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Denise Tsang

A WHIRLWIND OF  liberalisation is fuelling opportunities to tap the region's power sector, but is it worth investing?

China, India, the Philippines, Singapore, South Korea and Thailand have raised reform curtains by releasing a rash of power generation assets for public tender.

Hong Kong has yet to follow suit, but SAR power giants such as Hongkong Electric Holdings and CLP Holdings are set to reap the benefits of a more liberal regional playing field.

Hongkong Electric has reaffirmed its interest in expanding from its home market by seeking investments in the region.

The company yesterday revealed a meagre 3.7 per cent rise in profits from its core electricity supply business to HK$2.03 billion in the first half of the year.

The Asian countries all share a similar goal. Taking the power industry out of the hands of governments clears the way to catch up with international benchmarks.

More importantly, they want to lower their tariff levels - which rank among the world's most exorbitant - by bringing in competition.

They can also take steps to avoid the pitfalls of power-sector reform, such as happened in California, where a string of blunders led to haphazard power cuts and soaring tariffs.

The first step is to separate power generation, distribution, transmission and supply.

Power-generation assets are then put up for sale.

The pace of reform is gathering steam as the region gradually recovers from the Asian financial crisis.

The latest example is the Philippines, where parliament finally gave the green light last month to a power-reform bill which spans three political regimes - or six years - and in effect takes the sector out of government control by privatising the country's power-generation assets.

China is also expected to unveil new regulations to reform its power sector after the annual Beidahe meeting later this month.

Having set up the country's monopoly - the State Power Corp - Beijing is seeking to restructure its power grids and offload 150 gigawatts of power generation capacity to foreign independent power producers (IPPs).

This represents half of the country's total capacity.

In spite of the departure of a number of overseas IPPs from Asia in the past year - namely PowerGen, Sithe, Enron and GPU - some are still keen to grab the opportunities on offer.

They include CLP, Hongkong Electric, Altanta-based Mirant Group, Tractebel (the power arm of France-based conglomerate Suez), YTL Power International of Malaysia and EGCOMP of Thailand.

CLP, through its international investment arm CLP Power International, hopes to bid for some power generation assets.

'Encouraging signs are seen in the power markets in Singapore, the Philippines and South Korea,' a CLP spokesman said. 'CLP Power International will continue to observe the development in these markets and to explore the feasibility of its participation there.

'Many of these power markets are going through a transformation from government ownership to private ownership.

'As one of Asia's largest investor-owned power companies, CLP believes that it can offer its experience to contribute to the transformation process.'

Mirant, an ambitious IPP in the Philippines and China, also wants to stretch its legs in the region.

It intends to focus more resources in South Korea, the Philippines and Singapore, according to Henry Coolidge, managing director of Mirant's Asia-Pacific division.

Hongkong Electric, electricity supplier for Hong Kong and Lamma islands, is also scouting for investment opportunities in the region, according to its spokesman.

The group is seeking to fit another piece into the jigsaw of its regional portfolio, which largely comprises stakes in two power grids in Australia - ETSA Utilities and Powercor Australia.

While liberalisation in the region may offer investment opportunities it also has its risks, according to industry players and analysts.

Mr Coolidge believes political stability and financial planning are major factors in considering investment decisions.

'The biggest risk, in fact, in all of the Asian markets now, is the emerging competitive markets,' he said.

'First, you've got to know, how does the competitive market work, what are the rules behind the competitive market and how the government, of course, is in charge of that; and interpret the rules and whether they will work.

'A lot of governments have done much research by taking global issues - especially the California issue - and try to do the best job as they can.'

A second risk, Mr Coolidge said, was 'the ability to forecast', because of the new norm of shorter-term contracts. In the past, contracts tended to be on a long-term basis.

'We will now be selling to a competitive market just like the majority of businesses around the world,' he said.

'So, now we have to do market forecasting out of these competitive markets and that is a tremendous challenge.'

Merrill Lynch's latest research report on the regional power utility sector highlights the privatisation potential of South Korea and the Philippines as positive developments.

It saw encouraging progress in South Korea, noting that the government had resolved a complex system of debt guarantees which had been a stumbling block to the country's power-sector privatisation plan.

In the Philippines, where electricity tariffs are the most expensive after Japan, Merrill Lynch believes the reform bill 'has positive long-term implications to listed utilities such as [Meralco and First Philippine Holdings]'.

The Philippine Government vows to transfer 70 per cent of generation assets to overseas IPPs within three years.

However, Merrill Lynch pointed out that the reform in the Philippines would take years to implement, which means the benefits of competition, privatisation and restructuring would take years to materialise.

An analyst with a United States brokerage said the Philippines market needed more time before investor interest returned to the power sector, as the country was economically and politically unstable.

He said there was also the problem of excess capacity in parts of the Philippines.

Analysts generally believe the SAR has a long way to go before its power sector is liberalised because of the Scheme of Control agreement.

The agreement - which will stay in force until 2008 - enables the government to monitor power companies and protect consumers' interests. It also caps the companies' profits at 15 per cent of their asset value.

The government will review the agreement in 2003, paving the way for liberalisation of the sector.

In the region, JP Morgan recommended investors should take a close look at Singapore, which would become the first city to privatise most of its generation assets later this year or early next year.

In April, the Lion City saw the transfer of the entire ownership of two power plants - Senoko Power, with a capacity of 2,661 megawatts, and PowerSeraya, with a capacity of 2,860 MW - from Singapore Power's monopoly to government investment vehicle Temasek Holdings.

Temasek, which also owns Singapore's Tuas Power plant (with a 1,200 MW capacity), has promised to launch a public tender for the three power plants before the flotation of Singapore Power, scheduled for early next year.

So far, CLP and Mirant have both indicated keen interest in bidding for the power plants, with CLP contemplating a tie-up with Malaysia-based associate YTL Power International.

JP Morgan analyst Edmond Lee warned of another downside of the market - a high level of excess capacity.

'Given the abundance of new supply over the next few years, the concern remains that prices could be depressed for several years. This could result in a significant pricing differential in the sale of the new, more efficient Tuas power plant and the other two plants,' he said.

The three power plants are valued at HK$41 billion, based on a market price of US$800,000 per MW, analysts said. They were regarded as some of the few quality assets in the region.

Graphic: anal10gbz



Asia power on the block