THAILAND ISSUES INDEPENDENT POWER SOLICITATION

UNCLAS SECTION 01 OF 02 BANGKOK 003733 SIPDIS SIPDIS E.O. 12958: N/A TAGS: ENRG EINV ECON TH SUBJECT: THAILAND ISSUES INDEPENDENT POWER SOLICITATION REF: A. BANGKOK 727 ¶B. 05 BANGKOK 7124 ¶1. Summary: Thailand has finally issued the Request for Proposals for its second round of Independent Power Producers, after a two month delay. The current solicitation will award a portion of the country's future capacity to investors outside of the state-owned Electricity Generating Authority of Thailand (EGAT). Although the capacity on offer is relatively small, the RFP has already generated substantial interest from potential investors. A short timetable, institutional weaknesses and political uncertainty may make the bid process challenging, but the opening of the IPP bid indicates that the momentum for modernization in Thailand's power sector has not been completely lost. End summary. ¶2. On June 29, 2007 the RTG Ministry of Energy opened the bidding for Thailand's second round of Independent Power Producers (IPPs). Request for Proposal (RFP) packages went on sale that day and will be available until July 27. The bid solicitation is for electricity generating capacity to come on-line from 2012-2014. The total capacity available for bid is 3,200 megawatts, although individual proposals will be limited in size to 800 MW per unit and 1600 MW per plant. Separate packages must be purchased for each project proposed. Interested bidders will be required to purchase the RFP package, which contains full instructions for the bid as well as a draft power purchase agreement (PPA). Bids must be submitted by October 19, 2007. Following an evaluation process, winning bidders will be announced in December, 2007, and PPAs must be signed by June 2008. It is anticipated that very little variance in the draft PPA will be allowed. ¶3. The current round of IPP bidding is open to proposals using either gas or coal as a fuel. Although the Thai MoE has repeatedly expressed the desire to diversify away from its current 70 percent reliance on gas (projected to increase to 90 percent with current trends),the RFP does not contain any special incentives for coal-fired projects. Indeed, while the RFP will require all IPPs to pay a fee per kilowatt-hour produced to a special community development fund, the fee charged to coal-fired projects will be double that charged to gas-fired projects. Despite this disincentive, and a history of strong community opposition to coal-fired power in Thailand that has effectively blocked past investments, it is believed that at least two bidders are interested in proposing coal-fired projects. ¶4. To date, roughly two dozen bid packages have been sold. Japanese investors are prominent in the list of interested bidders, which is believed to include Electricity Generating Plc (EGCO),Ratchaburi Electricity Generating Holding Plc (Ratchaburi) (both semi-private subsidiaries of state-owned Electricity Generating Authority of Thailand - EGAT), Glow/Suez, Sumitomo, Gulf Electric, Mitsubishi, J-Power, and Kansai Electric. No U.S. firms are currently known to be planning to enter the bidding. ¶5. The current IPP solicitation forms part of Thailand's latest Power Development Plan (PDP),which covers the 15 year period from 2007-2021. Under the plan, in addition to the 3,200 MW available to IPPs for the 2012-14 period, an additional 2,800 MW has been set aside for EGAT on a no-bid basis. In the 2015-2017 period, a further 4,000 MW will be open for a new round of IPP bids, with 2,100 MW reserved for EGAT. ¶6. Although there have been complaints that the capacity on offer with this round of IPP bidding is too small, there appears to be ample interest from bidders. The two EGAT subsidiaries, EGCO and Ratchaburi, each have projects to propose that could account for the entire capacity on offer, although EGCO says they may defer proposing some projects until the next IPP round. With numerous other experienced power sector bidders interested, the bidding promises to be very competitive if it is conducted fairly. ¶7. The current round of IPP bidding has not been entirely smooth, and numerous potential problems continue to threaten the successful completion of the process. Ref.A reported on a December 2006 public preparatory conference for the current IPP round. A projected second conference never materialized, and the anticipated April date for the release of the RFP was pushed back by two months. According to one of the advisors hired to prepare the bid documents, the delay was mainly due to the inability of the MoE to make critical decisions relating to the RFP and make a concerted effort to meet its own declared timetable. The short timetable will make the preparation of quality bids, which must account for complex variables, difficult. The evaluation process will similarly face a difficult challenge to complete a thorough and fair consideration of the proposals in the time available. BANGKOK 00003733 002 OF 002 ¶8. Other difficulties the IPP must overcome include a significant political risk and the potential for interference from EGAT. According to current timetables, Thailand intends to hold elections for a new democratic government to replace the coup-installed interim government shortly before the bid evaluation is completed and winners are announced. Winning bidders will thus be involved in finalizing financing arrangements and final negotiations for the PPA at a time when a new government takes office with unpredictable commitment to the current PDP and IPP process. Observers have also criticized the role played by EGAT, the sole electricity buyer, in the PDP and IPP processes. EGAT projections of power demand in Thailand played a key role in the development of the PDP, and it is expected that it will serve as a technical advisor to the evaluation committee. The fact that the Chair of the EGAT board, who is also the MoE Permanent Secretary, will serve as the Chair of the Bid Management Committee provides ample reason to question the objectivity of the process. ¶9. The MoE itself, including its Energy Policy and Planning Office (EPPO),has limited technical capacity to manage the IPP. The advisors contracted to prepare the bid solicitation have completed their terms of reference and will not be available to oversee or support the remainder of the bid process. New advisors have yet to be hired. ¶10. Comment: Despite the diverse risks, the success of Thailand's previous IPP solicitation, the relatively small capacity on offer versus the projected overall new capacity needed, and the relatively non-controversial nature of the initiative suggest that the IPP solicitation will ultimately be completed more or less as planned. EGAT does have a vested interest in the IPP bidding and it will be surprising if they do not at least attempt to exert some influence on its outcome. With no independent energy regulatory body (a draft energy law contains provisions for one) the MoE will be responsible for making sure that the process functions properly. Thus far, despite Minister Piyasavati's personal vigor, it has demonstrated a reluctance to exert firm control of the process. ¶11. Comment continued: The limited capacity on offer, especially given the capacity set aside for EGAT, is disappointing. The possibility that EGAT subsidiaries might capture a portion of that capacity underscores that Thailand is a long way from having a truly open and competitive market for energy. Nevertheless, the high level of interest in the IPP offer, and the promise of another to come in the near future, suggests that Thailand may be inching little by little away from the model of complete state control of the power sector. Despite the collapse of the RTG's effort to privatize EGAT (Ref.B),the momentum for reform of the power sector has not been entirely lost. BOYCE