Why the generous subsidies for IPPs?

Oil price hike protest in Ipoh (Source: Unknown; forwarded via email)

So Petronas and the Malaysian government says subsidies distort the market. Of course, the withdrawal of subsidies will encourage conservation of a scarce resource – which is a good thing. It might even reduce pollution and congestion. Roads were noticeablly less congested in parts of Penang and KL today. Traffic on the Penang Bridge heading to the island at 5.20pm – peak time – was smooth; the usual bottleneck after the toll plazas, as the mutiple lanes narrow down to two lanes, was gone.

But has the government given much thought to the impact of the removal of oil subsidies on the poor – and even large segments of the middle-class, who are rapidly moving down to the ranks of the poor in terms of real purchasing power?

One key question has not been answered: why a sudden complete removal and not a gradual phasing out? Come on, tell us how much profit Petronas made for the year ended 31 March 2008. The figures should be available by now, even if the annual report isn’t ready.

This is what the Petronas CEO was quoted today by AFP as saying as he called for an end to energy subsidies:

“While this is being pursued, nations must also work towards a gradual removal of generous energy subsidies, which cause unmitigated consumption and market distortions that are unmanageable in the long run,” he said.

Perhaps the Petronas CEO and the government will care to explain why Petronas has to sell natural gas to the IPPs at vastly subsidised prices? Some RM30 billion over the years…

The government must also tell us why Tenaga has to pay the IPPs for capacity charges for electricity it really does not need.

Also, why are we spending billions to lay the longest undersea cables in the world to transmit electricity from the Bakun Dam to the peninsula, when there is a 40 per cent reserve capacity in the peninsula?

Questions, questions… but no satisfactory answers. This is an article I wrote some time ago about the colossal subsidies given to the IPPs:

Subsidising Gas to Private Power – State Utility Pays

PENANG, Oct 12 (IPS) – A staggering 27.6 billion ringgit (8.2 billion US dollars); that’s the amount the Malaysian public has incurred through gas subsidies given out over the years to private power producers by national petroleum corporation Petronas.

With oil and gas prices now soaring, the government – and Petronas – is feeling the pinch of higher fuel and gas subsidies. Petronas has proposed a removal of gas subsidies for electricity production, but much of the attention has focused on the impact it would have on state power firm Tenaga Nasional Berhad.

Tenaga faces a double whammy: from higher gas prices and from higher fuel costs being passed on to it by the privately owned, and from hugely profitable, independent power producers (IPPs). The IPPs sell power to Tenaga under lucrative power purchase agreements (PPAs). Tenaga also generates its own electricity through its network of power plants. Read more

In the meantime, small businesses are likely to suffer as people tighten their belts. Restaurants, hawker centres, and sundry shops are likely to see a drop in business.

Perhaps it’s time to look at alternative economic models that return to the basics – a more sustainable model of development that emphasises food self-sufficiency, public transport, the promotion of small eco-friendly business activity, and the recycling and recovery of waste.

To keep the economy healthy in the face of all that belt-tightening, the government should invest in activities that enhance human dignity. It should focus on expanding the public health care system, enhancing the quality of education, building more affordable houses, encouraging organic farming and improving public transport. All these will create jobs – and more importantly, they are sustainable activities, built on domestic demand, that will improve the quality of life. We cannot rely on fickle foreign investors alone to drive and control our economy.

In the meantime, do you detect any slowing of business activity in your area? What do you think are the likely implications of the price hikes? How are you coping personally? Have you “changed your life-style” in any way – what sort of belt-tightening measures have you undertaken? How do you think this will affect you – and the economy?