SECTOR BRIEFING. number. DBS Asian Insights DBS Group Research July Thai Power. Excess Supply Lingers

Transcription

1 46 number SECTOR BRIEFING DBS Asian Insights DBS Group Research July 2017 Thai Power Excess Supply Lingers

2 02 Thai Power Excess Supply Lingers Chaipat THANAWATTANO Equity Analyst DBS Group Research Thailand Research Team Produced by: Asian Insights Office DBS Group Research Goh Chien Yen Jean Chua Geraldine Tan Martin Tacchi Editor-in-Chief Managing Editor Editor Art Director

3 Executive Summary Industry Overview Capacity Breakdown Power Development Plan Regulatory Framework Electricity Tariff Structure Wholesale Tariff Retail Tariff 16 Demand and Supply Dynamics Demand Trend Supply Trend Promoting Renewable Energy Competitive Landscape in Power Industry

4 04 Executive Summary Power sector a largely a state-controlled industry The power sector in Thailand is largely a state-controlled industry in the whole value chain from generation to transmission and distribution. The Electricity Generating Authority of Thailand (EGAT) is the largest state-owned enterprise in the power industry value chain with total assets of THB900 billion, followed by more than THB370 billion for the Provincial Electricity Authority (PEA), and more than THB200 billion for the Metropolitan Electricity Authority (MEA). EGAT is the key power generator and the sole operator of the national transmission network while the latter two are responsible for the distribution in provincial areas, and metropolitan areas and vicinity, respectively. Thailand has adopted the Enhanced Single Buyer (ESB) Structure for the power industry, with EGAT the key buyer of electricity from other private generating entities, including foreign ones, mainly from Lao People s Democratic Republic (Laos). EGAT also plays an important role in electricity generation with a total installed capacity of 16,067 megawatt (MW), accounting for 30% of the country s total capacity. EGAT secures the power supply for the country by purchasing electricity from private operators under long-term Power Purchase Agreements (PPA). Better energy efficiency the key reason behind slower growth Electricity consumption to grow 2.5% annually from Electricity demand in Thailand has increased at a compound annual growth rate (CAGR) of 3.5% in the past 10 years, in line with the economic growth (+3.2%) over the same period. Based on the latest Power Development Plan (PDP) issued in 2015, electricity demand is expected to increase at a CAGR of 3.3% over the next five years, compared with GDP growth of 4.2% during the same period, and at a CAGR of 2.2% thereafter until Better energy efficiency is believed to be the key reason behind the slower growth of electricity demand compared to economic growth. The government has revised Thailand s demand outlook for the next 20 years in PDP 2015 to reflect a new set of economic growth forecast, changes in economic structure, infrastructure development projects, and targets for renewables and energy efficiency. In addition, population growth, urbanisation, and the growth rate of electricity customers by economic sectors were also included in the macro picture. The demand forecast is based on the annual average long-term GDP growth of 3.94% and population growth of 0.03% during , as estimated by the National Economic and Social Development Board. More importantly, PDP 2015 also integrates the Energy Efficiency Development Plan (EEDP), which projects a reduction of 89,672 gigawatt hours (GWh) in annual electricity consumption by 2036 compared to only 27,282GWh if there is no such plan.

5 05 Under Thailand s new power demand forecast, electricity consumption is expected to grow an average of 2.5% annually from 2017 to 2036 with energy and power demand expected to reach 326,119GWh and 49,655MW, respectively. The downward revisions in the demand forecasts affect the implementation of the PDP, possibly leading to revisions in the timing of capacity additions and delays in new bidding rounds for independent power producers and small power producers. This would favour projects that have already signed PPAs with EGAT. Limited investment opportunities in Thailand Anticipate more partnerships among private operators Although the industry is still largely regulated, private sector participation has increased the competition as well as power-generating efficiency for the industry, especially during the bidding for investment in new projects, both conventional and renewable ones. Given the current oversupply situation, including the capacity under development, we believe investment opportunities in Thailand are limited. Renewable power projects should continue to draw interest from the private sector, being the only segment which still requires more investment but this would be interesting for smaller investors. This has prompted larger operators to seek investment opportunities elsewhere, mainly in neighbouring ASEAN countries. Some players have even ventured to Australia and Japan, acquiring operating assets and developing green-field solar projects to maintain earnings growth momentum but only a few have achieved success. Amid fierce competition, we also anticipate more partnerships among private operators to develop large overseas projects to diversify risks. We believe the investment landscape in Thailand s electricity industry would continue to encourage overseas investment in high potential markets such as Myanmar, Indonesia and the Philippines in the medium term or until more opportunities in Thailand emerge.

6 06 Industry Overview Power sector largely a state-controlled industry The power sector in Thailand is largely a state-controlled industry in the whole value chain from generation to transmission and distribution. The Electricity Generating Authority of Thailand (EGAT) is the largest state-owned enterprise in the power industry value chain with total assets of THB900 billion, followed by more than THB370 billion for the Provincial Electricity Authority (PEA), and more than THB200 billion for the Metropolitan Electricity Authority (MEA). EGAT is the key power generator and the sole operator of the national transmission network while the latter two are responsible for the distribution in provincial areas, and metropolitan areas and vicinity, respectively. Thailand has adopted the Enhanced Single Buyer (ESB) Structure for the power industry, with EGAT the key buyer of electricity from other private generating entities, including foreign ones, mainly from Lao People s Democratic Republic (Laos). EGAT also plays an important role in electricity generation with a total installed capacity of 16,067 megawatt (MW), accounting for 30% of the country s total capacity. EGAT secures the power supply for the country by purchasing electricity from private operators under long-term Power Purchase Agreements (PPA). Private sector participation has been allowed since early-1990s when the government privatised the power generation business. The government liberalised the sector by introducing open bidding for power projects in 1994 under the Independent Power Producer (IPP) scheme to reduce EGAT s investment burden in building power plants to accommodate the fast-growing demand in the domestic market at that time. The bidding process was re-opened in 2007 and 2010 with a total installed capacity of 16,000MW for all three rounds. Most of these power plants are already in operation, except for 5,540MW which remains under development. The largest operating IPP player is Ratchaburi Electricity Generating Holding Plc, whose capacity under the IPP scheme accounts for 30% of total installed capacity. In addition to IPP, smaller-scale privately-owned power plants operate under the Small Power Producer or SPP (mostly 90MW-contracted capacity) and Very Small Power Producer (VSPP) schemes. The SPP scheme was designed to allow developers to propose projects with capacity sales of up to 90MW to EGAT. Any additional capacity can either be used internally or sold to industrial customers. As of March 2017, EGAT has signed power purchase agreement with 156 SPP projects with an installed capacity of 13,983MW. About 70% of this capacity is in operation. Normally, SPP plants employ co-generation or renewable energy technologies.

7 07 There are much more players in the SPP scheme given the much smaller contracted capacity of 90MW or less. The key players include B.Grimm Power Plc and Glow Energy Plc. Some IPP players are also involved in SPP as no new IPP bidding has opened since the last round in The VSPP scheme was launched in 2002 which allows small-scale renewable energy projects of up to 10MW to connect to the grid and sell electricity directly to MEA and PEA. The cap was initially set at 1MW and then increased to 10MW in To date, 981 VSPP projects with an installed capacity of 5,240MW were awarded PPAs, using biomass, solar, wind, biogas, and waste as fuel. The current installed capacity breakdown by fuel type remains concentrated in natural gas, accounting for 67.3% of the total installed capacity in Thailand, including power plants in neighbouring countries with long-term PPAs with EGAT. More capacity set to come online till 2025 The latest bidding for IPP was opened in 2010 and for SPP in Hence, more capacities will continue to enter the system until The next round of IPP and SPP bidding is not specified given the current overcapacity, with more capacity set to come online both from EGAT and private operators, according to the Power Development Plan (PDP), which is the government s strategic plan for long-term power supply. Capacity Breakdown The installed capacity as of April 2017 stood at 44,579MW, including imports mainly from hydropower plants and coal-fired power plants in Laos and capacity of VSPP that stem largely from renewable power. The installed capacity is still far above the latest peak power demand of 29,619MW being recorded in May This is equivalent to 34% of reserve margin, compared with the policy of 15%. Note that this is based on contracted capacity. Reserve margin could be as high as 48% If we consider installed capacity, the reserve margin could be as high as 48%. According to the PDP, the reserve margin will continue to increase and stay above 30% until 2026 before gradually declining to 15% by EGAT s capacity remains the highest among several key operators at 36% of total capacity but this has declined from more than 50% prior to IPPs command 33% of the country s capacity, followed by SPPs 14%. The contracted capacity of VSPP has increased remarkably from only 368MW in 2009 to 3,578MW currently. This will continue to increase to nearly 12,000MW by 2036 or a compound annual growth rate (CAGR) of 6% over the next 20 years.

8 08 Diagram 1: Thailand s installed capacity breakdown Source: Ministry of Energy, DBS Note: c.92% on EGAT system Currently dominated by gas-fired power plants but In terms of power mix, the electricity generation in 2016 was dominated by gas-fired power plants, accounting for 63.2% of total output. Although this has fallen from 66.5% in 2006, the high reliance on gas has raised concerns of an imbalanced portfolio of power generation for the country given that piped gas in Thailand is depleting and the concession of key gas fields in the Gulf of Thailand will expire in the next 4-5 years. The share of gas-fired power plants in Thailand s power mix will drop from 63% in 2016 to 37% in the next 20 years, according to the latest PDP issued in Diagram 2: Power mix in power generation (2016) Source: Ministry of Energy, DBS

9 09 Power Development Plan Since early 2000, the development of the power industry in Thailand has been pegged to the Power Development Plan (PDP) which lays out the long-term plan (15-20 years) for power supply management to fulfil rising demand. The PDP is prepared by the Ministry of Energy and EGAT, and requires the endorsement of the National Energy Policy Council and acknowledgement of the Cabinet. The latest PDP, i.e. PDP 2015, has been in effect since June 2015 to cover the period of , which emphasises improving power system reliability by: 1. Reducing dependence on natural gas power generation; 2. Increasing the share of coal power generation via clean coal technology; 3. Importing power from neighbouring countries; and 4. Developing renewable energy. The PDP also covers transmission and distribution system development in supporting renewable energy development and the ASEAN Economic Community via ASEAN power grid integration. The PDP 2015 is based on three pillars: Energy security: Dealing with the increase in power demand and taking into account fuel diversification in order to lessen dependency on one particular fuel Economy: Maintaining an appropriate cost of power generation and implementing energy efficiency policies and measures Ecology: Reducing environmental and social impact by reducing carbon dioxide intensity of power generation The following targets have been set to be achieved by 2036: Energy security: Dealing with the increase in power demand and taking into account fuel diversification in order to lessen dependence on natural gas for power generation, from 64% in 2014 to 30-40% Increase the share of renewable energy in the total capacity from 8% in 2014 to 15-20%, with a capacity of nearly 20 gigawatt (GW)

10 10 Increase the share of coal and lignite from 20% to 20-25%, with an unspecified amount to be delivered as clean coal by carbon capture and storage technology Increase the share of imported hydro power from neighbouring countries from 7% to 15-20% Introduce nuclear power and achieve up to 5% market share Revision expected soon The revision of PDP 2015 could be expected soon given that the peak demand is lower than previously expected and the start-up of new power plants has been delayed versus the initial plan.

11 11 Regulatory Framework Thailand s power sector is largely regulated by the government via the National Energy Policy Council which has the authority and duty to determine policies on energy industry management, while the Energy Regulatory Commission (ERC) which was established under the Energy Industry Act, B.E (2007) has the authority and duty to regulate energy industry operations in accordance with the policy framework of the government. The ERC is empowered to issue regulations, rules, announcements or criteria, procedures, and conditions in order to regulate various issues in the energy industry as prescribed by law, e.g. licence granting for energy industry operation; regulation of tariff setting; establishment of energy service provision standards and safety standards of energy industry operations; protection of energy consumer rights, including protection of energy industry operators by ensuring fair competition; utilisation of immovable property for the benefit of exploration or survey of a location for construction of an energy network system; and dispute settlement. In executing its duties, the ERC will give importance to and promote the participation and roles of energy consumers, the general public, and those affected by energy industry operations in national energy management and development. In connection with this, prior to issuing any ERC regulations, rules and announcements which will affect persons, groups of persons or licensees, a hearing process shall be arranged. In addition, the ERC is tasked with promoting renewable energy and efficient use of energy. Furthermore, the ERC also provides support and implements urgent tasks pursuant to the policy framework of the government so as to enhance energy security of the country. Several government agencies to overlook the industry The Ministry of Energy (MoE) is involved in the energy policy-making process by setting policies, including electric power and renewable energy policies, to be proposed to the National Energy Policy Council, chaired by the Prime Minister, for its review and approval. The MoE also oversees a number of agencies that are responsible for implementing energy policies and programmes: Energy Policy and Planning Office (EPPO) is involved in developing energy policies, measures, and plans for the oil, natural gas and power sectors. Department of Mineral Fuels (DMF) regulates the upstream sector of Thailand s hydrocarbons and is responsible for promoting oil and gas exploration and development, including licensing rounds.

12 12 Department of Energy Business (DOEB) monitors and supervises the trade, quality, industrial safety, environmental concerns, and security of fuels. Department of Alternative Energy Development and Efficiency (DEDE) implements the compulsory and voluntary energy efficiency (EE) and renewable energy (RE) programmes, including EE promotion, energy conservation regulation, development of alternative energy, and dissemination of energy technologies.

13 13 Electricity Tariff Structure Adifferent tariff structure is applied to different types of electricity generators, i.e. IPP, SPP or VSPP. The tariff also depends on the type of contract, firm or non-firm as well as energy source, conventional or renewable. Several features of electricity generation determine the applicable tariff structure. In general, Thailand s electricity tariff structure comprises wholesale tariffs for bulk electricity supply, mainly the electricity generated by EGAT and sold to the two state-owned enterprises, i.e. MEA and PEA, and retail tariffs for end-users, including the industrial sector and household users. Nonetheless, both types of tariffs share a common calculation principle which is EGAT s marginal costs of generation and transmission. These elements are regulated by ERC. Wholesale Tariff Applied to bulk electricity supply Wholesale tariff is applied to bulk electricity supply. The tariff structure comprises generation and transmission costs. Voltage levels and time of consumption determine the applicable tariff structure, as shown in the table below. This is also subject to Power Factor Charge and value-added tax. EGAT charges the bulk tariff to MEA and PEA, and its direct customers. Diagram 3: Wholesale tariffs Voltage Generation (Bt/KWh) Transmission (Bt/KWh) Total (Bt/KWh) Peak Off-peak Peak Off-peak Peak Off-peak 230kV kV End of the line kV kV Source: EGAT, Ministry of Energy, DBS Supply transmitted via national grid must be sold to EGAT Under government regulations, all power supply transmitted via the national grid, whether by private power producers, other government agencies or producers in neighbouring countries, must be sold to EGAT. The only exception is the VSPPs that can sell directly to the distribution utilities, but the sale is capped at 10MW. Thus, EGAT is the primary entity that sells wholesale energy to the distribution sector. For electricity supply generated by private operators, both IPPs and SPPs have long-term PPAs with EGAT as the single buyer (typically 20 or 25 years). The PPAs allocate the risk

14 14 of fuel prices to EGAT (and its captive ratepayers), leaving SPPs and IPPs to manage the operating risks, including financial costs. Apart from electricity, SPPs also sell steam directly to their industrial customers, hence there is no price adjustment mechanism, the SPPs take on the fuel price risk. Nonetheless, steam price setting is normally on a cost-plus basis, meaning that fuel price risk could be passed on to customers. For SPP, EGAT has defined two types of purchasing rates for buying SPP power, firm and non-firm power. SPPs with firm contracts are obliged to guarantee availability of electricity supply during the system peak months. Firm fossil fuel-fired SPPs must operate for at least 7,008 hours per year and they must generate power during the months of March, April, May, June, September, and October. Firm contracts for conventional energy SPPs are subject to receive an unbundled base tariff, which comprises a capacity payment, an energy payment, and a fuel savings payment. Renewable energy SPPs with a firm contract receive the same base tariff plus two additional components: A fixed one, called the renewable energy promotion, and one that is specified for each type of renewable energy, as known as adder. Note that due to lower investment cost of renewable power plants, especially for solar, the government has changed the tariff scheme from adders to fixed feed-in-tariff (FiT) for 20 years. For non-firm contracts, the availability of power plants is not guaranteed and the electricity is sold whenever it is available (solar, wind, some biomass, etc.). The non-firm tariffs are generally lower than those for firm power due to lower penalty risk. Non-firm contracts of conventional cogeneration SPPs is subject to the Energy Payment, based on EGAT s avoided energy costs, whereas non-firm renewable energy SPPs get the Time of Use (TOU) rate, adjusted for peak and off-peak hours, plus the fuel adjustment (Ft) charge plus adder that depends on the type of renewable energy. Retail Tariff Retail tariff structure comprises two parts: The base tariff and Ft. The base tariff reflects the marginal cost of the utilities to construct and operate power plants, transmission and distribution lines, including fuel costs. The distribution utilities charge different base tariffs for different consumer categories, consumption levels, and time of use. (More details could be found at The base tariff is reviewed every 3-5 years. Historically, the regulator has considered the trend of energy cost when determining the base tariff. The fuel adjustment or Ft is a mechanism for adjusting the power tariff to reflect the actual fuel cost for power generation. The Ft surcharge is revised every four months, in January, May, and September to reflect changes in EGAT s fuel costs, power purchase costs, and the impact of government policy, including the Power Development Fund, and subsidies for renewable energy generation. Note that the latest Ft was set in January 17 at negative

15 15 THB per kilowatt-hour (KWh). The MEA reported that the average retail tariff, including Ft, as of January 17 was at THB3.5455/KWh, down 8.2% year-on-year (y-o-y) on lower fuel cost, especially for natural gas although more power supply from renewable power plants has increased. The ERC is now in the process of adjusting Ft for May-August 2017, which is estimated to increase to negative THB0.1946/KWh, according to ERC s invitation for the public hearing on Ft adjustment. Diagram 4: Movement of Ft Source: Ministry of Energy, DBS

16 16 Demand and Supply Dynamics Demand Trend Better energy efficiency the key reason behind slower growth Electricity demand in Thailand has increased at a CAGR of 3.5% in the past 10 years, in line with the economic growth (+3.2%) over the same period. Based on PDP 2015, electricity demand is expected to increase at a CAGR of 3.3% over the next five years, compared with GDP growth of 4.2% during the same period, and at a CAGR of 2.2% thereafter until Better energy efficiency is believed to be the key reason behind the slower growth of electricity demand compared to economic growth. Diagram 5: Power demand trend Source: Ministry of Energy, DBS Normally, demand in Thailand peaks during summer when air conditioners are on full blast, in contrast to other major buyers like Japan, South Korea, and China, where energy imports rise during winter to meet heating needs. Current installed capacity sufficient to meet needs The peak demand year-to-date was recorded in March 2017 at 28,497MW (+4.6% y-o-y), in line with EGAT s expectation. The peak demand as of April 2017 was still below the expectation at 30,000MW as frequent rains cooled temperatures. Based on PDP 2015, peak demand in 2017 could reach 31,385MW, or up 6% y-o-y from the peak demand in The government expects this to happen in May 2017 at slightly more than

17 17 30,000MW (+1.5% y-o-y). This means that the current installed capacity of 41,332MW could comfortably accommodate the strong demand anticipated in summer. In addition, the government has urged the public to minimise electricity consumption in April-May 2017 due to the maintenance shutdown of natural gas fields in Myanmar, with the energy shortage to be met with more expensive imported liquefied natural gas (LNG). Diagram 6: Thailand s peak demand for electricity Source: Ministry of Energy, DBS Note that the historical peak demand of 29,619MW was recorded in May 2016, up 8.3% from the previous peak in June 2015, remaining far below Thailand s installed capacity and the committed capacity from neighbouring countries under long-term PPAs. Industrial sector is the largest consumer but has the slowest demand growth The industrial sector is the largest power consumer, accounting for an average of 50% of total demand since 2007, but this has decreased slightly to 48% in Business and residential consumption averaged 22% and 23%, respectively, over the same period, with the share of business consumption rising from 20% to 24%. In terms of demand growth, the business sector recorded strong growth rates in the past 10 years, with a CAGR of 6%, thanks to higher electricity consumption in the services sector. While demand growth in the industrial sector was the slowest with a CAGR of 2.4%, reflecting better energy efficiency and the manufacturing sector s diminishing role in driving economic growth, in our view.

18 18 Diagram 7: Power consumption by sector Source: Ministry of Energy, DBS Electricity demand outlook The government has revised Thailand s demand outlook for the next 20 years in PDP 2015 to reflect a new set of economic growth forecast, changes in economic structure, infrastructure development projects, and targets for renewables and energy efficiency. In addition, population growth, urbanisation, and the growth rate of electricity customers by economic sectors were also included in the macro picture. The demand forecast is based on the annual average long-term GDP growth of 3.94% and population growth of 0.03% during , as estimated by the National Economic and Social Development Board. More importantly, PDP 2015 also integrates the Energy Efficiency Development Plan (EEDP), which projects a reduction of 89,672 gigawatt hours (GWh) in annual electricity consumption by 2036 compared to only 27,282GWh if there is no such plan. Electricity consumption to grow 2.5% annually from Under Thailand s new power demand forecast, electricity consumption is expected to grow an average of 2.5% annually from 2017 to 2036 with energy and power demand expected to reach 326,119GWh and 49,655MW, respectively. The downward revisions in the demand forecasts affect the implementation of the PDP, possibly leading to revisions in the timing of capacity additions and delays in new bidding rounds for IPPs and SPPs. This would favour projects that have already signed PPAs with EGAT.

19 19 Supply Trend Highly dependent on natural gas Electricity generation in Thailand is highly dependent on natural gas. Over 60% of Thai electricity generation is produced from natural gas that is sourced from the Gulf of Thailand, Myanmar, and another 9.9% from imported LNG (as shown in Diagram 2). Nonetheless, the proportion of renewable power plants (excluding hydro) has increased significantly over the last decade, contributing 6.2% of the total electricity generation in Diagram 8: Thailand s electricity supply outlook Diagram 9: Thailand s electricity generation by fuel type Sources: PDP 2015, Ministry of Energy, DBS

20 20 Thailand s installed capacity will continue to increase both from conventional and renewable power plants. According to PDP 2015, the total capacity is projected to reach 70,335MW in 2036 (after deducting installed capacity of 24,736MW from power plants that will be retired in the next 20 years). Natural gas will remain the dominant fuel in the coming years, but this is projected to drop from the current 64% to 30-40% by To achieve this target, more power will be sourced from renewables, imported hydro, coal, and nuclear during the later years of projection. On the reserve margin, Thailand is expected to maintain a consistently high reserve margin the amount of capacity available above peak demand in its power system, well above the minimum standard of 15% as specified by PDP The reserve margin will gradually decline from 2025 onward to reach 15% by Behind the expected high reserve margin are (1) slower demand growth, as GDP growth is lower than previously expected; (2) improved energy efficiency, with nearly 90GWh savings per annum by 2036; (3) new projects under construction or approved and waiting to be built; and (4) additions of intermittent renewable energy supply such as wind and solar, which raise capacity figures, but may either produce at a lower-than-planned utilisation rate or unable to generate power supply. Supply outlook remains uncertain Importing pipeline gas to bridge demand gap The supply outlook remains uncertain in light of the government s policy on diversifying fuel source from natural gas to imported thermal coal. But the Thai public s opposition to coal-fired plants has prompted some private operators, both IPP and SPP alike, to switch their investment projects from coal-fired power plants to gas-fired ones. Currently, EGAT is also facing strong opposition to its planned 800MW coal-fired plant in Krabi, which may mean that this plant as well as others under development may not come online as planned. Similarly, the development of nuclear power has long faced strong objections from the public which caused the government to postpone the commercial date of nuclear power plants to the later years in PDP Furthermore, given the long lead times for developing large hydro plants in Laos and Myanmar, prospects for additional imported power from these sources could be uncertain. We believe the supply planning in PDP 2015 for coal-fired, imported hydro, and nuclear power remains overly optimistic. This implies that Thailand is likely to depend heavily on natural gas in the foreseeable future, in our view. This could lead to problems with gas supply given that the country s growing economy has been fuelled by rising natural gas production from wells in the southern Gulf of Thailand for years. The reserves and production of fields like Bongkot and Erawan are depleting. To bridge the gap, the state-owned oil & gas company PTT imports pipeline gas from Myanmar and in 2011, opened its first LNG import terminal near Rayong, southeast of Bangkok. A project to double its size to be able to handle 10m tons/year (mtpa) will be completed before summer 2017, according to PTT. Another planned expansion will take the capacity to 11.5mtpa by 2019, and PTT plans to open a second terminal near Rayong to add another 7.5mtpa to import capacity by 2022.

21 21 Note that PTT, the only company with a licence to import LNG, signed a contract in 2012 to import 2mtpa from Qatar, the largest exporter in the world. It signed three other contracts in the past year with BP Plc, Royal Dutch Shell Plc, and Petroliam Nasional Bhd of Malaysia, adding another 3.2mtpa of supply. PTT also buys cargoes on the spot market and is interested in signing medium-term deals with other LNG suppliers. Protests over a proposed coal-fired power plant in the country s southern Krabi province may cause the government to shift course and build an LNG terminal and gas-fired plant instead. We believe the supply planning in PDP 2015 for coal-fired, imported hydro, and nuclear power remains overly optimistic

22 22 Promoting Renewable Energy Under the Alternative Energy Development Plan (AEDP 2015), which was integrated into PDP 2015, the government step up endorsements of renewable power plants over the next 20 years, up to It targets to increase the proportion of renewable power to 18% of total electricity supply by 2036, up sharply from only 6.2% in Diagram 10: Electricity capacity by renewable power The key points of AEDP 2015 include: Source: Ministry of Energy, DBS Prioritisation of power generation from waste, biomass, and biogas in the near term. Local specification of renewable energy targets to match local grid capacity. New solar and wind programmes at a later stage, as soon as they become competitive to LNG. Competitive bidding structured as a reverse auction in which the bid is submitted as a discount to the FiT, instead of awarding PPAs on a first-come, first-served basis

23 23 Diagram 11: Capacity breakdown by 2036 Source: Ministry of Energy, DBS The Thai government had provided incentives to private investors during the initial phase of renewable power, in terms of adder to attract more investments given the high investment and low return of the industry. The adder rate for each type of renewable power plant is shown in table below. This adder rate is added up to the normal wholesale tariff (base tariff plus Ft charge). Diagram 12: Adder rates for renewable energy projects 1. Biomass Initial Adder (2006) (Baht/kWh) Revised Adder (from July 2009) (Baht/ kwh Additional for Diesel Substitution (Baht/kWh) Additional for projects in the three most southern provinces (Baht/kWh) Installed cap. <= 1 MW Installed cap. > 1 MW Biogas (all sources) Installed cap. <= 1 MW Installed cap. > 1 MW Waste (MSW and non-hazardous industrial waste) Fertiliser/landfill Thermal process Period (Years)

24 24 Diagram 12: Adder rates for renewable energy projects cont. 4. Wind Initial Adder (2006) (Baht/kWh) Revised Adder (from July 2009) (Baht/kWh Additional for Diesel Substitution (Baht/kWh) Additional for projects in the three most southern provinces (Baht/kWh) Installed cap. <= 50 kw Installed cap. > 50 kw Hydro (mini/micro hydro) Installed cap. <= 50 kw Installed cap. > kw Solar Period (Years) Source: ERC, Ministry of Energy, DBS Nonetheless, the technology of renewable business has improved dramatically during the past five years which could bring down investment cost, especially for solar power, to a more investable level. This was also supported by cheap funding cost during the low interest rate cycle globally. Hence, the government has decided to alter the tariff scheme for renewable power plants to FiT, which is a much lower rate but for a longer period. According to the regulator, this will still provide favourable return to investors. Diagram 13: Feed-in-tariff for VSPP renewable energy projects FIT (F) Waste (e.g. incineration, gasification) FIT (V 2017) Total calculated FIT Period of support (Baht/kWh) (Baht/kWh) (Baht/kWh) (Years) Period (Years) (Baht/ kwh) FIT premium Southern provinces (project lifetime) (Baht/kWh) Capacity <= 1 MW Capacity > 1 MW up to 3 MW Capacity > 3 MW Waste (landfill gas)

25 25 Diagram 13: Feed-in-tariff for VSPP renewable energy projects cont. Biomass FIT (F) FIT (V 2017) Total calculated FIT Period of support (Baht/kWh) (Baht/kWh) (Baht/kWh) (Years) Period (Years) (Baht/ kwh) FIT premium Southern provinces (project lifetime) (Baht/kWh) Capacity <= 1 MW Capacity > 1 MW up to 3 MW Capacity > 3 MW Biogas From wastewater/waste products From energy crops Hydro power Capacity <= 200 kw Wind Solar* Source: ERC, Ministry of Energy, DBS Vickers Note: Solar programme for government agencies and agricultural cooperatives Unreliable power supply But the problem with renewable power plants are their reliability since most of them are non-firm contracts, therefore it is difficult for the government to manage power supply to optimise the country s electricity cost. The solution for this has emerged with the introduction of the hybrid SPP scheme for renewable power plants with firm contracts. Under this scheme, operators will have the flexibility to select alternative energy for their power plants. The operators are required to submit the fuel supply procurement plan and plantation plan for the power plant, either for biomass or bio-gas power plant. The FiT is also adjusted to compose of fixed FiT of Bt1.81/KWh and variable FiT of THB1.85/KWh for power plants with a capacity of 10-50MW. It remains to be seen if this scheme could attract more investment from investors given the lower rate of return.

26 26 Competitive Landscape in Power Industry Limited investment opportunities in Thailand Anticipate more partnerships among private operators Although the industry is still largely regulated, private sector participation has increased the competition as well as power-generating efficiency for the industry, especially during the bidding for investment in new projects, both conventional and renewable ones. Given the current oversupply situation, including the capacity under development, we believe investment opportunities in Thailand are limited. Renewable power projects should continue to draw interest from the private sector, being the only segment which still requires more investment but this would be interesting for smaller investors. This has prompted larger operators to seek investment opportunities elsewhere, mainly in neighbouring ASEAN countries. Some players have even ventured to Australia and Japan, acquiring operating assets and developing green-field solar projects to maintain earnings growth momentum but only a few have achieved success. Amid fierce competition, we also anticipate more partnerships among private operators to develop large overseas projects to diversify risks. We believe the investment landscape in Thailand s electricity industry would continue to encourage overseas investment in high potential markets such as Myanmar, Indonesia and the Philippines in the medium term or until more opportunities in Thailand emerge. We believe the investment landscape in Thailand s electricity industry would continue to encourage overseas investment

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29 29 Disclaimers and Important Notices The information herein is published by DBS Bank Ltd (the Company ). It is based on information obtained from sources believed to be reliable, but the Company does not make any representation or warranty, express or implied, as to its accuracy, completeness, timeliness or correctness for any particular purpose. Opinions expressed are subject to change without notice. Any recommendation contained herein does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. The information herein is published for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. The Company, or any of its related companies or any individuals connected with the group accepts no liability for any direct, special, indirect, consequential, incidental damages or any other loss or damages of any kind arising from any use of the information herein (including any error, omission or misstatement herein, negligent or otherwise) or further communication thereof, even if the Company or any other person has been advised of the possibility thereof. The information herein is not to be construed as an offer or a solicitation of an offer to buy or sell any securities, futures, options or other financial instruments or to provide any investment advice or services. The Company and its associates, their directors, officers and/or employees may have positions or other interests in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking or financial services for these companies. The information herein is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation.

30 Living, Breathing Asia