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Kpower Solar Example LSS4 1
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This article first appeared in The Edge Malaysia Weekly, on March 22, 2021 - March 28, 2021.
Below: TNB’s LSS Bukit Selambau, which has a 30mw-generation capacity, began
operations last September. (Photo by Tenaga Nasional Bhd)
AFTER four months, the Energy Commission (EC) announced the winners of
the fourth cycle of the Large Scale Solar (LSS4) programme on March 12. The
government selected a total of 30 bids to develop solar farms, with export
capacity ranging from 10mw to 50mw.
However, the low price range of the LSS4 and the cost of solar modules, which
has been rising since last July, raise the question of whether the project would
be a boon or bane for the winning bidders.
“When bidding closed last October, a lot of companies put in low bids, as low
as 13.99 sen per kWh. Since July, however, the cost of solar modules has been
increasing, and I doubt the LSS4 is as lucrative as the previous three rounds,”
says a bidder for the LSS4.
The cost of producing electricity from solar power plants has been decreasing
over the last decade, and this has led to a surge in solar energy production
worldwide. Photovoltaic (PV) solar power has become among the cheapest
renewable energy (RE) sources.
Levelised cost of electricity (LCOE) for solar decreased to 6.8 US cents per kW
in 2019, from 37.8 US cents per kW in 2010, according to data from the
International Renewable Energy Agency.
A global solar PV module producer says project price in the European Union
has increased from around 20 US cents per watt in July 2020 to between
28.66 and 28.96 US cents per watt in February 2021.
The almost 45% increase was due to a rise in costs across the supply chain,
from logistics to commodities involved in the production of a PV cell and
module, such as polysilicon, glass, silver, aluminium and copper.
Therefore, some market observers point out, the low tariff bids for the LSS4
are quite unrealistic. While the winners were those who put in bids of 17.68 to
24.81 sen per kWh, these prices are still quite low for them to make good
returns, they say.
During the first LSS, the lowest bid was
39 sen per kWh; for LSS2, the lowest bid
was 33.98 sen per kWh; and, for LSS3, it
was 17.78 sen per kWh.
Note that total electricity generation capacity for Peninsular Malaysia stood at
26,132mw as at end-2019, as per the EC’s 2019 annual report. The reserve
margin for the peninsula stood at 38% of total capacity, with the maximum
demand in 2019 at 18,566mw.
Among the winners of the LSS4 are landowners such as ATK Development
Sdn Bhd, MK Land Resources Sdn Bhd, Taiping Solar Sdn Bhd and Asiabina
Properties Sdn Bhd. These companies may already have suitable parcels of
land in their books that are held at low cost.
He agrees that solar panel prices have been on the rise. Nevertheless, he says,
KPower had locked in the price when it made its submission to the EC.
KPower estimated that the project would cost RM160.25 million, with RM153.4
million being the EPCC cost and the rest, financing-related. Eighty per cent of
the project cost will be funded via borrowings, and the rest will be from equity
injections.
Besides the project cost, the SPV will have to pay PKNP a land lease of
RM432,000 a year for the duration of the contract. Annual operation and
maintenance (O&M) costs of around 1% of the project cost will also be borne by
the SPV over the 21-year period.
It is not known whether the SPV will have to make the lease payments to
PKNP or whether the sum will be deducted from the share of profits from the
LSS project. The latter is quite unlikely, however, given that PKNP holds only
5% of the SPV.
Note that KPower has an internal rate of return (IRR) target of 7.5%.
At KPower’s tariff of 17.91 sen per kWh, that means the SPV would be earning
RM17.3 million in revenue a year.
Given that 80% of the RM160.25 million project cost will be funded by
borrowings, and assuming an interest rate of 3% a year for a period of 15 years,
the SPV will have to pay RM10.6 million a year to service the loan.
After deducting O&M cost of RM1.6 million a year and land lease cost of
RM432,000, the SPV would have a profit of RM4.67 million a year. While this
shows that, at 17.91 sen per kWh, the SPV can still make a profit, it is lower than
the RM5.2 million annual profit after tax projected by KPower.
Note that the LSS4 projects might not kick off this year. Steven Chan, an
analyst from Kenanga Research who covers the industry, says solar project
costs are expected to decline in the second half of this year.
The LSS4 winners will have to complete their projects and start producing
electricity to the grid by 2023. Liquidated and ascertained damages (LAD) will
be imposed on the winners if they fail to get the projects up and running by
then.
The LAD is thus a penalty that the LSS4 winners would want to avoid by hook
or by crook, and the plants will have to be completed and commissioned on
time. If the project price of solar plants does not decline as expected, the LSS4
could be a bane for the project winners.
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