The vision for reforming Papua New Guinea’s power sector is becoming clearer, with power auctions likely to play a major role in driving down electricity prices and helping the country meet its future electricity needs.

Niupower’s power station in Port Moresby. Credit: Niupower

During a recent Business Advantage PNG online briefing, the Managing Director of state-owned utility PNG Power Ltd (PPL), Flagon Bekker, spoke of the importance of private power producers to the country’s electrification goals.

‘Independent power producers (IPPs) are fundamental to our strategy going forward. We don’t see IPPs are competitors at all, we see them as the future by which we can accelerate growth. If we’re to meet our electrification targets, we need all hands on deck.’

Already, PNG Power has power purchase agreements with a number of IPPs, including Korea’s Posco International, Niupower (a joint venture of Kumul Petroleum and Oil Search Ltd) and PNG Forest Products.

It clearly needs to sign more such deals if PNG is to meet its stated goal of providing 70 per cent of the nation with access to power by 2030.

Too many hats

PNG Power’s Flagon Bekker.

One constraint, as Becker sees it, is that PNG Power has a several roles – it is both a generator of its own power and a purchaser of power from others. It also has a regulatory role in the energy sector.

‘For us to release the power of private sector, we need to get out of the way as a regulator,’ says Bekker.

This means handing back some of its roles to a new National Energy Authority (NEA). The NEA, established under the National Energy Authority Act 2021 and Electricity Industry (Amendment) Bill 2021, which were passed by Parliament in April) and the Independent Consumer and Competition Commission.

‘As soon as they’re up to scratch, we’d like to hand those responsibilities back,’ says Bekker.

While it waits for these institutions to be ready, Bekker says PNG Power is creating a subsidiary which will hold all current and future power purchase agreements (PPAs) with IPPs as well as ‘ring-fencing’ its national systems operations team – the team that physically runs PNG’s power grids.

‘The PPAs, combined with a national systems operator, are perfectly positioned to be handed over to the NEA,’ says Bekker, who thinks the process could take between 18 months and two years.

Power auctions

Ultimately, the motivation for the reform is to bring down electricity prices in PNG, which Bekker acknowledges are some of the highest in the world.

‘The reform element that is critical is that we need to make new investments in megawatts – we need to make that process competitive,‘ says Bekker. This means holding auctions for future PPAs, which should be ‘run by the regulator, not PNG Power.’

Between one and three auctions, fronted by the ICCC, are planned for this year. Under these auctions, IPPs will be asked to supply competitive bids to supply power to meet identified needs across PNG’s power network.

‘If you make the private sector compete, over time you will drive down your production costs,’ says Bekker, who argues power auctions are now the international norm.

As part of the process, Becker had flagged a review of existing PPAs, to see if prices can come down.

Nervous

IP3’s David Burbidge

While this sounds like good news for PNG’s electricity users, the reform process is making PNG’s existing IPPs nervous. It is not cheap to finance and build power plants in PNG, and the costs have to recouped over many years.

‘The intention of the utility to renegotiate the price defined in a contract is problematic for IPPs; it will also have sector wide ramifications,’ David Burbidge, Chair of IP3, the peak body for PNG’s IPPs, warned back in April.

‘Setting the precedent that PPL can reopen PPAs at any time to renegotiate prices will be devastating for the power generation industry in PNG.’

Far from making power cheaper, Burbidge suggests renovating existing contracts ‘will increase the cost of any financing and the future cost of power from IPPs, as it creates an environment of major contractual uncertainty and major sovereign risk in terms of all contracts with State Owned Enterprises in PNG.’

As with most reforms, a bedding-down process appears likely. If reforms can be handled correctly, however, there could be tantalising benefits both for PNG’s electricity consumers and IPPs themselves, as the country’s national grid expands.