the timing of the incurring of
such costs or the receipt of such revenues, or (2) de-
crease the costs or increase the revenues of the IPP in
connection with the operation or maintenance of the
facility, then the IPP (in case of such increase in costs
or decrease in revenues) or TNB (in case of such de-
crease in costs or increase in revenues) shall (a) de-
termine the amount of such increase or decrease in
costs or revenues, (b) submit to the other party a cer-
tificate setting forth in detail reasonably satisfactory
to such party the basis of and the calculations for such
amount, and (c) jointly with the other party, determine
the applicable adjustments to the fixed operating rate
and the variable operating rate to reflect such increases
or decreases in costs or revenues with the intent that
the financial position of the IPP shall remain unaf-
fected by such change-in-law. Each party shall in good
faith cooperate with the other party in connection with
such determinations. The fixed operating rate and the
variable operating rate (if applicable) shall be adjusted
in the manner so determined jointly by the parties.
86 Energy for Sustainable Development
Notwithstanding the foregoing, in case of any such
adjustments to the fixed operating rate and the variable
operating rate (if applicable) to reflect any such
increase in costs or decrease in revenues of the IPP,
(1) such adjustments shall not be made until after the
receipt by TNB of the written approval of the Depart-
ment of Electricity Supply of (a) the amount of such
increase in costs or decrease in revenues of the IPP,
and (b) such adjustments to the fixed operating rate
and the variable operating rate (if applicable) so de-
termined by the parties.
4.8. Finance
The private power projects are generally financed through
single financing. The financial structure involves debt of
the private power projects with part of it as a bond issue
at a fixed interest rate and the remaining as floating rate
loan facility. The equity continues to be owned by the
IPPs, who bear the entire development expense them-
selves. At 4000 MW, the 5 private power projects consti-
tute the largest exercise anywhere in Asia. It is also
Malaysia’s largest debt financial package at a total of
RM10 ($3.9) billion. All this is financed locally, relieving
the 5 IPPs of foreign exchange risks.
4.9. Market for the power produced
Only one of the IPPs has a minimum take-or-pay provi-
sion. The rest of the IPPs will sell their energy as des-
patched by the National Load Despatch Centre. Recently
one of the IPPs has expressed interest in selling electricity
to Singapore and a potential IPP has expressed interest in
selling electricity to Thailand.
4.10. Policies and laws on energy and environment
The Environmental Quality Act 1974 provides the legis-
lative framework for regulation and policies with regard
to the environment. The following are some of the sec-
tions of the Act that will have an effect on electric power
plants.
Section 21: Power to specify conditions of discharge
Section 22: Restrictions on pollution of the atmosphere
Section 23: Restrictions on noise pollution
Section 24: Restrictions on pollution of the soil
Section 25: Restrictions on pollution in inland waters
Section 27: Prohibition of discharge of oil into Malay-
sian waters
Section 32: Need to maintain and operate equipment
Section 34A: Report on impact on environment resulting
from prescribed activities
One of the conditions in the PPA is for the IPP to obtain
all government authorizations. Thus, only after the EIA
has been approved by the Department of Environment
will the licence to operate the power plant be given by
the Department of Electricity Supply. As such, it can be
assumed that the IPP will meet the requirement of the
environmental laws and regulations and the conditions
imposed by the Department of Environment.
5. The impact of privatization in the electricity
supply industry
The privatization of TNB has been successful. The
Government of Malaysia is now less burdened with
l Volume III No. 6 l March 1997
 Letters
capital-intensive generation programmes to ensure the
country’s economic development. By 1997 Malaysia will
have a comfortable margin in generation capacity of 30%
as planned and this will ensure security and availability
of supply.
The response of the private sector to this privatization
programme of the government has been very encouraging.
This can be seen from the fact that more than 100 pro-
posals have been received from potential IPPs. The
knowledge and expertise in the electricity sector is be-
coming more widespread now. Whereas previously this
was concentrated in the 3 utilities, it has at present spread
out to other parties. Apart from IPPs, consultants, banks,
legal firms, different government agencies and consumers
are now becoming increasingly aware of the varied issues
involved in the electricity sector. For consumers, the
awareness has resulted in their being more critical and
demanding with respect to services provided to them. This
is evident from the increasing number of complaints re-
ceived by the Department of Electricity Supply on matters
which they had passively endured earlier. While this puts
pressure on the utilities, it certainly pushes them to up-
grade their services.
The breaking-up of the monopolistic situation in the
industry and the ensuing competition has motivated those
involved in the industry to improve themselves. TNB it-
self has been forced to improve its performance. One such
example is the establishment of a list of performance in-
dicators, thus setting a minimum level of performance the
customers can expect of them. This list includes, besides
other things, the maximum time-period for connection of
new and disconnected supplies, for responding to com-
plaints, the minimum period of notice for planned out-
ages, and the method of collecting deposits. Confidence
is being generated that this will result in a better and more
efficient industry as a whole.
Industry in general is becoming more efficient and the
business of electricity provision, in particular, more trans-
parent. This is evident in the way factories having cogen-
eration potential are now beginning to avail themselves
of that facility. Where formerly they would just have to
purchase all their electrical energy requirements from
TNB and discard waste fuel and/or waste heat, they are
now considering seriously the economics of cogeneration.
Also, whereas earlier, decisions were taken without rea-
sons being made public, the electricity supply industry is
becoming far more proactive. Thus, the utility now pro-
vides details of how connection charges are calculated, so
that the consumers know what they are paying for.
The utility has responded to the situation well by com-
ing up with better and more services. Besides the intro-
duction of incentive schemes for users related to
demand-side management, TNB has now started advising
consumers on how to improve the efficiency of their elec-
trical equipment and to cut losses. This benefits TNB as
Energy for Sustainable Development
well as the consumers.
6. Salient issues in promotion and
implementation of IPPs
Various challenges have to be faced as the privatization
of the Malaysian electricity supply industry is being un-
dertaken. First of all there are very few examples or mod-
els to follow. The advantages and disadvantages of the
various models of privatization have to be studied care-
fully and suitably modified to apply in this country. In
this respect, the introduction of IPPs is actually more an
exercise in financial engineering than anything else. Each
project needs to be analysed carefully in terms of whether
it can be financed, long before it can be implemented and
operated. While the entire debt funding of the existing
IPP projects worth 4000 MW was raised locally, over the
next 30 years about 30,000 MW of capacity is needed.
To implement such a huge programme, capital invest-
ments of the order of RM 100 ($39.2) billion are required.
The question is not only the affordability of finance, but
also the availability of the funds. The scramble for scarce
funds has, in fact, become a global issue and is likely to
become a major challenge for the electricity industry.
The regulatory framework and the various regulations
and codes have to be set up to ensure that the various
parties involved in the industry work in harmony with
each other and in an efficient and reliable manner. The
major portion of this framework is already in place and
various other regulations and the Grid Code are being
formulated.
The sourcing of the fuel necessary for the power sector
is another challenge by itself. While oil has traditionally
played a major role in this respect, natural gas is increas-
ingly playing a more prominent role. Newer and better
technologies in the use of natural gas for generation are
available. Notwithstanding this, the fuel diversification
policy has to be maintained and achieved to improve the
security of energy availability and to reduce the vulner-
ability of depending on only one fuel source or a group
of fuel sources. In this respect, the Government of Ma-
laysia fully realizes the limits to the availability of gas in
the future. With this, other sources such as hydro and coal
may play greater roles in the electricity sector beyond the
year 2000.
7. Some salient features of recent developments
Installed capacity in 1997 had reached 11,646 MW, while
generation in the same year was 36,156 GWh. About 14
independent power producers had been issued licences for
generation by mid-1998.
Suggestions for further reading
Environmental Quality Act 1974 (and regulations made under it)
Power purchase agreements of IPPs
Proposed Malaysian Electricity Masterplan (draft)
l Volume III No. 6 l March 1997 87
 Letters

Appendix 1
Highlights of IPP deals

Sl. Name of IPP YTL Power Sikap Energy Genting Sanyen Powertek Sdn Bhd Port Dickson
No. Generation Sdn Ventures Sdn Bhd (M) Sdn Bhd Power Sdn Bhd
Bhd

1. Site Paka, Terengganu, Lumit, Perak Kuala Langat, Alor Gajah, Melaka Tanjung Gemuk,
Pasir Gudang, Selangor Port Dickson
Johor

2. Capacity 808 MW 1303 MW 720 MW 440 MW 440 MW

404 MW

3. Type of plant 2 Combined cycle Combined cycle Combined cycle Open cycle 4×110 Open cycle 4×110
block MW MW

4. Project cost RM 3.6 ($1.4) RM 3.6 ($1.4) RM 1.0 ($0.4) RM 719 ($282) RM 685 ($269)
billion billion billion million million

5. Licence issued 7 April 1993 15 July 1993 10 June 1993 1 December 1993 1 December 1993

6. Energy purchase 31 March 1993 16 October 1993 6 January 1994 10 December 1993 10 December 1993
agreement with TNB

7. Gas purchase agreement 15 March 1993 17 July 1993 Not signed yet Not signed yet Not signed yet
with Petronas

8. Technical consultants Tenaga Ewbank SWEC Zainal Sdn Lahmeyer KTA Tenaga Sdn Black & Veatch
Preece Bhd International Bhd International of
Missouri, USA

9. Finance Employees Malayan Banking Malayan Banking Malayan Banking Malayan Banking
Provident Fund, Bhd, Bhd Bhd Bhd
Bank Bumiputra Bank Bumiputra
Malaysia Bhd Malaysia Bhd

10. Commercial operating 31 December 1994 1 July 1996 31 December 1994 15 January 1995 15 January 1995
date1st generating unit

Last generating unit 1 July 1997 1 July 1997 31 December 1995 1 May 1995 1 May 1995

11. Shareholders YTL Corporation Sikap Power Syarikat Genting Cergas Unggul Sime Darby
Bhd Sdn.Bhd 75% Bhd. Sdn.Bhd35% Bhd.40%
Asea Brown Boveri Arab Malaysia Malaysian
Holdings Dev.Bhd 30% Resources
Sdn.Bhd. 25% Yayasan Melaka Corp.Bhd. 30%
20% Hypergantic
Dato’Dr,Mokhzani Sdn.Bhd.20%
Abdul Rahim 8% Tenaga Nasional
Lim Ewe Jin 7% Bhd.10%

Notes
1. These costs (in current terms) are calculated on the basis of the following assumptions:
Generation costs=$1.75 million per MW for period 1991-1995
=$2.00 million per MW for period 1996-2000
=$2.50 million per MW for period 2001-2010
=$3.00 million per MW for period 2011-2020
Transmission costs=50% of generation costs
Distribution costs=40% of generation costs
Other costs (e.g., equipment cost)=10% of generation costs

88 Energy for Sustainable Development l Volume III No. 6 l March 1997