Thailand’s electricity prices remain stubbornly high, burdening consumers and businesses alike.
The current and former governments have tried to tackle this problem without much luck. Subsidies are a short-term tonic, but they have created new financial burdens. It is about time to ask what makes electricity costs so high and what needs to be changed at a fundamental level.
Last month, at our forum titled “Expensive Electricity: Who Is Responsible for the Public’s Struggles?” experts gathered to dissect this pressing issue. Lively debates on external factors, such as the price of natural gas in the global market, were held. But the elephant in the room was Thailand’s energy and power procurement policy.
First of all, we need to understand that Thailand’s electricity market operates under an “enhanced single-buyer model”, which is a vertically integrated monopoly controlled by three state-owned enterprises: The Electricity Generating Authority of Thailand (Egat), which serves as the sole electricity wholesaler and operates the transmission grid; the Metropolitan Electricity Authority (MEA); and the Provincial Electricity Authority (PEA), which handles retail and distribution. Apart of that trio, centralised energy planning falls under the National Energy Policy Council, chaired by the prime minister.
The question is whether the “centralised energy systems” are efficient and good for the country and consumers.
The so-called “centralised energy systems” are good in ensuring security of supply. But this leads to high electricity prices and prevents the system from experiencing real business competition and reaching its full efficiency.
Thai officials often claim this power market policy is based on “merit order”.
I beg to differ. Our “centralised energy systems” contain structural hurdles. One is the government using the cost-passing mechanism to shift some of the financial burden to consumers.
Another is the inflexible power purchase agreements (PPAs) that Egat has been signing with private power companies, which limits negotiations and the freedom to choose a power source that fits the social and environmental conditions.
Every two to three years, Thai policy makers will update the so-called “Power Development Plan” (PDP) to adjust the energy demand and electricity prices. The decision is primarily based on the demand for power consumption and the actual fuel price in the global market.
Critics blast the PDP for over-projection. Policymakers are criticised for not including demand site management — a positive effect from energy saving such as better electric appliance quality, better energy-saving buildings — in the update. Therefore, the PDP always shows that the demand for electricity is surging substantially.
The question is, why? Policymakers do not have to bother about any impact of an inaccurate forecast. That is because Thailand’s PPA private concessionaires have several financial obligations, such as a price guarantee, known as an Availability Payment (AP) fee, and some mechanism to pass on the financial burden to consumers.
For instance, when Egat signs a contract to buy power from a company, Egat must pay some AP — covering fixed costs and shareholder returns, even when no electricity is generated.
While this AP clause invites power companies to invest huge sums of money to produce electricity for the national grid, it prevents the power sector and officials from being effective — or at least providing a precise demand forecast.
The Russia-Ukraine war is a showcase of the flaws in our PPAs, too. As global gas prices soared, Thailand’s reliance on natural gas exacerbated the problem. The Automatic Tariff Adjustment Mechanism (Ft) that is contained in the power-buying contract automatically passed these increased natural gas costs onto consumers.
Meanwhile, private power plants that use gas to produce energy face little risk. In this monopolistic environment, the Thai government and Egat do not have any pressure to diversify their energy sources or even try to fix the lopsided gas dependence. Why bother when consumers take care of the higher gas price when they pay their monthly utility bill?
If that were not enough, the PPA contains another guarantee mechanism known as the “take-or-pay” clause. With it, Egat is obliged to buy electricity from power plants even though the country has too many energy reserves in the national grid. This contractual obligation prevents policymakers and Egat from switching over and exploring better alternatives.
As alternative sources such as renewable energy such as solar and wind are increasingly affordable, our country’s national grid should be flooded with this green energy that can help reduce pollution and aid the government in reducing emissions and meeting our “net zero” goal in the future.
However, in reviewing Egat’s national grid management, I found that renewable energy is often placed near the bottom, while electricity produced by natural gas and coal is in high demand simply because power contracts required this. Again, the contracts Egat signed with private generators — 60% of which uses natural gas — “legally” requires Egat to buy power from these companies.
Needless to say, with generous PPAs, the profits of these power plants rise sustainably while those of Egat move in the opposite direction. Formerly a major power producer of the country, Egat now mainly acts as a buyer.
Politicians and experts have pressured the current and former governments to renegotiate with power companies. Revising the concession is complex and could invite lawsuits. But it is a must for any government that wants to reform the power market.
In the PPAs, there is a force majeure clause that opens the door for removing liability for unforeseeable and unavoidable catastrophes that prevent participants from fulfilling their contractual obligations.
The Covid-19 pandemic was an event that fits “force majeure” as power demand substantially decreased while reserves hit the roof. The former Prayut Chan-o-cha government should have negotiated this with private power plants. It did not.
The first step would be to revise the terms with new power procurement contracts. It is naive to expect change under the same old PPA rules.
This means the new PPAs must reduce the guaranteed purchase volume and modify the obliged take-or-pay clauses.
Indeed, the Paris-based International Energy Agency (IEA) recommends alternative power market mechanisms. Under this model, generous financial obligations such as Ft and purchase-guaranteed clauses, like the AP and take-or-pay clauses, must be removed, if not reduced. Without any binding financial obligation, negotiations for a fair price, flexible management and merit-based competition are a pipe dream.
Addressing the inefficiencies in our centralised electricity structure offers could help reduce electricity costs by 10% to 20%. With political will, it is doable.
First Published on the Bangkok Post
