RTG INVITES FEEDBACK ON POWER SOLICITATION

UNCLAS SECTION 01 OF 03 BANGKOK 000727

SIPDIS

SIPDIS

E.O. 12958: N/A
TAGS: ENRG EINV TH
SUBJECT: RTG INVITES FEEDBACK ON POWER SOLICITATION


1. SUMMARY. Thailand is moving closer to issuing its second
solicitation for Independent Power Producers (IPPs) in 2007.
The new solicitation is designed to minimize the cost and
risk for the RTG throughout the bid process and up to the
point the new capacity comes on line. Bidders will face
numerous stringent bid requirements, but the Ministry of
Energy (MOE) seems to be striving for a transparent process
limiting the amount of subjectivity in the bid evaluations.
Significantly, state owned enterprises (SOEs) will not be
permitted to participate in the bidding. Despite the MOE's
desire to diversify Thailand's energy supplies, and use the
country's coal reserves, it seems likely that there will be
few, if any bidders proposing coal-fired projects, if any.
Even as the IPP round moves forward potential bidders will be
conscious of the risk posed by Thailand's unsettled political
situation. End summary.

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Thailand Moves Closer to Second IPP Solicitation
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2. In December 2006, the Energy Policy Planning Office
(EPPO) of Thai Ministry of Energy held a conference to
discuss the upcoming bid solicitation for Independent Power
Producers (IPPs). The target audience was principally
potential bidders for the new IPP awards. The draft plan for
the IPP solicitation was presented and feedback from industry
was solicited.


3. The timetable for the second IPP round projects an RFP
issuance in March 2007, bid submission in October 2007,
preferred bidders named in April 2008, Power Purchase
Agreements (PPA) signed in October 2008, and financial close
and notice to proceed in April 2009. EPPO claims that this
schedule is generous, with selection of preferred bidders and
signing of PPAs possibly occurring earlier than scheduled.


4. The current round of IPP bidding will be Thailand's
second. The first round was conducted in 1994 and drew 88
proposals, of which seven were awarded, for 6,675 megawatts
of capacity. All seven eventually achieved financial close,
despite the 1997 financial crisis, and are now operational.


5. This round of IPP bidding will award 3,000-4,000 megawatt
(MW) of capacity, with scheduled commercial operation between
from 2011 through 2013. The Ministry will announce annual
capacity amounts in early 2007 following the finalization of
the new load forecast and power development plan.
Additionally, in order to mitigate excess capacity risk, the
Ministry will require each bidder to provide a option to
extend the bidder's scheduled commercial operation date by up
to 24 months, at a fixed price, which option the MOE can
exercise at any time prior to the scheduled commercial
operation date.


6. The RTG's objective for the new round of IPP solicitation
is to encourage high quality, low cost bids for the private
sector to develop, finance and construct the next expansion
of Thailand's energy generating capacity. In addition to
seeking the lowest cost proposals, the process itself has
been designed to impose the lowest expense on the RTG, using
a pay-to-play format.


7. Much of the financial burden of the bid process will be
placed on the bidders themselves. The bid package itself
will cost 100k baht, and each bidder will be required to
submit with the bid an evaluation fee of 1m baht, and a bid
bond of 500 baht/kilowatt of proposed capacity. The funds
will help finance an independent bid management committee
(BMC),appointed by the MOE, that will evaluate the bids and
recommend preferred bidders.

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The Bid Process Explained
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8. Bids will comprise separate sealed technical and price
proposals and will be evaluated in two separate phases. The
first phase will be a pass-fail evaluation of compliance
requirements and non-price factors, including acceptance of
the mostly non-negotiable PPA, the PTT gas sales agreement
(for gas-fired projects),and a guaranteed bid validity of 9
months. Bids will also be evaluated on the use of proven
technology, submission of an environmental impact analysis
(EIA),and fuel supply and price risk. Bids that
successfully pass the technical review will be evaluated and
ranked based on price. The price will comprise two
components, and Availability Payment (including capital
recovery),and an Energy Payment. As part of the evaluation
process EPPO states that the BMC may request meetings, which
may be private, with any bidders to clarify (but not
negotiate) terms.

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9. Once preferred bidders have been named they will be
required to submit an additional non-refundable fee of 4m
baht at the commencement of the contract finalization phase.
Nevertheless, EPPO anticipates that PPA negotiations will be
of very short duration (weeks) due to previous PPA precedent
and the pre-acceptance of large sections of the PPA.


10. EPPO notes that Thailand's power sector is heavily
dependent upon limited supplies of natural gas and a single
generating technology. In 2005 over 75% of Thailand's
electricity was generated by gas-fired power plants, and this
figure is expected to increase slightly in the next few
years. The Ministry of Energy (MOE) is consequently
considering placing capacity award limits on gas-fired
projects, and/or offering additional incentives to developers
of coal-fired projects. At the same time the Renewable
Portfolio Standard (RPS),which would have required each IPP
to provide 5% of capacity from renewables, has been canceled
in favor of a future, separate, solicitation targeting
renewable energy.


11. Each IPP will be required to submit a community
development program (CDP) providing benefits to the project's
host community. At a minimum, each IPP must commit funds
equal to 30 THB per kilowatt of project capacity for CDP
start-up, and 1/100 THB per KWh of deliveries for continuing
programming. Submission of a satisfactory CDP will
constitute one of the pass/fail elements of the bid
evaluation.


12. Bidders are also required to submit their projects for
an Environmental Impact Assessment (EIA),and must obtain EIA
approval prior to the execution of the PPA. Failure to
obtain approval after a maximum six month extension from the
scheduled signing date will result in the rejection of the
bid and the retention of the 15% bid bond.

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SOEs Need Not Apply
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13. State owned enterprises (SOEs) will not be permitted to
directly participate in the bid solicitation, although they
may do so indirectly through subsidiaries or consortiums in
which the SOE holds less than 50% equity interest and/or
control. Notably this minority limit applies from the bid
date through the end of the PPA.


14. Significantly, EPPO also stated that it had not yet been
decided that the Energy Generating Authority of Thailand
(EGAT, the state-owned power company) should be allotted any
share of new capacity for the 2011-13 time period. (Comment:
Previous rumors had suggested that as much as 50% of new
capacity might be reserved for EGAT, with the possibility
that EGAT might also be allowed to bid for IPP capacity.
This no longer appears to be the case, although notably EPPO
did not definitively state that EGAT would NOT be awarded a
share of capacity. End Comment.)


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Participants Respond
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15. EPPO's presentation generated considerable feedback from
industry representatives. One clear theme was the need for
transparency, and the appearance of transparency, in the bid
and evaluation process. In this regard participants objected
to the possibility of closed-door clarification meetings
between the BMC and individual bidders. There was also
uneasiness about EGAT's involvement in the bid process,
forcing the EPPO representatives to reiterate that EGAT would
serve only as a technical resource.


16. Another recurring theme was the size of the
solicitation, with multiple comments suggesting an expansion
of the capacity available, or an extension of the time frame,
or both. One participant questioned whether 3-4 thousand MW
was too small to be worth the trouble. EPPO pointed out that
Thailand was proposing the largest current public
solicitation in the region. They also noted that it was the
intention of the EPPO and the MOE to hold solicitations on a
more regular basis, ensuring that unsuccessful bidders would
have an opportunity to try again in the near future.


17. There was considerable comment regarding how the
proposed bid parameters would make accurate pricing
difficult. Prices for critical materials (such as copper and
steel) vary greatly, any fixed price quote beyond three
months will need to include a price risk premium. The MOE's
requirement for an option to delay commercial operations will

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also introduce a risk cost. One respondent complained this
option price could skew the overall bid price and the
competitiveness of the bid, even though the option might
never be exercised.


18. Multiple participants were also uneasy about the EIA and
CDP elements of the bid requirements. Some wondered if the
RTG's Office of Environmental Policy and Planning (OEPP) had
the capacity to handle numerous EIA applications in a timely
manner, although EIA approval will only be required for
winning bidders.


19. A number of participants pointed out the special issues
involved for coal proposals, including a higher fuel cost
risk, and the significant risks associated with obtaining EIA
approval and popular opposition to coal plants. One
participant involved with a coal project from the first IPP
spoke about the significant difficulties faced with bringing
the project to completion. Indeed, the overwhelming
sentiment seemed to be one of great reluctance to submit a
bid involving a coal-fired plant; no one seemed to want to
take on the headaches associated with coal. Some speakers
supported the possibility of a separate solicitation
targeted exclusively towards coal-fired projects.

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Comment
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20. As presented by EPPO the structure of Thailand's next
IPP solicitation is designed to minimize the cost and risk
assumed by the RTG. At the same time the extensive EAI and
CDP provisions of the bid requirements seem designed to
ultimately make the completion of projects by successful
bidders politically smoother. While the MOE is clearly
determined to maintain tight control of the development of
Thailand's energy sector (e.g. by reserving the option to
delay the operational start of IPPs if they feel the capacity
is not yet needed),EPPO is also clearly committed to
considering the perspectives of potential bidders.
Considerable effort has gone into developing the IPP
solicitation and it is likely that the RFP will result in
numerous bids, despite the requirements that bidders will be
required to meet. From the general lack of enthusiasm
expressed by participants for coal projects, however, it is
hard to see how the MOE will achieve its objective of
reducing Thailand's reliance on natural gas without further
incentives, or a separate solicitation. The limits on SOE
participation, and the absence of an EGAT set-aside are
encouraging signs for increased competition in Thailand's
energy sector. Also, the RTG's Chief Economic policymaker,
Deputy Prime Minister and Finance Minister Pridiyathorn, is
an enthusiastic supporter of the relatively open bidding
arrangments. Yet despite all of the positives any optimism
must be tempered by a realization of the political
uncertainty, with elections and a new government due in early
fall (or about when IPP bids are due). A new administration,
or a deterioration of the situation under the interim
government, could yet derail the entire process.
BOYCE