PNG POWER SECTOR IN CRISIS FEBRUARY 2024

State Owned Enterprise Minister Duma was reported as saying back in August that “PNG Power was in danger of insolvency with an income of K76.9 million and incurring costs of K91 in 2022. ( The National August 11, 2023).”

The situation has deteriorated significantly since then and PNG Power continues to owe the IPPs in excess of K700 million.

The power sector in PNG is in crisis and there seems to be no plan that we are aware of to fix the situation. Unless swift action is taken there is a real chance of a complete system breakdown.

What are implications for PNG Power ?

The risk is that PNG Power does not have the cash flow and working capital to pay suppliers, undertake necessary upgrades and capital works to ensure the aging network can continue to supply power of the quality and reliability needed to sustain the economy.

This means the whole power system is close to total failure.

Electricity is tightly linked to economic development and higher levels of GDP are correlated with greater electricity use, access, reliability and affordability.

There is ultimately no route to development without greater electricity use, yet here we have a power utility on the verge of collapse.

Why is PNG Power in this situation ?

PNG Power has not had a tariff increase for over  10 years  and this has meant the situation has got progressively worse. PNG Power’s costs have risen but revenue has gone backwards. To make matters worse there have been 10 CEO’s in the same period. Over the past 15 years there has been a lack of substantial preventative maintenance and upgrades to the network and generation plant.

This has resulted in many of the generation assets performing poorly or failing completely and a network constantly being patched up, hence constant blackouts.

Revenue is further compromised by the large amount of power theft ( around 20%). PNG Power is undertaking a programme to rectify this.

More large customers are choosing to go off grid due to reliability issues. It is a more expensive option but these companies see no alternative.

It has been reported in the press that the PNG Government  who is responsible for 70% of PNG Power’s revenue , has not been paying PNG Power on time adding to the cash flow problems.

This all adds up to a seriously under funded PNG Power. That means a huge cash shortfall in the business.

What is the role of the Independent Power Producers ?

The  Independent Power Producers, IPP’s, were contracted to provide modern, efficient and well maintained power plants. There have been claims that the IPP’s are expensive and are the cause of the PNG Power financial problems.

This is untrue and the fact is that these plants are competitively priced , approved by the ICCC and if it wasn’t for IPP’s there would be wide generation shortfalls and wide spread blackouts. PNG Power simply cannot afford to maintain what generation it has and certainly cannot afford to build new generation because of lack of funds.

PNG Power / PNG Government does not provide any kind of payment guarantee to IPPs, therefore given the current risk ,it is unlikely any further investment will be made in the sector and that is a very worrying outcome.

It is only with the goodwill of IPP’s that they keep generating without being paid. This situation cannot continue.

Has all this been raised with Government ?

Yes , the Independent Power Producers of PNG has raised the issue and made numerous submissions; of which we are awaiting a response. The key points are:

·         A comprehensive external independent forensic audit of the PPL business including procurement, contracts, operating costs and management is needed.

o   This is to determine the true cost of running the business which then determines the correct tariff.

o   Determines the economic efficiency of the business.

·         A proper external asset valuation.

o   To find out what the business is worth in order to attract investment.

·         PPL to be able increase tariffs through the approved National Electricity Authority  process.

o   To give PNG Power a revenue that allows it to run the business properly

·         NEA as regulator to competitively assess new generation capacity based upon sound demand forecasting.

o   To date the procurement process has been informal.

·         Amend NEA legislation to allow pass through of all mandated charges on all generators

o   New charges and fees have resulted in some IPP’s being unable to recover imposed charges putting further strain on these businesses

·         Introduction of private ownership of all PPL generation

o   This would enable existing generation to be maintained properly and allow PNG Power to concentrate on the network and retail..

·         Separate independent system operator .

o   At present the system is operated on an informal process and does not allow for the best mix of generation, standby and optimal cost. The system operator should be an independent entity .

·         Competition in wholesale and retail especially for large customers

o   Large customers should be allowed to purchase electricity at the best price from whom ever they wish, including PNG Power.

What can be done now ?

What is the short term fix ?

·         PNG Government should inject enough money into PNG Power to pay outstanding debts and provide a 3 month buffer for future debts

·         PNG Power to increase  tariff to allow  them to operate profitably in the interim.

·         Remove GST on generation invoices.( PNG Power cannot pass this through to customers)

·         Implement restructuring plans based on experienced advisors.