Why was 1MDB given a tariff rate hike of 22% for its yet to be built 50MW Solar Farm?

Media Statement by Dr. Ong Kian Ming, MP for Serdang, on the 20th of April, 2015

Why was 1MDB given a tariff rate hike of 22% for its yet to be built 50MW Solar Farm?

It was reported in the Edge Financial Daily today that the proposed 1MDB Solar Farm has been given a hike it its electricity tariff from 41 sen per kWH to 50 sen per kWH, an increase of 9 sen or 22%.[1] The reason given, according to this report, was that the “previous tariff was deemed simply too low for the project to be feasible. The new tariff was negotiated on the basis that Edra caps its internal rate of return for the project at a maximum of 9%.”

If this report is true, then the Ministry for Energy, Green Technology and Water (or KeTTHA) has a lot of explaining to do. Firstly, if Edra Global, a subsidiary of 1MDB, felt that the initial tariff rate of 41 sen per kWH was too low, why did KeTTHA not allow for an open tender in the market for the proposed 50MW solar farm, which would be the largest solar farm project in Malaysia? In fact, KeTTHA should have allowed for an open tender in the first place instead of awarding this project to 1MDB, which has no experience of building and operating any solar projects, on a direct negotiation basis. An open tender for this proposed solar farm would have ensured the best pricing for Tenaga Nasional Berhad (TNB) and set the benchmark for future solar farm projects.

An argument can also be made that the tariff rate of 50 sen per kwH is too high by market standards.

According to the tariff rates found in the website for the Sustainable Energy Development Authority (SEDA), the minimum feed-in-tariff (FiT) for solar power installations which are more than 10MW but less than 30MW has been dropping steadily over time (Table 1 below). These ‘digression rates’ were introduced because of the rapidly falling installation costs of solar panels due to improvements in technology.

Table 1: Minimum Tariff per kWH for Solar PV Feed in Tariff for installations >10MW but less than 30MW

Date of FiT installation 1 Jan 2012 1 Jan 2013 28 March 2013 1 Jan 2014 15 March 2014 1 Jan 2015
Minimum Tariff per kWH 85 sen 78.2 sen 68 sen 54.4 sen 61.2 sen 49 sen

Source: www.seda.gov.my

For installations starting on the 1st of January 2015, the minimum feed in tariff was 49 sen (See graphic below). There are very good reasons to expect a 50MW solar farm to be able to offer a tariff lower than the 49 sen per kWh under SEDA’s Feed-in-Tariff. Firstly, a solar farm of that size will inevitably have greater economies of scale e.g. lower per unit installation costs and lower per unit land acquisition costs. Secondly, the solar farm will only be completed at a later date which means that the costs of the solar PV can drop further because of improved technology. Thirdly, the proposed contract between 1MDB and Tenaga is for 25 years which is longer than the 21 years under the Feed in Tariff. A longer contract means a longer period of guaranteed returns which means that more players would have been willing to accept a lower tariff in exchange for the longer contract.

Given this information, one cannot help but to think that this tariff hike is an attempt to help ‘bail out’ 1MDB by providing more favourable financial terms for its subsidiary, Edra Global, to be listed.

Dr. Ong Kian Ming
Member of Parliament for Serdang

Graphic 1: Fit Rates for Solar PV (Non Individual) starting from the 1st of January 2015

[1] http://www.theedgemarkets.com/en/article/1mdb%E2%80%99s-solar-farm-gets-tariff-hike