Tenaga Nasional Bhd

ASIAN CASE RESEARCH JOURNAL, VOL. 19, ISSUE 2, 353–376 (2015)

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Tenaga Nasional Bhd. This case was prepared by Professor John Antony After seven years1 at the helm of the national utility Xavier of the National University of Malaysia and company, Dato’ Sri Che Khalib, the President and Chief Exec- graduate student Yazmin Islahudin of Universiti Putra utive Officer of Tenaga Nasional Berhad (TNB), faced one of Malaysia, as a basis for class his biggest challenges in January 2012: the last two quarters discussion rather than to illustrate either the effective of 2011 recorded two consecutive quarterly losses amounting or ineffective handling of an to RM440.2 million and RM453.9 million, respectively. While administrative or business situation. the national power company managed to register a net profit of RM499.5 million for the year ending August 2011, this was Please send all correspondence 2 to Datuk Dr. John Antony below its 2010 achievement of RM3.2 billion. Xavier, Professor of Manage- The main reason for the dwindling returns was TNB’s ment, Graduate School of Business, The National Uni- dependence on Petronas’ supply of gas, which recently had versity of Malaysia. E-mail: [email protected]; been inconsistent. As a result, TNB had to incur additional johnantonyxavier@ costs by running its gas-fired power plants on oil and dis- hotmail.com tillate which were five times more expensive per kilowatt hour (kWh) than the price of gas. If the gas shortage were to continue, TNB would face further losses in the coming years. TNB was a Malaysian government-linked company which had national and strategic importance as a national power utility. As such, it could be expected that TNB could rely on government support for its continued operations and obligations. Independent power producers also produced electricity from which TNB bought to augment its own pro- duction. Notwithstanding, TNB retained its monopoly in the transmission and distribution of electricity.3 The government’s golden share in TNB carried veto power over major decisions of the company to ensure that it did not make excess returns at the expense of society. The company faced the challenge of obtaining timely and appro- priate tariff increases to cover its operating costs, especially its fuel costs.4 As it was constrained by public policy from

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increasing its tariff and as Petronas was unable to supply gas to TNB in the quantities required, TNB felt that it should be compensated for the losses therefrom so as to protect its shareholders and consumers from electricity disruptions in the future. “We need the money for our operational needs. Our cost per month for operations and capital expenditure is RM2.5 billion. We have to pay for the fuel to fire our electricity generation plants, pay the independent power producers (IPPs) for their supply of electricity to TNB and cover our operating costs,” Dato’ Sri Che Khalib lamented during his address at the TNB annual general meeting on December 15, 2011. “We will record a similar kind of [quarterly] results as before if we do not get the money,” continued Dato’ Sri Che Khalib.5 Further, the demand for electricity was expected to increase to meet the country’s needs, particularly, to cater for the government’s economic transformation programme. Mega projects planned for 2011 alone totalled RM118.4b. These included construction projects such as the high speed rail, Kuala Lumpur mass rapid transport system, new low- cost carrier terminal and two coal-fired projects worth RM10 billion.6 These projects were expected to catalyse Malaysia’s growth and ramp up electricity consumption in the country. With cash reserves being drained by the cost of expensive alternative fuels, Dato’ Sri Che Khalib considered that TNB should find ways to contain its escalating fuel costs while meeting the country’s rising demand for electricity.

THE POWER INDUSTRY AND TNB

The Energy Commission (EC) — a statutory body set up to ensure a safe and reliable supply of energy at reason- able prices — regulated the energy sector comprising the electricity and gas supply industry. Since utility companies were natural monopolies, tariffs could only be set by the Ministry of Energy, Green Technology and Water after cabinet approval.7 The Ministry was also responsible for approving and granting licences to power producers.8

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TNB was the largest Malaysian electricity utility company. It had its beginnings as the Central Electricity Board on September 1, 1949 and became the National Electricity Board of the States of Malaya on June 22, 1965. Its status as a government entity came to an end when the national utility was privatised on September 1, 1990 with the aim of improving its operations and the quality of its services rendered to an increasingly consumerist public.9 As of January 2012, with over 31,000 employees and an estimated eight million customers, TNB had assets worth RM74.6 billion. There was war for talent in the market-place. TNB had trained experts who were serving in its subsidiaries while others had left for greener pastures. As the only integrated utility, TNB boasted a 100% market share in the transmission and distribution industry, and a 41.8% market share in the generation industry. With a total installed generation capacity of 9,110 MW in Peninsula Malaysia alone, TNB generated the largest amount of electricity through its six thermal stations, comprising coal and gas-fuelled power plants, and three major hydroelectric plants. TNB also operated the national grid, a comprehensive transmission network that also interconnected with that of Thailand and Singapore.10 Since its existence, TNB had earned international reputation and numerous awards. It ranked 100 in the list of 250 power companies worldwide that won the 2008 “Power Company of the Year” Platts Global Energy Award. Addition- ally, TNB was the winner of “The Prime Minister’s Industry Excellence Award” for 2007. In 2010, TNB received recog- nition for good enterprise governance by the Malaysian Business-Chartered Institute of Management Accountant (CIMA) and was conferred the “Merit Award” at the CIMA Enterprise Governance Awards 2010.11 While TNB was considered a monopoly and an integrated utility, as of January 2012, the government had issued 26 licences to independent power producers (IPPs), the largest being Segari Energy Ventures Sdn. Bhd. and YTL Power Generation Sdn. Bhd. These IPPs were introduced to encourage competition and create efficiencies in the power sector. Through power purchase agreements (PPAs), IPPs

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generated electricity which was then sold to TNB for transmission and distribution to consumers. As was common with PPA arrangements such as those that bound TNB, TNB was obliged to pay capacity and energy payments to the IPPs. These costs constituted a large portion of TNB’s expenses. Payments to IPPs alone constituted 62.5% of TNB’s total costs in 2011.12 With cost pressures narrowing TNB’s margins, Dato’ Sri Che Khalib felt the urgency of devising a long-term solu- tion. He had been brought in to turn the company around. During his tenure, debt levels had reduced from RM32.5 billion to RM18.6 billion, and TNB had achieved operational efficiency comparable to the world standard. Along with its reduced debt levels, TNB was also able to achieve strong investment grade credit ratings from local and foreign agencies: AAA from Rating Agency Malaysia and MARC, as well as Baa1 from Moody’s and BBB from Standard & Poor’s. Foreign shareholding was also at a high of 28.4% in May 2007, but had since declined to 10.7% in August 2011 as a result of the global economic crisis in 2008 and TNB’s on- going fuel issue.13 While the company had successfully implemented continuous performance monitoring through headline key performance indicators (KPIs), recent issues had not been easy to overcome. (Table 1 details TNB’s historical KPIs for the past eight years, illustrating the achievements as well as problems plaguing the company.)

OPERATIONAL EFFICIENCIES

As caps on its tariffs were imposed by the government and the price of natural gas to fuel electricity generation was ever increasing, TNB sought to enhance its profit margin through securing internal efficiencies and venturing into related but non-regulated businesses. TNB’s 60-year experience was not necessarily an indicator of future prospects. That was why TNB outlined a vision: “To be among the leading corpora- tions in energy and related businesses globally”. This vision was further reiterated through its mission that stated: “We are committed to excellence in our products and services”.

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Table 1. TNB’s Historical Headline KPIs

KPI Measures35 FY2004 FY2005 FY2006 FY2007 FY2008 FY2009 FY2010 FY2011 Return on Assets (%) 2.6 2.2 3.3 6.3 4.6 3.9 4.7 2.1 Gearing (%) 68.6 64.9 58.1 49.9 46.9 45.2 41.3 38.6 Unplanned Outage Rate (%)a 9.4 6.1 4.7 2.2 3.3 2.9 2.7 7.1 Transmission & Distribution Losses (%)b 10.8 10.5 11.0 10.0 9.5 9.7 9.5 9.0 System Minutes (mins)c 18.0 14.0 7.3 9.3 6.6 1.0 0.9 1.0 System Average Interruption Duration 152 148 102 83 78 69 87 79 Index (mins)d

Source: TNB annual reports and quarterly announcements (various issues) aMeasures the percentage of energy not generated because of an unplanned outage. (The lower the score the better is the performance.) bMeasures the percentage of energy lost during transmission or distribution to consumers. (The lower the score the better is the performance.) cMeasures the total minutes of unsupplied electricity in a year. (The lower the score the better is the performance.) dMeasures the total minutes, on average, that customers are without electricity in a year. (The lower the score the better is the performance.)

The mission inspired its employees to become more account- able for their actions at work so that TNB could produce world-class products and services. That, in turn, would help TNB attain its vision.14 Armed with its vision and mission, TNB worked on improving its operational efficiencies to provide secure and reliable electricity to the nation.15 It embarked on several initiatives to ensure its operational performance contributed to its profitability. Seventy percent (70%) of TNB’s power plants had actually achieved the KPI of Equivalent Unplanned Outage Factor by Station of less than 2.4%. That achievement matched international industry standards. Apart from the high reliability in electricity supply, TNB’s thermal plants were also known for their efficiency. Their performance had increased by 1.3% between 2007 and 2011. TNB’s reliability was further emphasised by its superior performance in having achieved zero major disturbance in electricity transmission over the last six years, as well as zero tripping with

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load loss at 500kV and 275kV levels for three consecutive years. As a result, TNB had managed to increase its system availability to 99.4% and reduced the number of tripping with load-loss incidents from 26 in 2008 and to 15 in 2011. Part of TNB’s success lay in its investment in state-of- the-art technologies to ensure reliability of supply. In 2009, the cutting-edge Supervisory Control and Data Acquisition/ Energy Management System (SCDA/EMS), was commis- sioned at the National Load Dispatch Centre, which moni- tored and ensured that the country’s national grid network was performing optimally. This SCDA/EMS was among the best in the Asia-Pacific region and was comparable to those used by major utilities in North America. To complement its improving technical performance, TNB had also taken measures to improve its customer service to reflect its core values of integrity, customer focus, business excellence and caring.16 The call to put customers first was answered through TNB’s new Customer Charter that addressed many of existing and new customers’ needs. A “People 1st Programme” was launched to instil a culture of service excellence. Accordingly, TNB’s existing call centres were enhanced to meet the growing number of calls by customers regarding TNB’s service. With the rising popularity of internet services, TNB also developed the “e-Application” to enhance customer experience by affording customers, electrical contractors and developers the convenience of applying for electricity online. By January 2012, the system was processing an average of 11,000 applications per month. The internet application was easy to use that it soon became popular. As at January 31, 2012, 40.8% of the total number of new electricity supply applications were through e-application. The driving force behind TNB’s technological break- throughs and improved processes was its information and communications technology (ICT) division. That division continually sought to provide the best solutions and services to the company to enhance its productivity. In keeping with the latest innovations, the ICT division had implemented several initiatives such as the multi-protocol label switching system that centralised data between two separate networks

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to enhance data services, improve security and increase efficiency. The supply chain management project was another ICT initiative developed to support TNB’s procurement division by automating the tendering and purchasing processes, contract management, and supplier relationship management. Together with the ICT division’s assistance, the procurement division had achieved significant value creation, partly through its e-bidding programme. In 2011, RM167 million savings were recorded through various procurement initiatives, most of which were driven by the ICT division. Also, with its move towards a paperless office, the ICT division helped promote TNB’s company-wide green initiative by reducing the need for countless documentation that was normally inherent in procurement processes. TNB has been able to maintain its level of human capital even through its expansion and increased operations. In the past five years (2005–2010), productivity grew at a faster rate than the increase in employees. TNB’s productivity had grown to 8.1% in the past five years while the increase in employment had only grown by 2.1%.

GLOBAL PRESENCE

As part of the Government-led initiative to push government- linked companies (GLCs) as economic drivers through the GLC Transformation Programme launched in May 2004,17 TNB also developed its own 20-Year Strategic Plan in 2005. The plan outlined the company’s goals in five phases till 2026. The immediate goal in 2005 was to reduce debt through effective cost-cutting. The second phase, which ended in 2011, focused on improving TNB’s core operations. It sought to place TNB as the best-performing company in Malaysia by 2007 and as the regional best by 2010. These two goals were achieved when TNB won “The Prime Minister’s Industry Excellence Award” in 2007 and was ranked as the “Power Company of the Year” in the 2008 Platts Global Energy Awards.

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Beginning 2011, TNB began its global expansion. It had already begun to mark its presence globally by expanding its business through its power plants in Saudi Arabia (Shuaibah Independent Water and Power Producer) and Pakistan (Liberty Power Limited). TNB had also solidified its exper- tise as a repair and maintenance specialist through its subsidiary TNB Repair and Maintenance Company (REMACO), an achievement that was in line with TNB’s goal to expand into other energy-related businesses. The last two phases of the 20-Year Strategic Plan entailed TNB becoming global leaders in the power industry and expanding its overseas investments for revenue diversification. While REMACO was set up primarily to provide maintenance services to TNB’s power plants, it had since expanded its role to include project management and opera- tion and maintenance (O&M) for other companies. Its vast experience had enabled it to tap into the international scene. In 2011, REMACO was awarded a contract to operate the Laraib Energy’s hydro-power plant in Pakistan. REMACO had also undertaken maintenance jobs in Yemen. It was also aggressively exploring O&M and repair and maintenance contracts in ASEAN countries, Kuwait, Saudi Arabia, United Arab Emirates and other Middle Eastern countries. TNB Engineering Corporation Sdn. Bhd (TNEC), another wholly-owned subsidiary of TNB, had also begun to set foot in the global arena. TNEC supplied district cooling systems (DCS) in Malaysia, and played an important role in the development of the low-cost carrier terminal — a project listed in the 10th Malaysia Plan (2011–2015). A 20-year con- cession was awarded to TNEC and its joint venture partner, Malaysia Airports Holding Berhad. Its proven capabilities and growing reputation allowed TNEC to extend its presence abroad through its associate company, Abraj Cooling LLC, and TNEC-Abu Dhabi in Abu Dhabi, where two DCS plants were developed. TNB had also ventured into Vietnam and Indo- nesia through its subsidiary Tenaga Switchgear Sdn. Bhd. (TSG). TSG manufactured high-voltage switchgears through joint ventures and collaborations with business partners. It also offered an array of turnkey services encompassing

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transmission and distribution markets — the only manufac- turer of high-voltage switchgears in Southeast Asia to do so. See Appendix 1 for TNB’s structure and list of subsidiaries. To complement its high-performing subsidiaries, TNB had worked to further enhance its human capital by creating a specialist career path scheme for technical and professional positions. Since the launch of this scheme in 2005, TNB had developed three specialists and 32 technical experts in their respective areas of specialisation. These initiatives, coupled with its global exposure and experience in the power industry provided TNB with a competitive edge.

RISING DEMAND

With the launch of the New Economic Model in 2010, Malaysia was expected to grow at an annual average rate of 6.5% so that it could achieve its Vision 2020 of being a developed nation with a doubling of its per capita income to at least USD15,000 by 2020. TNB was expected to cater for the increasing demand for energy to meet Malaysia’s construction and infrastructure plans as detailed in the 10th Malaysia Plan (2011–2015). On average, electricity peak demand had increased by 5% annually since 2004, with the latest peak recorded at 15,476 MW in 2011 against 15,072 MW in 2010. The increasing peak demand reflected the country’s continued growth and requirement for electricity. The peak demand was projected to increase 60 percent to 24,770 MV by 2030.18 In 2011, 39.2% of sales were contributed by the industrial sector, 40.2% by the commercial sector, 17.7% by the domestic/residential sector, with the remaining generated by other sectors including agriculture and mining. The growth from the commercial sector came mainly from mega-shopping malls, four or five-star hotels, hospitals, airports and ports. The mushrooming of shopping centres such as the Pavilion, and hospitals such as the Prince Court Medical Centre, cer- tainly had spiked national electricity consumption. The industrial sector, on the other hand, was mostly driven by the country’s electronics industry. Many international companies had set up factories in Malaysia due to

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its relatively low tariff rates and its special industrial tariff scheme. This special industrial tariff scheme was introduced by the Government to encourage a healthy and competitive economy which entitled industrial customers, whose total annual electricity cost was 5% or more of the total annual cost of its operations, to a preferential tariff scheme. The tariff rates for each sector differed slightly; with domestic or residential users benefitting the most as those consuming less than 200 kWh a month continued to enjoy a low tariff of 21.8 sen/kWh since 1997. The tariff was pro- gressive so that those consuming more electricity were charged higher for every extra kWh consumed.19 This was because of the underlying philosophy that those who could afford electrical appliances, such as a huge refrigerator or air-conditioner, could therefore afford higher rates that were less subsidised. The structure also allowed consumers to understand that electricity was produced through depleting resources and encouraged them to reduce wastage. Tables 2 and 3 below show that sales were driven mostly by the industrial and commercial sectors, hence devel- opments in these areas would have the biggest impact on TNB in the future. With the recent rollout of the 10th Malaysia Plan, TNB expected demand to rise further. In order to cater for

Table 2. TNB’s Revenue Sources

Revenue (RM million) FY2007 FY2008 FY2009 FY2010 FY2011 Sales of Electricty Peninsula Malaysia 20,696.5 22,555.0 26,388.2 28,020.5 29,273.1 Export to Thailand (EGAT) 412.4 206.6 38.2 21.4 18.6 Sabah Electricity Sdn. Bhd. 807.0 853.9 953.7 1,029.5 1,079.0 LPL (Pakistan) 468.1 574.6 703.7 522.8 503.2 Total Revenue from Electricity Sales 22,384.0 24,190.1 28,083.8 29,591.5 30,873.9 Others* 936.4 1,560.5 701.8 725.9 1,333.0 Total Revenue 23,320.4 25,750.6 28,785.6 30,317.4 32,206.9

*Includes Goods and Services and Deferred Income.

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Table 3. TNB’s Revenue Profile

FY2007 FY2008 FY2009 FY2010 FY2011 Sector GWh RM GWh RM GWh RM GWh RM GWh RM Industrial 45.4% 41.4% 47.8% 41.6% 42.5% 39.3% 43.3% 39.4% 42.9% 39.2% Commercial 30.4% 36.1% 31.1% 36.7% 33.4% 39.4% 33.0% 39.6% 33.6% 40.2% Domestic 18.6% 17.6% 18.6% 17.4% 20.5% 17.5% 20.4% 18.0% 20.5% 17.7% Others* 5.6% 4.9% 2.5% 4.3% 3.6% 3.8% 3.3% 3.0% 3.0% 2.9% Total 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%

*Includes agriculture, mining, public lighting, LPL and EGAT. Source: TNB Annual reports (Various issues).

this, in 2011, TNB was awarded several power plant projects to increase its current capacity. These included the 250 MW Hulu Terengganu Hydroelectric Project in Terengganu and the 372 MW Ulu Jelai Hydroelectric Project in Pahang. TNB’s existing Janamanjung plant was also being extended to include an additional coal-fired unit. This plan would employ the latest supercritical boiler technology with a higher efficiency level. Another 300 MW gas-fired combined-cycle power plant was planned to be constructed in Lahad Datu, Sabah. All these projects would achieve completion and commission by 2016.20

INCREASING UNCONTROLLABLE COSTS

While the increase in total revenue in 2010 was RM30,317 million over that of the previous year, the corresponding figure in 2011 (over 2010) was RM32,207 million, representing a growth of 6.2%, TNB suffered an 84% decline in net profit from RM3.2 billion in 2010 to RM499.5 million in 2011. The decline was mainly attributed to TNB’s costs, which had increased by 19%. Fuel, a major cost component and an increasingly costly commodity, was mainly used to generate electricity and to fuel 79% of TNB’s power plants. The remaining plants were hydroelectric power stations totalling 1,911 MW. Since gas-fired plants constituted 48.6% of TNB’s

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total installed capacity, gas remained the most important fuel source to generate electricity. While the independent power producers could pass the cost to TNB under the power purchase agreements, TNB was disallowed from passing on the high cost to consumers through higher tariff. And to protect customers against the increasing tariffs, gas was partially subsidised by the Government.21 Between September 2010 to May 2011, gas was sold at RM10.70/mmbtu to TNB. However, along with the approved tariff hike in June 2011,22 gas sold to TNB also increased to RM13.70/mmbtu to closer reflect rising market prices. While TNB was heavily reliant on gas as a fuel source — due to its available gas-fired power plants and subsidised prices — in 2011 the supply of gas from Petronas began to deteriorate due to gas curtailments. The disruption was caused by scheduled and unscheduled maintenance of gas plants, as well as unforeseen incidents such as a fire on Petronas Carigali’s Bekok C platform23. Although the power industry’s gas allocation was 1,250 million standard cubic feet of gas per day (mmscfd), gas supplied to TNB in 2011 aver- aged 930 mmscfd as a result of the gas shortage — a 30% drop from TNB’s usual gas requirement. To respond to the shortage of gas, TNB had to fuel its gas-fired plants using alternative fuel sources, namely, oil and diesel, thereby incur- ring additional costs between RM300 to RM400 million a month.

Table 4. TNB’s Cost and Units Generated by Fuel Type36

Fuel Cost and Units Generated Fuel Cost /Unit Generated FY2010 FY2011 FY2010 FY2011 Fuel Cost Units Fuel Cost Units (RM mn) (GWh) (RM mn) (GWh) Sen/kWh Sen/kWh Gas 5,433.8 54,714.2 4,974.4 46,383.8 9.93 10.72 Coal 5,270.4 40,539.9 6,546.4 45,147.7 13.00 14.50 Oil 94.5 250.8 1,567.4 2,682.7 37.68 58.43 Distillate 116.4 225.1 1,392.1 2,535.9 51.71 54.90

Source: TNB 4th Quarterly Report for Financial Year 2011.

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With limited gas, TNB also needed to burn an additional 1.1 million metric tonne (MT) of coal amounting to RM0.4 billion to meet demand. Thirty-four (34) percent of TNB’s plants ran on coal, which was imported and pro- cured in US dollars. In contrast to gas, which was partially subsidised, coal was purchased at market prices and, therefore, was sensitive to market volatility. The cost of coal had increased significantly in the past eight (8) years, fluctuating between USD34/MT in 2004 to USD107/MT in 2011. With increasing demand, the consumption of coal had also risen from 7.6 million MT in 2004 to 18.9 million MT in 2011. The cost pressures on coal were further exacerbated by China’s demand for coal. In 2011, China consumed 48.2% of the world’s total coal consumption, with the United States of America (“USA”) trailing second at only 14.8%24. With China commanding the market, other countries were unable to move prices in their favour. While foreign exchange rates remained a risk factor, the 2007/8 economic instability in the USA had caused the greenback to weaken against the ringgit, thus cushioning the impact on coal. Apart from rising fuel costs, TNB’s margins were further squeezed by existing payments to IPPs and rigidity of electricity tariffs which were highly dependent on the government’s approval. As such, TNB’s tariff structure could not be automatically adjusted to reflect higher costs incurred. While the government had reviewed the tariff upwards three times in the past five years, the quantum had not been sufficient to cover all costs, as shown in Tables 5 and 6. Many cost-cutting initiatives were put in place to keep operations efficient. Among the earlier measures taken by TNB were to sell off its idle assets and the launching of a more aggressive collection method from bad debtors and delinquent accounts. Energy losses resulting from electricity theft were also reduced through frequent raids as well as improved technology such as Remote Meter Reading. The latter enabled TNB to monitor its high-risk customers more closely. These initiatives allowed TNB to recover revenue worth RM100 million a year.

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Table 5. TNB’s Tariff Reviews37

Tariff Review June 2006 July 2008 March 2009 June 2011 Tariff (sen/kWh) 26.2 32.5 31.3 33.5 (12% increase) (23–24% increase) (3.7% reduction) (7.1% increase) Rationale Reflects inflationary Reflects increase Reflects reduction Reflects increase costs of gas price from in gas price from of gas price from RM6.40/mmbtu to RM14.31/mmbtu to RM10.70/mmbtu to RM14.31/mmbtu RM10.70/mmbtu RM13.70/mmbtu

Table 6. TNB’s Cost Breakdown38

Cost Per Unit (sen/kWh) FY2010 FY2011 Average Selling Price 31.3 31.7* Cost Per Unit Payments to IPPs 17.7 20.8 Fuel Cost 1.9 2.8 Repair and Maintenance 1.2 1.5 Staff Cost 2.5 2.7 Depreciation 3.7 3.7 General Expenses 1.3 1.2 Total Cost Per Unit 29.1 32.7 Margin 3.0 (1.0)

*The discrepancy between Average Selling Price of 31.7 sen/kWh in 2011 and tariff rates of 33.5 sen/kWh shown in Table 5 is due to the fact that the tariff increase was effective June 2011 and was only accounted for the last two months of the financial year that ended on August 31, 2011.

SABAH ELECTRICITY SDN. BHD. (SESB)

TNB’s wholly-owned subsidiary, Sabah Electricity Sdn. Bhd., while being the sole integrated electricity provider to the Sabah state, had been facing public scrutiny over the years due to its operational performance. It owned 46 power plants of which 66% was run on diesel. SESB generated 4,964.3 GWh in 2011 compared to 4,821.5 GWh in 2010, representing a 3% increase in electricity generation. Meanwhile, Sabah’s 12 IPPs constituted 76% of the electricity market in the state.

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Domestic customers consumed 83% of SESB’s electricity. In contrast to TNB’s customer profile, the commercial sector contributed 16% while the industrial sector contributed 1%. The gap between the domestic and industrial sectors showed the potential growth that could be unlocked in Sabah, more so as Sabah was fast becoming an industrial hub and an internationally-renowned tourist spot. In 2009, SESB’s under-performance came to light as maintenance of its plants, and those of the IPPs, were not being carried out due to funding problems.25 In addition to the shortfall in installed capacity, electricity supply was also unreliable as constant maintenance led to power cuts resulting in load shedding. The problem reached a point where SESB needed to rely on companies that owned private generators to help produce energy to meet the demand. A major contributor to SESB’s lack of funds was that its tariff had not been revised in over 25 years despite escalating cost of electricity generation. Tariffs were fixed to prevent such costs being passed on to the consumers. Despite the government’s subsidy in the form of diesel and tariff prices, SESB’s financial position kept deteriorating to the extent that it could not conduct its normal maintenance. In 2010, SESB sparked national outrage against its blackouts. Its System Average Interruption Duration Index (SAIDI) — which indi- cated the number of minutes of interruption that is experi- enced by a consumer — had reached 2,870 minutes/consumer (compared to TNB’s SAIDI which was only 87 minutes/ consumer in 2010). While the then Minister of Energy, Green Technology and Water, Dato’ Sri Peter Chin Fah Kui acknowledged the need for a tariff increase, the Prime Minister Datuk Seri Najib Tun Razak thought otherwise. The latter felt that SESB would need to prove it had the will and capability to improve its operations before it could earn a tariff hike. As such, the Prime Minister had set the goal that SESB would need to decrease its SAIDI to 600 minutes/consumer by the end of 2010. Taking up the challenge, not only did SESB manage to meet the target at 687/minutes/consumer in 2010, it also managed to halve that achievement to reach a lower SAIDI of

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366 minutes/consumer in 2011. As a result, SESB’s tariff was increased by 3.1 sen/kWh from 25.5 sen/kWh to 28.6 sen/ kWh, as promised earlier by the Prime Minister. The increase was expected to boost SESB’s revenue by about RM150 million, allowing it to invest in its assets to further improve operations. Figure 2 shows the forecasted installed capacity of SESB till 2030. With current electrification of approximately 90% in Sabah, SESB had the potential to grow and install new infrastructure to provide power to another 10% of its population. Power demand was also projected to increase by an average 8% to reach 1,500 MW by 2020,26 as shown in Table 7. However, even with its growth prospects and recent tariff hike, SESB’s cost per unit of 31.19 sen/kWh still exceeded its average tariff of 28.6 sen/kWh, thus eroding its margin, albeit at a slower pace than before. With its costs growing at a faster pace than its revenue, which was further constrained by the need for government approval over tariff rises, SESB still faced an uncertain future. In addition, SESB’s financial strain could also burden its parent company TNB into injecting funds to SESB in order to sustain its operations. The preparation to meet Sabah’s imminent need for power began with talks of a 300 MW power plant to be built in Lahad Datu back in 2005. As gas was limited, SESB decided on building a coal-fired plant. TNB’s Chairman,

Table 7. SESB’s Forecasted Installed Capacity MW 3,500

3,000

2,500

2,000

1,500

1,000

500

- 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 Source: The Sabah Electricity Sdn. Bhd corporate website at http://www.sesb.com.my/).

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Tan Sri Leo Moggie, explained the choice of having a coal- fired plant: “[I]n the east coast of Sabah, gas is not available. Hydropower [is] also [not available]. Biomass is still a very marginal way of power supply. So coal is the most practical fuel source and that’s why we decided on it.”27 However, while the project was seen to be necessary, it became one of the controversial projects TNB had undertaken. The project was met with opposition from environmentalists as the site was near Darvel Bay, an environmental haven that had been described by the scientific world as the “Cradle of Coral Evolution”. It was a location that served as the starting point of coral reefs running from the Sulawesi Sea to the Great Barrier Reef in Australia. After an extended disapproval from various non- government organisations (NGOs) and the unfavourable environmental impact assessment report that was conducted to assess the viability of the project, the RM1.3 billion plant was scrapped by the Government in 2008. Nevertheless, the decision was overturned within a month with the Cabinet deciding that the plant should be relocated instead. The decision evidenced that Sabah was in need of electricity, particularly, with the planned Sabah Development Corridor (SDC) already set in motion. However, opposition by environmentalists remained strong. So, in 2011, the Government finally approved a gas-fired plant to be built in Lahad Datu to replace the original coal-fired plant. The three-year campaign by environmentalists and NGOs surfaced new threats to TNB and its subsidiaries. While it made economic sense for a coal plant to be built due to the limitations of gas supply in East Malaysia, the opposition to such a plant caused the Cabinet to change tack. The gas plant was the alternative choice to appease an increasingly environment-conscious public. In response to the changing landscape of the electricity industry that saw consumers having more bargaining power, SESB reviewed its business plan to improve its operations and financial standing. Among its initiatives were to iden- tify gaps between actual business and operational achievements and taking corrective measures, developing strategies that were aligned to those of its parent company, TNB, and

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creating a 20-year Strategic Transformation Action Roadmap 2026 or STAR 2026. With these initiatives, SESB hoped to sustain its business in a bid to serve the state and meet its rising needs.

REFORMATION OF THE MALAYSIAN ELECTRICITY SUPPLY INDUSTRY

The New Energy Policy, which was outlined in the 10th Malaysia Plan, was the Government’s plan to chart a more effective way of sourcing and delivering energy. Among other things, the policy aimed to encourage more eco-friendly energy through renewable energy as well as to move towards market-based energy pricing. To this end and as the country became more mindful of environmental issues, in 2011, the Government introduced the Renewable Energy (RE) Act 2011. The move was one of many that marked the beginning of a new energy supply landscape.28 In response to the Government’s initiative, TNB launched the Green Renewable Energy and Energy Efficiency Roundtable (GREENER TNB) to spearhead its green energy programmes. Among GREENER TNB’s activities were to develop low carbon generation technologies and signing renewable energy power purchase agreements with renewable energy developers under the Small Renewable Energy Programme. TNB had so far succeeded in gaining trac- tion in the green energy market and was awarded the “Best Utility in Clean Energy Initiative” at the 2nd Asia Power & Electricity Awards 2011.29 Its commitment to becoming an eco-friendly power provider was also evident by its efforts to implement the Environmental Management System MS ISO 14001:2004 to all its power plants and achieve certification by SIRIM QAS International Sdn. Bhd. Through its subsidiary TNB Research, TNB had also developed a suitable methodology to determine the carbon dioxide (CO2) emission of TNB’s power plants, help monitor its plants and reduce CO2 levels by upgrading its systems, processes and facilities. The initiative had borne some fruit. In addition to TNB’s higher utilization of hydro

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plants, CO2/MWh registered a decrease of 3.6% between 2010 and 2011. TNB had also ventured with Felda Palm Industries Sdn. Bhd. to develop a 10MW Jengka Biomass Power Plant in Pahang as an effort to promote renewable energy. Instead of using fossil fuel, the plant would be fuelled by palm oil empty-fruit bunches. Such utilisation was expected to con- tribute to a reduction in CO2 emission of about 45,000 tonnes. The push towards a more market-driven energy supply industry was also reinforced when the Government set up the Subsidy Rationalisation Lab in efforts to reduce subsidies gradually and allow the industry to compete in a healthier environment. This initiative also aimed at preventing over- consumption and abuse of subsidies by those that could afford to pay market prices. The impact to TNB would be huge. It would involve the consideration of a fuel cost-pass- through mechanism that disassociated tariff setting from the Government, and instead allowed tariffs to move in tandem with market price fluctuations. While no decision has been made to date, numerous labs have been set up to look into the matter in order to seek the best method that would benefit all parties involved — consumers, industry players such as TNB, and the country as a whole. In light of all the recent activities promoting a more competitive and efficient market, one initiative stood out as being a threat to TNB’s existence. A special purpose unit named MyPower Corp. was set up to review the existing PPAs and make necessary recommendations on the structure of the PPAs that had in the past affected TNB’s finances due to the payments made to IPPs. While this task was one that was long-awaited by TNB, MyPower Corp.’s other role included studying the possible restructuring of the country’s electricity supply industry by unbundling consumers’ bills to reflect charges related to generation, distribution and transmission.30 This could eventually lead to the breaking up of TNB’s divisions to increase transparency and cost efficiency. A deregulation of the power industry would mean more competition to TNB which had dominated the market by being the only transmitter and distributer of electricity to consumers, albeit its generation and distribution business might not have to compete with new players.31

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EPILOGUE

Dato’ Sri Che Khalib had to decide what to do to ensure the continued sustainability of TNB. Peninsular Malaysia was highly reliant on fossil fuel, particularly natural gas (45%) and imported coal (44%). Local gas fields were depleting and TNB had not built any new gas plant since 2003 in Peninsula Malaysia. Coal would cost more in the future. The combina- tion of solar, biomass, hydro and other renewable energy sources was insufficient to cater to Malaysia’s rising power demand. These energy sources had their own limitations: solar farms required huge amounts of land and high instal- lation costs. The wind in Malaysia was not as strong as Euro- pean countries. Peninsula Malaysia had also exhausted its hydro-electric potential.32 He had to contend with accusations that, as a monopoly, TNB had grown inefficient in electricity generation.33 And he had to contend with the environmentalists and NGOs. In May 2010, Malaysia had announced plans to build two 1 GW nuclear power plants. Was going nuclear an attractive option? He felt so, especially, as it would miti- gate global warming. But that would also raise the ire of environmentalists.34 It was best that he table a report to the Government on electricity generation in the future and the continued sustainability of TNB as the premier power company in the country.

REFERENCES

1 . Dato’ Sri Che Khalib was appointed Chief Executive Officer of Tenaga Nasional Berhad on July 1, 2004. His contract of appointment expired in June 2012. 2. TNB Annual Report 2012. 3. TNB signs deals with three independent power producers (February 26, 2013). Available at http://biz.thestar.com.my/news/ story.asp?file=/2013/2/26/business/12759954&sec=business. (Accessed on 26 February 2013). 4. Marc Affirms Tenaga Nasional Berhad’s Issuer and Long-Term Debt Ratings of AAA and AAAID Respectively; Outlook Stable,

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Apr 18, 2012. Available at http://www.marc.com.my/ratbase/ pub.press.detail.php?aid=4206 (accessed on 25 February 2013). 5. Quote by Dato’ Sri Che Khalib at TNB’s 2011 Annual General Meeting held on December 15, 2011, extracted from The Star’s article, Without Govt Compensation TNB Will Continue to Post Losses, Says CEO, dated December 16, 2011. 6 . Economic Planning Unit (2010), 10th Malaysia Plan, Putrajaya: Economic Planning Unit. 7. Laws of Malaysia, Act 447, Electricity Supply Act 1990, Section 26. 8 . Laws of Malaysia, Act 447, Electricity Supply Act 1990, Section 9. 9 . Sovacool, B. K. and Drupadi, I. M., 2011. Untapped Potential: Difficulties of the Small Renewable Energy Power Programme in Malaysia. Centre on Asia and Globalisation, Lee Kuan Yew School of Public Policy. Available at http://www.spp.nus.edu. sg/docs/energy-case/%2310-Malaysia.pdf. (Accessed on 25 April 2012). 10 . Thairah, S. J. and Bodger, P., 2009. National Energy Policies and the Electricity Sector in Malaysia. In Proceedings of ICEE 3rd International Conference on Energy and Environment, 7–8 December 2009, Malacca, Malaysia. Available at &bav=on.2,or.r_ cp.r_qf.&bvm=bv.45512109,d.bmk&biw=1034&bih=592& emsg=NCSR&noj=1&ei=A6p0UZWLJIenrAej04AY (Accessed on 22 April 2012). 11 . TNB Awarded the Merit Award — CIMA Enterprise Governance Awards 2010. Available at http://www.tnb.com. my/highlights/2010/10/tnb-awarded-the-merit-award-cima- enterprise-governance-awards-2010.html (Accessed on 25 February 2012). 12 . TNB 4QFY2011 Analyst Briefing, announced on October 28 2011. 13. TNB 3QFY2007 Analyst Briefing, announced on July 13 2007. 14. TNB Website. About TNB (Corporate Profile). Available athttp :// www.tnb.com.my/about-tnb/corporate-profile.html (Accessed on 25 April 2012). 15 . TNB (2007). Electricity Supply Application Handbook. Available at www.tnb.com.my/application/uploads/uploaded/ ESAHv3.pdfShare (Accessed on 15 April 2012). 16. TNB Website. About TNB (Corporate Profile). Available athttp :// www.tnb.com.my/about-tnb/corporate-profile.html (Accessed on 25 April 2012). 17. Putrajaya Committee on GLC High Performance, Catalysing GLC Transformation to Advance Malaysia’s Development, published in July 2005. 18. Going nuclear an option? Insight, February 24–26, 2012.

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19. TNB Tariff Book, Electricity Tariff Schedule, effective June 1, 2011. 20. Economic Planning Unit Malaysia (EPU) (2011). Tenth Malaysia Plan (2011–2015). Putrajaya: EPU. 21. Business Times (2012), The transformation of Malaysia’s power sector, 15 October 2012. Available at http://www.btimes.com.my/ Current_News/BTIMES/articles/POWVIEW/POWVIEW.pdf. Accessed on 5 December 2012. 22. Based on TNB’s announcement on the Increase in Electricity Tariff in Peninsular Malaysia Due to the Revision of Natural Gas Price, Revision of Base Tariff & Implementation of Feed-In-Tariff (FiT) for Renewable Energy (RE), dated May 30, 2011. 23. As reported by TNB during its FY2011 3rd Quarter announcement on October 28, 2011, with information available on its website http://www.tnb.com.my. 24. BP Statistical Review of World Energy June 2011, pp. 33. 25. The Star, Sabah Electricity grapples with Repairs of Generator Sets, July 11, 2009. 26. Sabah Electricity Sdn. Bhd. 27. Quote by Tan Sri Leo Moggie at SESB’s Hari Raya Open House held on November 20, 2006 extracted from The Star’s article, Interview with Tenaga Nasional Berhad Chairman Tan Sri Leo Moggie, dated November 21, 2006. 28 . Ministry of Energy, Green Technology and Water (2008). National Energy Policy. Malaysia. 29 . TNB (2011). Annual Report. Available at http://www.tnb.com.my/tnb/application/uploads/annualreports/ e5dcad80d1621d1b705519b7041f598c.pdf. 30. The Star, MyPower to Review PPAs, July 13, 2011. The Edge Financial Daily, TNB: Breaking Up is Hard to Do?, September 27, 2011. 31. The Star, Tough Challenge for MyPower, July 18, 2011. 32 . Gan, P. L., 2012. Going Nuclear: An Option? Selangor Times, 24 February 2012. Available at http://peilinggan.com/tag/tnb/ (Accessed on 25 June 2012). 33. The Star, Finally, a Relief for TNB, December 2, 2011. Also Business Times (2012), The transformation of Malaysia’s power sector, 15 October 2012. Available at http://www.btimes.com.my/ Current_News/BTIMES/articles/POWVIEW/POWVIEW.pdf. Accessed on 5 December 2012. 34. Che Khalib’s address at a forum on nuclear energy at the Institute of Diplomacy and Foreign Relations, Kuala Lumpur, 16/2/12, as reported in Going Nuclear: An Option”, Insight, February 24–26, 2012, p. 12.

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35. The information was compiled from TNB’s annual reports and quarterly announcements. 36. TNB 4QFY2011 Analyst Briefing presentation, pp. 25. 37. TNB’s CLSA 18th Investors’ Forum 2011 Presentation, presented on September 26, 2011, available on TNB’s website at http:// www.tnb.com.my. (Accessed on 12 April 2012). 38. TNB 4QFY2011 Analyst Briefing presentation, pp. 23.

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Appendix 1

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