Jurisdiction - Myanmar
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Myanmar – New Lights: Powering Ahead.

19 January, 2015

 

Legal News & Analysis – Asia Pacific – Myanmar – Energy & Project Finance

 

Earlier this year, for the first time since its accession in 1997, Myanmar assumed the chair of the Association of Southeast Asian Nations – another milestone in the country’s re-emergence from isolation. This article looks at what this means for the country’s electricity industry.

 

Myanmar is currently at a pivotal moment in its development: ongoing reforms and the easing of sanctions have opened up exciting possibilities, both for the country as it seeks to catch up with its neighbours, and for foreign investors looking for a new frontier market – but these opportunities are not without their attendant risks. One of these risks is Myanmar’s inadequate electricity infrastructure, which could pose a serious constraint on growth in the years to come.


In this article, we look briefly at:

 

  • Myanmar’s current and projected power needs;
  • the structure of Myanmar’s electricity supply industry; and
  • some of the ways in which Myanmar might be able to plug its emerging electricity deficit.


Powering Ahead?


Electrification rates in Myanmar are currently some of the lowest in the world, reflective in part of a predominantly rural population, low industrial development and a limited grid infrastructure. There is, in theory, sufficient capacity in the system to meet peak demand. A significant proportion of Myanmar’s installed capacity, however, is in the form of hydroelectric power stations – not the most reliable source of power during the annual dry season that stretches over several months. Couple that with inefficient plant and significant transmission losses and the result is frequent load-shedding and rolling blackouts in the few electrified areas of the country: a problem that is likely to be exacerbated by the increase in demand for electricity if economic growth takes off over the coming years.


Organisation Of The Electricity Sector


The electricity sector in Myanmar remains largely state-controlled and fragmented. Overall responsibility for energy policy lies with the Ministry of Energy, with oversight of the electricity sector resting with the Ministry of Electric Power (MOEP). Within MOEP are three key departments responsible for the four state-owned enterprises operating in the sector (as set out in figure 1).


Somewhat confusingly, thermal power plants (other than gas-fired plants) fall within the remit of the Departments of Hydropower Planning and Hydropower Implementation, while gas-fired plants and wind generation are administered by the Department of Electric Power. A National Energy Management Committee, comprising representatives from both the Ministry of Energy and MOEP (among others), has been established to improve co-ordination in developing the electricity sector, but it is unclear if this has helped to streamline policy making and enhance efficiencies in the management and oversight of the industry.


Single-Buyer Model


The linchpin of the Myanmar electricity sector in any event is not MOEP or its departments, but the Myanmar Electric Power Enterprise (MEPE). In a sector organised around a single-buyer model, MEPE (as bulk buyer of power) sits at the centre of a contractual web of power purchase agreements with third-party generators. The electrical power it purchases is sold to the Yangon Electricity Supply Board (YESB) and the Electricity Supply Enterprise (ESE) for distribution and onward sale to end-users (see figure 2). In addition to its role as single buyer, MEPE is also responsible for dispatch and for transmission along the grid.


MEPE, in its current guise, was established pursuant to the Myanmar State-Owned Economic Enterprises Law 1989. Its powers and authority, however, are not set out in that law and (unsurprisingly in a country still in the process of opening up) its corporate constitution is not publicly available. What appears clear is that MEPE is a separate legal entity to MOEP, which means that the obligations it assumes under its power purchase agreements are not binding on the Myanmar Government, and its financial standing is separate to that of the Myanmar Government. This has given rise to concerns about MEPE’s creditworthiness, particularly given that the subsidised tariffs for end-users are below the cost of supply, but it is believed that MEPE benefits from a degree of Myanmar Government funding and support – for the time being, at least.


Transmission And Distribution Infrastructure


The grid network in Myanmar comprises 66 kV lines, as well as high-voltage 132 kV and 230 kV overhead lines, and primarily covers the populous Irrawaddy delta area and the corridor linking the key cities of Yangon, Naypyidaw and Mandalay (see figure 3 for a simplified schematic of the grid). There are proposals to extend the grid by constructing a 500 kV line to link the north of the country (with its rich hydroelectric potential) to the demand centres in the south.


The distribution network comprises low-voltage 33 kV, 11 kV and 0.4 kV lines, operated by YESB in the Yangon region and by ESE in the remainder of the country.


As previously noted, electrification rates in Myanmar are low: the geographical extent of the transmission and distribution systems is limited, and there is a particular need for rural electrification (whether on- or off-grid). What is more, transmission and distribution losses are high, so improving system reliability and efficiency is vital.

 

Legislative Framework


The key sector laws in Myanmar are the Electricity Act 1948, the Electricity Law 1984 and the Electricity Rules 1985. These are dated, and acknowledged to be inadequate for a sector in need of investment, modernisation and expansion. The current legislative framework was never intended to create a regulatory regime for independent power projects, so MOEP has been working with the Asian Development Bank to develop a new electricity law better suited to the country’s current needs. At the same time, the National Energy Management Committee is understood to be working with the relevant ministries to prepare a new legislative framework for the entire energy sector. Drafts of the new electricity law have been circulated and, based on an unofficial English translation that we have seen, the new law is likely to provide for (among other things):

 

  • the establishment of an Electricity Regulatory Commission to oversee the sector;
  • a licensing regime for participation in electricity sector activities; and
  • the promulgation of industry norms and specifications.


Until the law is finalised and passed, however, there is little that can be said for certain about the new structure of the electricity supply industry. Although it has been hotly anticipated for some time now, we understand that the new law had still not been passed at the time this article went to press.


Myanmar IPPs


For all the flaws of the current legal framework, there has been some legislative progress: a new foreign investment law was enacted in 2012, and investment regulations promulgated under it the following year (more details on the foreign investment regulations can be found in our Myanmar briefing of April 20131). Also, despite the absence of any specific basis for public-private partnerships and independent power projects (IPPs), a number of IPPs have been implemented.


The IPP process, however, lacks transparency and structure: at the present time, power projects tend to be initiated by way of a submission of proposals to MOEP, instead of through a formal MOEP-led bid process. An open tender was announced late last year in relation to an IPP at Shwe Taung, but it remains to be seen if this marks a systematic change in MOEP’s approach to IPP procurement. In the meantime, many key project details are left to bilateral negotiations between MOEP and project sponsors, as no model form power purchase agreement has been developed or adopted. For those familiar with Myanmar’s upstream oil and gas sector, where exploration acreage is awarded in organised bid rounds based on model production sharing contracts, the contrast is stark.

 

That said, as a matter of practice, there are two main steps in the IPP process for a gas-fired plant:


(i) a preliminary phase, during which a relatively short, non-binding memorandum of understanding is entered into for the conduct by the project sponsors of a feasibility study, and environmental and social impact assessments in relation to the proposed power project; and


(ii) a project development phase, marked by the award of:

 

  • a binding memorandum of agreement (MOA) with the Department of Electric Power; and
  • a binding power purchase agreement (PPA) with MEPE;
  • following successful completion of the feasibility study and the environmental and social impact assessments. (There are, however, no published criteria or guidelines for the award of an MOA or a PPA.)


IPP Project Documents


The MOA and PPA together form the contractual basis for the construction and operation of the power project. Typically, the MOA provides a framework for the implementation of the project (documenting key principles such as the concession rights granted, the specifications of the plant, the tariff, site and land lease issues, and tax concessions), while the PPA addresses the construction schedule for the plant, the sale and purchase of power generated, technical matters (such as plant dispatch and metering), payments and liabilities. A separate land lease agreement (LLA) will also be entered into in relation to the site of the power plant. In practice, the focus of the parties will shift from the MOA to the PPA and LLA once these have been signed.


It will also be important for foreign sponsors to obtain a permit from the Myanmar Investment Commission (b) in relation to their investment in Myanmar, and a permit to trade from the Directorate of Investment and Companies Administration (DICA). (See figure 4 for a diagrammatic overview of the project structure.)

 

Gas Supply Issues


Feedstock gas for gas-fired IPPs has typically been provided by MEPE, sometimes at no cost to the IPP. This structure is similar to a tolling arrangement, placing fuel supply risk primarily with the Myanmar Government. In return, the Government often takes a proportion of power generated as “free power” and/or a proportion of project equity as a “free share”. Gas consumption in excess of specified thresholds, however, may be charged to the IPP by way of a pass-through of the cost to MEPE of such additional gas.


While Myanmar has considerable gas reserves, these are only gradually being developed. With a significant proportion of current domestic gas production having been committed to China and Thailand, the availability of feedstock gas for gas-fired IPPs could be limited – at least until new gas fields are brought onstream.


Coal is a viable alternative fuel for thermal plants (Myanmar has major coal deposits) and, as previously noted, the country is also rich in hydroelectric potential.


Tariffs And Payments


As noted above, end-user tariffs in Myanmar are heavily subsidised. The Myanmar Government took a bold step in raising rates earlier this year – an unpopular move that had sparked protests previously – but the revised tariffs are still not cost-reflective. In the absence of market-driven tariff pricing, sponsors considering IPP projects in Myanmar will to look to continuing Government support for MEPE as part of their analysis of project economics.


PPAs we have seen have included hard currency “guaranteed payments” to the IPP. These “guaranteed payments”, which are akin to a take-or-pay commitment, help to provide a stable revenue stream to the project, while provision for them to be made in hard currency (typically in US dollars, despite end-user tariffs being set in kyat) helps to mitigate currency risks.


PPA Protections


In addition to the protections afforded to foreign investors under the foreign investment law, the PPAs we have seen have also offered contractual safeguards such as:


(i) change in law protections, which provide for payments under the PPA to be adjusted to take account of material increases in project capex or opex, or material decreases in project revenues; and


(ii) compensation on termination, if MEPE elects to purchase the power plant on termination of the PPA.


There are, however, limitations to the comfort these give: there is no indication, for example, as to how payments will be adjusted in the event of an adverse change in law, or how the plant is to be valued for the purposes of any sale and transfer to MEPE, and the contractual compensation on termination regime does not apply if MEPE chooses not to purchase the plant. The application of these provisions also remains untested under Myanmar law – but their inclusion in PPAs is nevertheless helpful.


Financing


It is early days for project financing in Myanmar. Long-term economic sanctions have only recently been eased, so the capacity of the domestic banking and financial services sector is underdeveloped and limited. Much of the funding available for projects in Myanmar at the present time is in the form of export credit and development finance. While commercial banks in the region and beyond are interested in lending to projects in Myanmar, conventional project financing is realistically some way off. This is in part due to a host of legal uncertainties around the structure and regulation of the electricity sector, as we have seen, but also in relation to the taking of enforceable security under Myanmar law and the robustness of legal rights and remedies in general.


For those with an appetite for risk, however, the Myanmar electricity sector is a potential bright spot: will the next one to arrive please turn up the lights!

 

(Click to enlarge)
 

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End Notes:

 

1 Myanmar: Regulations implementing the Foreign Investment Law shed further light on rules for foreign investment, Ashurst, April 2013.

 

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For further information, please contact:

 

John McClenahan, Partner, Ashurst
john.mcclenahan@ashurst.com


Shan Koh, Ashurst
shan.koh@ashurst.com

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