Although Myanmar’s installed generation capacity is 5 GW, actual generation capacity sits between 2.9-3.1 GW. With the Ministry of Electricity and Energy (MoEE) predicting that daily demand will increase by another 1.5 GW over the next few years, the authorities are looking at avenues to boost production levels. The World Bank expects demand to be even higher, forecasting an average annual growth rate of 11% to 2030, with peak demand reaching 8.6 GW by 2025.
In addition to the future hikes in demand, only around half of Myanmar’s population currently has access to electricity, presenting a significant challenge for economic development. According to a 2019 World Bank survey, 95% of local firms in Myanmar have reported experiencing power outages and more than half rely on diesel-powered generators.
Price of Subsidies
Most of Myanmar’s electricity is generated by 20 gas-fired power plants, 62 hydropower stations and one coal-fired plant. The state-run national power provider, Electric Power Generation Enterprise (EPGE), has recorded losses for a number of years, in large part because it supplies electricity at heavily subsidised rates. The electricity tariffs had not been adjusted since 2014, despite mounting costs of delivering electricity. Indeed, the provider’s deficit jumped from MMK580bn ($378.1m) in FY 2017/18 to MMK750bn ($488.9m) in FY 2018/19.
It costs the government MMK89 ($0.06) per unit of electricity to generate and distribute electricity from hydropower and MMK178 ($0.12) per unit of electricity from natural gas. EPGE supplied electricity at a loss of approximately MMK507bn ($330.5m) in FY 2017/18. This gap grew even wider – by around MMK123bn ($80.2m) – in FY 2018/19. According to the World Bank’s “Myanmar Economic Monitor 2019” report, the weighted average retail tariffs were around 40% below cash cost recovery levels.
Tariff Hike
In a bid to stem unsustainable losses, the government took the difficult decision to raise electricity tariffs in July 2019, marking the first hike in five years. It introduced a progressive tiered tariff rate, which rises alongside increasing consumption. However, the government was careful not to have the burden of the increase fall on the poorest. Under these new rates, residential households and religious buildings will continue to pay the previous rate of MMK35 ($0.023) per unit, but only for up to 30 units. Consumers will be charged MMK50 ($0.033) for 31-50 units; MMK70 ($0.046) for 51-75 units; MMK90 ($0.0059) for 76-100 units; MMK110 ($0.072) for 101-150 units; MMK120 ($0.078) for 151-200; and MMK125 ($0.081) for over 201. For example, consumers who used to pay MMK3500 ($2.28) for 100 units now pay MMK6050 ($3.94), or 72.9% more than what they paid earlier. Commercial consumers, such as business and industrial establishments, now pay MMK125 ($0.081) per unit for up to 500 units consumed; the tariff increases a further MMK10 ($0.007) each time consumption goes over 5000 units, 10,000 units, 20,000 units and 50,000 units. Establishments consuming over 100,000 units are now charged MMK180 ($0.117) per unit, whereas in the past they paid MMK150 ($0.098). Previous rates also decreased for commercial consumers beyond the 200,000-units mark, but this favour has been revoked as the tariff regime – even for high power consumers for a production base – has now become strictly progressive.
It is expected that the new tariff regime will also ease the concerns of independent power producers (IPPs). In the past, IPPs were deterred from investing in Myanmar due to the government’s control over rates. However, as the tariff hikes start from a low base, electricity in Myanmar is still among the cheapest in the region. For instance, in 2018 electricity rates in Myanmar were one-fifth of those in Thailand and one-sixth of those in Cambodia. After the July 2019 price hikes, they remain among the lowest in the region.
Meeting Demand
The new tariff does not entirely cover the costs of production and distribution, but the government hopes it will stem the escalating subsidy bill and free up funds to invest in building capacity.
In response to negative public reaction to the higher tariffs, the government announced plans to add more than 1040 MW of additional power capacity ahead of the general elections in 2020. In October 2019 the MoEE announced that a consortium led by Hong Kong-listed VP ower Group, which has close links to China-based CITIC, had won bids for four out of five emergency power plant projects, totalling some 920 MW. Three of the power plants will be fired with imported liquefied natural gas (LNG) and one will rely on domestic gas. The contract to build the 152-MW gas-fired fifth plant was awarded to a consortium led by China Energy Engineering Corporation in September 2019.
It is hoped that these emergency power plants will prevent a repeat of the blackouts experienced in the summer of 2019. However, it may only be a temporary solution. Power shortages will ultimately hamper economic growth unless the government attracts new investment in gas-fired plants, hydropower stations, renewable energy and distribution networks.
However, critics have questioned the terms of the gas-to-power projects, particularly the one-month deadline contractors are given to prepare the bids. Other criticised terms of the projects include a clause that requires the use of LNG, rather than other forms of fuels; the short five-year contract term; the fact that payments from the government to contractors are made in kyat rather than US dollars; and hefty fines for missing completion deadlines.
Governance
Despite its reformist credentials and intentions, the National League for Democracy-led government has not been able to deliver new generation capacity at the pace required since taking office in 2016. Most of the power projects that have come on-line were initiated by the previous military-led government. Nevertheless, the current administration has demonstrated that it can take tough decisions to avert an energy crisis. Tariff increases are a step in the right direction, as they are a crucial short-term measure to set the power sector on the path of financial viability.
In parallel to such reforms, the government will need to take measures to reduce costs and remove the many inefficiencies in the power production and distribution network. For instance, an efficient, real-time data-collection system to monitor the financial and operational performance of the sector would be beneficial. In addition, a new methodology for setting tariffs may need to be implemented to allow for more regular tariff adjustments. To diversify power sources and take advantage of Myanmar’s solar potential, smart systems could allow households and businesses to feed excess power into the grid in return for tariff offsets.
Universal Electrification
The National Electrification Plan (NEP), which aims to achieve universal electrification by 2030, forms the basis of the government’s efforts to reform the segment and increase generation capacity. The plan is being supported by the World Bank, which has extended a $400m credit facility to the government to help meet its targets. The NEP has laid out specific milestones, seeking to reach 50% electrification by 2020 and 75% by 2025, before achieving 100% electrification by 2030. While in the long term electricity will come through the main grid, short- and medium-term demand will require off-grid solutions. Home solar photovoltaic systems, which are becoming increasingly popular in Myanmar, are likely to become even more common in the years to come.
Myanmar’s power transmission system is a complex network of 230-KV, 132-KV, 66-KV and 33-KV transmission lines and substations connecting hydropower plants to load centres. None of the power plants, however, work to optimum capacity, with all but three operating below 50%. Transmission and distribution losses amount to approximately 15% of the power produced. The money saved by tariff rationalisation could therefore be invested in modernising outdated equipment.
Myanmar has had mixed results in attracting private sector investments in power generation. Power purchase agreements (PPAs) between EPGE and IPPs include purchase guarantees totalling up to $570m per year, which is equivalent to 30% of the current account deficit. Although deemed necessary to attract private sector investments, such payment obligations could create a significant fiscal burden for the government if they are not checked or reviewed periodically.
Once the 1040-MW power projects come on-line, it may become necessary for the government to develop a cost-effective power development plan, which would require to prepare a priority list of projects that are best suited to fulfil the country’s long-term power needs.
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