Is The Current Model For Ending PPL's Electricity Power Supply Monopoly Wrong And Can The Pricings In The PPAs Be Reviewed?

The latest saga in the reliable electricity challenge for PNG is the recent announcement by an Independent Power Producer (IPP), Dirio, which has advised PNG Power Limited (PPL) that it is exercising its rights under the Power Purchase Agreement (PPA) to suspend supply of electricity as of 12 PM on 27th September 2024.

Dirio is not the first IPP to stop supplying power to the PPL's POM grid to get PPL to pay up. Sometime back another IPP in NiuPower Limited threatened PPL with insolvency case for money owed to it by PPL.

These cases are not the first and surely will not be the last. This should force us to pause and ask:

Is The Current Model To End PPL's Power Supply Monopoly Right?

The current model had these three basic electricity market segmented areas where competition is going to be introduced.

1.??PPL exclusive supply (retail) areas - loads less than 10 MW located within a 10 km radius from PPL's distribution network.

2.??Large loads - loads of 10 MW and greater.

3.??Small loads - loads less than 10MW located outside of PPL's exclusive supply areas (i.e. The rural areas).

In the link immediately hereunder is more on the current model to end PPL's electricity market monopoly.

Obviously GoPNG has been working to influence the market by having introduced the bill (from the policy paper called 'Electricity Industry Policy' developed in 2009) to remove PPL's power supply monopoly and to try and meet GoPNG's objectives.

The two key objectives of governments are: 1. Social Efficiency (benefits of producing something must be greater than its cost to society) and 2. Equity Considerations (society's resources are fairly distributed and shared by all).

In a free market economy and to ensure its objectives are met, the government participates in the market to meet its social obligations by providing public goods and services. But when free market is not distributing equitably and fail to achieve social efficiency the government intervenes to correct it. Where government is not involved directly it will intervene using various government policies and legal instruments to correct the market. Policy instruments may include taxes and subsidies to correct a monopoly market situation. Legal instruments are executed via regulatory bodies such as ICCC for price control so monopoly and oligopoly firms as well as SOEs do not charge high prices.

SOEs such as PPL are set up as semi-government businesses to deliver on the two key government objectives of social efficiency and equitable distribution while at the same time strive to become the government's 'milking cows'.

In line with the first objective and away from the present model to remove PPL's monopoly, GoPNG should privatise the generation facilities that are connected to the main power grids: POM, Ramu and Gazelle but keep the transmission facilities. The cost to the society is the losing of State assets but we get reliable electricity.

Aligning with the second objective of equitable considerations and taking a different approach to the current model to remove PPL's monopoly, GoPNG should keep the non-profit centers and focus on its CSO (community service obligations). Money earned from taxing IPPs in the main grid areas should then be used to support the non profit areas and improve the reliability of electricity supply.

It would not be in the interest of IPPs to extend the grid to unconnected areas and people who are unable to pay electricity if the recovery cost of investment in the grid is build into the power purchase prices. PPL can then focus on extending the grid in both the main grid areas and the non-profit centers and work to reach the 70% of the population it aspires to provide electricity to by 2030.

In this way the government will justifiably meet its two objectives of social efficiency and equity considerations.

Alternatively we should pose this question:

Can The Pricings In The PPAs In The IPP Market Be Reviewed?

Electric power and energy is an important enabler for economic growth and energy consumption as a development KPI is an easy comparison to make.

The IPP market came about as part of GoPNG's policy to increase local participation in key industries to PNG’s economic growth and to ensure meeting Government’s target of 70% electrification by 2030. This means that PPL's monopoly in the electricity sector will be ended by entering PPL into various agreements. One of these agreements is the PPA to enable IPPs to come into the market and as the name implies, IPPs will produce electricity and PPL will purchase electricity from them at what is supposed to be fair market pricing.

Unfortunately PPL appears to be now in a 'collar agreement' with these PPAs where it is paying power at a higher price then forced by GoPNG to sell at a lower price.

From former PMPO (this paragraph is a later edition and inclusion on 03/10/2024 after this article was published on 28/09/2024), the PPA between Dirio and PPL, executed in October 2019, is for 25 years and requires PPL to pay for 45MW of electricity whether PPL need the power or not. The average tariff metered by PPL between January 2024 and August 2024 is K0.91/kWh and the cost of power from Dirio is K1.40/kWh. The highest rate charge by Dirio in 2024 is K2.31/kWh. According to former PMPO, based on the 2024 average, PPL will have to pay Dirio K1.379 billion over the next 25 years even if they do not need the power produced or for some reason cannot access the power due to say fallen power lines or faulty substation.

Interesting to note too that some of the very people who would have provided oversight as GoPNG representatives in the setting up of these long-term PPAs are now chairmen and directors of the IPPs. Kudos to them for being strategic in their thinking and planning. As they say, when we don’t have a plan, chances are high that we will exist only to fulfill other people’s plans.

However, a major flaw in that plan is not realising then that in order for the success of the IPP market segment the GoPNG's 'milking cow' SOE PPL must be financially efficient and effective as a physical asset intensive SOE. They had the opportunity to influence GoPNG decisions to turn PPL around to be a sound business.

It does not make business sense for PPL to buy power at a higher price and sell it at a lower price. Was it expected that by increasing its sales volume and reducing its operational overheads PPL would breakeven and be profitable?

PPL unfortunately appears to be no longer profitable and a 'milking cow' and these plans to milk it via the IPPs are unraveling. If only resources were invested to set up PPL for long-term success, the IPP business would have been an even more attractive sector attracting more investors and investments.

For the greater utilitarian good of all of us as a country, GoPNG and its relevant authorities and agencies like NEA and ICCC needs to bring all the IPPs to a round table discussion to review these long term PPAs and pricings.

Postscript

All business should be able to monitor such business risks as falling behind on settling debts and collecting credits and take action to mitigate incurring such risks of suppliers withdrawing their services due to non payment of debt. This question below is now posed for both PPL and the IPPs.

What Is The Lead Indicator For Monitoring Such Business Risks?

From a purely business management perspective, under the five Financial Category Ratios of: Liquidity, Activity, Debt, Profitability and Marketability, the answer will lay under Activity.

Activity indicates the speed with which various accounts are converted into sales or cash (or inflows and outflows).

Under the Activity Category is Accounts Payable and Accounts Receivable. This will be where the risk indicator for mitigating such risks of not paying off debts or collecting credits will lay.

Often a maximum of 30 days is allowed for Accounts Payable and Accounts Receivable. Any duration above a maximum allowable may indicate trouble brewing.

This link below is an example analysis of the audited financial statements showing the holistic spectrum of financial ratios and warning of such impending crisis.

For relevance to this particular business case of an IPP turning off additional power supply capacity to PPL, the article is titled ‘The Stories Financial Statements Tell Of PPL From 2016 - 2018'.

Post Article Publication Revelations

This is further revelations by former PMPO on 3/10/2024 on the Dirio vs PPL saga after this article was published here on LinkedIn. I am keeping it as documentation of what is transpiring.