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Market Directions and Opportunities of Power Transmission in ASEAN
Presented by Sarah Fairhurst
The Lantau Group
Let’s start with a fundamental point: The Economic Role of Transmission
1
• Electricity transmission is not essential for the supply of electricity to end users
• Distributed local generation is possible, albeit with specific costs and performance
characteristics
• Electricity transmission network enables access to economies of scale in generation,
access to location-specific resources, and access to backup and ancillary services
When is transmission worth it, and when is it not?
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How does transmission lower electricity costs?
• Economies of scale in generation:
– Many types of thermal power station (particularly coal and nuclear power stations) are more
efficient when built in larger sizes
– Higher efficiency means that the cost of electricity generated from these power stations is
lower than for smaller power stations
– However, large power stations generate more power than is required in the immediate
vicinity of the power station, and so to move the power to where it is needed, transmission
must be built
• Load and outage diversity
– Electricity cannot be stored and load changes from minute to minute
– Some single power stations connected to a load can manage these fluctuations, but many
cannot
– Transmission systems allow many different power stations to connect to many different
loads, meaning the diversity in output of the power stations (outages) and the variations in
the load can be pooled, lowering the overall costs of managing the systems
2
The Lantau Group
Therefore transmission should only be built where it lowers costs
• If you start from the premise that the purpose and role of transmission is to reduce the
cost of delivered power, then a number of other points become obvious:
– Transmission augmentations should only take place if the net effect is lowering the overall
cost of delivered power
– All transmission projects should be evaluated to ensure that they actually lower the cost of
electricity – no “connection for the sake of connection”
– The cost of electricity can be affected in many ways:
• Changes in the use of specific power stations and the costs of those power stations
• Changes in the merit order as a result of access to different resources
• Changes in imports and exports (where applicable)
• Lowered cost of ancillary services for system stability and backup
3
Careful analysis is required before each project to ensure it lowers
costs, taking into account ALL the impacts of the project and ALL
the alternatives
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Should Network A connect to Network B?
4
Network A Network B
?
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Should Network A connect to Network B?
5
Network A Network B
?
Size of each network?
Marginal fuel of each network?
Annual growth rate of each network?
Only incremental benefits count… changing prices or
moving costs from one network to the other do not!
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The benefits of an interconnection generally fall into three areas:
6
0
20
40
60
80
100 Ancillary Services
Capacity
Energy
The Lantau Group
The benefits of an interconnection generally fall into three areas:
7
0
20
40
60
80
100 Ancillary Services
Capacity
Energy Incremental energy savings
where lower cost fuels can be
imported over the interconnector
or where diversity of load profiles
means plants can run more
efficiently to meet the load shape
Capacity savings where
lumpy new build capital cost
can be deferred due to
sharing of resources
Operational benefits
due to sharing of
system reserves and
standby capacity;
diversity of load
profiles
The Lantau Group
Energy benefits: Transmission brings remote low cost generation sources to
market
• Some types of fuel are difficult to move (e.g. hydro)
• Transmission is a benefit when:
• In all cases, it is important to take into account all the costs – including environmental
costs and benefits; social costs (of displacement of people, for example) and the
opportunity costs of the alternative fuels (that is, what better use might there be for
scarce gas resources, for example)
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Full cost of
generation Full cost of
transmission
Full cost of
alternative
generation
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Example: Bakun Transmission Project
• Bakun is a 2400MW hydro project in Sarawak, Malaysia
• At the time of construction and commissioning, the output of the power station was
larger than the total demand in Sarawak and the plan was to export much of the
power to Peninsular Malaysia via a 300km HVDC transmission line
• Financial analysis of the project indicated that the cost of hydro power plus
transmission costs would be competitive in the Peninsular Malaysia grid, which is
powered mainly by coal and gas
• This transmission project has not occurred, mainly due to political and geopolitical
issues and now Bakun is part of the Sarawak Corridor of Renewable Energy
(SCORE) which is attracting industries with high energy demand to Sarawak.
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Transmission projects can bring low cost power sources to market
but they are rarely without implementation hurdles
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Economies of scale are not infinite
• As technological improvements mean the
efficiency of smaller power stations
increases, the benefits of having a small
number of large power stations far from
the load decreases
• As the costs of smaller power stations
such as renewables decrease, the
benefits of economies of scale in
generation decrease
• As the distances involved in moving
power from the large power stations
increase, the benefits of transmission
decrease
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Co
st
sa
vin
gs d
ue t
o e
co
no
mie
s o
f s
ca
le i
n
co
nve
nti
on
al p
ow
er
sta
tio
ns
($
/MW
h)
Falling generation
costs from small
power stations
The Lantau Group
Benefits of diversity also vary with the technology and geography
• More use of intermittent generation
• Cost of large power stations decreases
• Significant low cost resources far from
load that cannot be moved (e.g. hydro)
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• Bigger electrical systems
• Larger distance from load
• Cheaper standby generation costs
• Cheaper fast-start flexible generation
• Cheaper alternative options to move fuel
(e.g. rail, shipping)
Drivers of lower diversity benefits Drivers of higher diversity benefits
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Ancillary Service Benefits: Example Queensland – NSW Interconnector
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$0.00
$1.00
$2.00
$3.00
$4.00
$5.00
$6.001998-51
1999-8
1999-17
1999-26
1999-35
1999-44
2000-1
2000-10
2000-19
2000-28
2000-37
2000-46
2001-2
2001-11
2001-20
2001-29
2001-38
2001-47
2002-4
2002-13
2002-22
2002-31
2002-40
2002-49
2003-6
2003-15
2003-24
2003-33
2003-42
2003-51
2004-8
2004-17
2004-26
TotalA
ncillaryServiceCosts($/M
Wh)
Commissioning of
Queensland to NSW
Interconnector
Post QNI the
average cost was
0.56 $/MWh
Pre QNI, the
average cost was
1.55 $/MWh
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Are transmission wires the only form of energy transport?
• Obviously not: Transmission also competes with other forms of transportation
• Do you move the electricity to the market, or put the power station closer to the load
and move the fuel?
• Most conventional fuels can move:
– Coal can move on trucks (expensive); by rail (moderate) or by ship (relatively cheaply)
– Gas can move by pipeline or by ship as LNG
– Oil moves by truck or ship
• Transmission therefore competes with these other forms of moving fuel but has a
different cost structure
– Fixed vs variable costs
– Baseload vs peak operation
13
The Lantau Group
Example from Philippines: Transmission wires vs gas pipelines
• Part of the work undertaken for the Gas Master Plan in the Philippines was to assess
where an LNG terminal should be located – the key question being:
Is it better to move power via transmission or to move gas by pipeline?
14
The analysis in this case was
specifically for 3000MW of power
station running at 50% load factor
with a 12% rate of return.
Other assumptions on power
required may give different
answers
The Lantau Group 15
Source: TLG Analysis
The cost advantage of transmitting electricity declines as coal prices increase. At recent price levels (around RMB550/tonne at Datong), the economics of transporting coal and transmitting electricity
are quite similar
Cost of Transmitting Coal-fired Electricity vs. Transporting Coal from Datong to Shanghai
160
180
200
220
240
260
280
300
300 400 500 600 700
Co
st
of
Ele
ctr
iicty
(R
MB
/MW
h)
Coal Prices at Datong
Transmitting Electricity Transporting Coal
Example from China: Transmission wires vs coal by rail
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And input assumptions are not static either
48
Figure 24 Natural Gas Pipeline Costs ($1000 per inch-mile)
$0
$10
$20
$30
$40
$50
$60
$70
$80
$90
$100
$110
1993
1996
1999
2002
2005
2008
2011
2014
2017
2020
2023
2026
2029
$1
00
0s
per
Inc
h-M
ile
Misc.
Labor
Material
R.O.W.
Average of large-diameter gas pipelines 30 to 36 inches FERC data compiled by Oil & Gas Journal
2010 to 2030 projections by cost component is based on trends from 1993 to 2004.
Micellaneus includes includes surveys, engineering, supervision, interest, administration, overheads, contingencies, allowances for funds used during
construction (AFUDC) and FERC fees.
ProjectionHistorical
Between 1999 and 2007, the cost of building pipeline compression ranged from $1,400 to $1,800 per horsepower (Figure 25). Compression costs have not been as volatile as pipeline costs. Similar to pipeline costs, compression costs are expected to tren d upward at a rate near inflation, consistent with recent historical trends. Materials costs, which account for one-half of the cost of adding horsepower, represent the single largest component of the total cost of adding horsepower, because they include the manufactured compressor itself. Labor costs and the miscellaneous component, which includes engineering and environmental compliance, account for roughly one-fourth each. Land costs in connection with adding compression are insignificant. Unlike pipelines that can extend for many miles and cross the property of multiple landowners, the cost of land in connection with adding compression is limited to the immediate area surrounding the compressor station.
16
This is taken from an
infrastructure report by
IFC International in 2010
The figures used to
underpin the Philippine
analysis in 2013 were
higher than the peak
seen in this graph.
If we had used the
projected 2013 numbers,
gas pipelines would have
been cheaper than wires
for all distances
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Implications for Myanmar
• Choosing which fuel to burn and which fuel to export is an optimisation problem and
depends on the prices achieved for the export as well as the costs of burning an
alternative in-country
• What is important are the marginal costs – that is, the costs associated with a small
change in output
• What are the appropriate marginal costs of Myanmar’s indigenous fuels?
– Marginal cost of hydro is the cost of new infrastructure plus the costs of any environmental
and social remedies required
– Marginal cost of coal would include the costs of any new coal transportationl infrastructure
as well as the pure mining costs
– If gas delivered to Thailand (or China) by pipeline or via LNG yields a particular net-back
then, then this value becomes its marginal opportunity cost.
• Given these opportunity costs, what are the economics of delivering baseload (and
mid-merit) power to Yangon?
– The alternatives would include hydro by wire, coal by wire, renewables by wire, local gas
transport by pipeline, LNG imports, and coal imports 17
The Lantau Group
Inter-regional transmission projects include commercial as well as economic
constraints
• Transmission lines linking different regions with different Governments, economics
and policies face a number of difficulties
– Who decides if the project is economic?
– How are the benefits shared between the regions, particularly if one region is primarily an
importer and the other an exporter?
– How do the commercial arrangements work?
• In addition to economics, politics is often also important:
– Desire for self sufficiency
– Concerns about security of supply
– Issues about sharing resources at times of shortage (“we have no power and you sold OUR
power to someone else?”
– Limiting generation market power
– Impacts on the value of other assets/electricity sales or exports
– Trying to maximise the value of excess capacity
18
The Lantau Group
Example: Australia’s Regulatory Investment Test (1)
• Australia is a good example of interregional transmission issues as it removes the
international context but leaves the fundamentals
• A number of new transmission projects have been built in the Australian NEM since
market start. These include:
– Queensland to NSW Interconnector (QNI)
– Victoria to Tasmania DC link (Basslink)
– South Australia to NSW interconnector (originally SANI, later Murraylink)
• The Australian NEM has a framework for reviewing inter-regional transmission
linkages which identifies the net economic benefits of the project, compared with
other alternatives (such as generation projects in the region short of power)
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The Lantau Group
• The regulatory investment test is intended to provide an ex-ante test of proposed
investment projects
• For major projects (>AU$5 million), transmission licensees have to provide cost-
benefit analysis of the project
• Concerns have been raised over the effectiveness of the test
– the regulator oversees the process (consultations etc.) but does not approve the conclusions
of the test
– the transmission licensee has a major data advantage over other stakeholders who may
wish to challenge the test
– the costs used in the test are not those used in the Regulated Asset Base (RAB)
• Alternatives now being adopted in Australia are
– central planning of transmission investments by AEMO (as in Victoria)
– amendments to the NEM Rules, allowing ex-post review and disallowance of investments
from the RAB
Australia’s Regulatory Investment Test (2)
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Australia has also tried other methods of incentivising transmission investment
• If an interconnector links a region of low priced generation with a region that needs
power – surely the market should be able to compensate for the cost of the line?
• This was the theory underpinning “Market Interconnectors” at the start of the NEM
– A market interconnector earns money by earning the difference between the energy prices in
the two regions that it connects
– A regulated interconnector earns money from all consumers, through transmission use of
system (TUOS) charges that are set at a regulated rate
• In order to arbitrage regional differences, Market Interconnectors needed to be DC
rather than AC links. This made them more expensive and thus at a disadvantage to
traditional AC lines
• Market interconnectors built by separate companies (as happened) did not have the
benefit of being able to reinforce other apects of the grid to assist the economics
• Although two were built both have now converted into “Regulated Interconnectors”
21
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International Transmission projects add another layer of complexity again
• Where transmission lines link different countries, not only do all the inter-regional
issues come into play, but national issues, culture, history and geopolitics also have a
starring role
• The Memorandum on the ASEAN Grid includes little on economics, but rather
stresses:
– cooperation among the Member Countries in developing energy resources to strengthen the
economic resilience of the individual Member Countries
– exchange of experience and information on planning, construction and operation of
interconnected systems, the acquisition of appropriate technology and methodology on all
aspects of an interconnected system, and joint studies on transfer of electrical energy
through interconnection
– harmonisation of technical specifications, taxation and tariffs
– harmonisation of regulatory and legal frameworks
– Introduce institutional and contractual arrangements for power trade
22
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The ASEAN Grid – pipedream or pipeline….or LNG tanker?
• The ASEAN grid is rolled out at conferences and discussed at various high level
meetings … the map has not changed for years and little emphasis is put on any
good economic analysis of the benefits
• Since the Memorandum was signed, many changes have taken place in Asia – not
least of which is the lowering cost of LNG terminals (via FSRU technology) and the
increased number of countries installing them
• This raises a key question not answered by any of the ASEAN grid studies:
– Should Asia move power by transmission line or gas pipeline or LNG tanker?
• LNG is not without issues but the commercial barriers may be lower as each
component of the chain can operate with a degree of independence
– Less need for harmonisation of technical transmission issues
– Lower chain of interdependent project finance structures
23
The Lantau Group 24
Liquefaction Regasification
Operating
Constructing
Planned
Possible
Almost none of these proposed LNG regas projects were around at the start of
the ASEAN grid project
Rayong
Son My
Bataan
Batangas
Arun
Lumut
Singapore
Satu/Dua/Tiga
Brunei
Bontang
Donggi-
Senoro
Tangguh
Abadi
Semarang
Nusantara
Source: TLG;
www.globalnginfo.com
Kanowit
Lampung
Melaka Pengerang
2014 Data
Rotan
Thi Vai
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But if both regions (countries) have the same marginal fuel cost, how can
transmission linkages make economic sense?
• The cost of LNG terminals and the cost of the LNG imported via the terminals is much
the same across most jurisdictions
• Which means transmission to arbitrage marginal gas value cannot be economic
• If transmission is between gas producing and gas consuming areas, then on the face
of it there may be value… BUT!... In this case, often the better solution is to import
coal instead and so the marginal gas moves to a mid-merit role
– Transmission of mid-merit electricity would operate at a low capacity factor, substantially
decreasing the value of the transmission option
• This then changes the transmission economics
25
Transmission economics cannot be understood without a very
clear understanding of the alternatives and the impact of
alternatives on the dynamics of the whole system
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Extracted from a presentation by EGAT in 2013
26
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How realistic is this really? Let’s focus on a small part of the map…
• This shows Sabah connecting to Palawan in
the Philippines.
• Palawans’ population is less than 1 percent of
the total Philippines population
• Palawan had a peak electricity demand of
39.7MW in 2013, expected to rise to 75MW
by 2028 (yes – MEGAWATTS)
• Palawan is not connected to the rest of the
Philippine grid
• The distance between the load centres in
Sabah and Palawan is some 500km, most of
it undersea
27
Only sensible economic
connections are likely to
actually get built
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A good, economic framework for the ASEAN Transmission would:
Have an over-arching policy which:
• Encourages innovation
• Fosters an environment where decisions are open, transparent, based on sound
analysis and consultation (without being bogged down in bureaucracy)
Has a regulatory environment which:
• Rewards good decisions and allows the impacts of poor decisions to flow through to
the decision maker (and not the customer)
• Does not penalize good decisions that happen to have bad outcomes (luck is a factor)
Is implemented by companies and government departments that
• Question each decision
• Review each investment for efficiency, appropriateness, size and timing
28
The Lantau Group
Economics is one constraint on transmission; the other is TIME
• Building transmission within a country, under the control of a well-financed utility with
an adequately skilled workforce and a clear regulatory structure is slow
• Building transmission where any of these applies is very slow:
– Finance is constrained or expensive
– The approvals regime is unclear
– Few well trained linesmen
– Land acquisition is problematic
• Myanmar has a clear and pressing need for short term power to the people
• It also has a long term need for sensible, prudent and economic development of its
electricity infrastructure
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A key issue therefore is how to accommodate the short term
needs while not making uneconomic long term decisions
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As with other countries, the issues are far larger than just transmission
• Using domestic gas to fuel power stations may well be the highest short term value of
gas
• In the longer term, however, exporting gas to neighbouring countries and building
larger coal fired power stations (plus transmission) may be a more economic option
• This obviously risks stranding gas power stations in the future - or using short term
(mobile) units in the short term while building an economic longer term strategy
around cheaper fuel sources
• Similarly, in the short term, mini-grids; distributed generation and renewables may be
the fastest way to get power to people outside of the existing grid
• Again, the build-out of these solutions needs to take into account the longer term
expansion of the network, to the extent that this is economic
30
The Lantau Group
In summary
• Good outcomes generally result from good decisions
• Good decisions:
– Require a clear framework
– Benefit from good data and information inputs
– Are a product of good analysis
– Should require the investor to take some of the risk of the outcomes
– If the investor does not take any risk, should have a very well run and
robust regulatory process to test the benefit of the investment before
customers pay for it
• The best advice for the development of transmission in ASEAN and in
Myanmar is to put in place a policy and regulatory framework for good
decision making
• And allow the decisions made under that framework to guide development 31
The Lantau Group
Contact Us
For more information please contact us:
By email General Capabilities Inquiries
Direct Communications
By phone +852 2521 5501 (office)
By mail 4602-4606 Tower 1, Metroplaza
223 Hing Fong Road,
Kwai Fong, Hong Kong
Online www.lantaugroup.com
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