Dependence on client risks
Major and important clients of the Company and its subsidiaries in government sector include the electricity-related agencies such as the Provincial Electricity Authority, the Metropolitan Electricity Authority and the Electricity Generating Authority of Thailand in terms of business to distribute high pressure electrical equipment and business to procure and construct the power plant and transmission line.
- Business to distribute high pressure electrical equipment
The revenue from sales to these customers is based on the government’s budget for the development of production capacity and supply. If there is a change of the cabinet that results in alteration of electricity investment policy or any delay in approval of procurement for various projects, the Company’s revenue in relation to these clients may be affected. Moreover, procurement processes of the government agencies are carried out mostly by competitive bids that sometimes involve many bidders. If the Company does not win the bids, it will lose revenue from these clients.
So it can be said that the risks arising from the change of investment policy in the government power sector is quite low. As for the bids for government projects, they tend to be carried out separately according to product groups. The Company’s products are not only of great variety, but also accredited by ISO 9001 quality standards. Many of them are registered with the Ministry of Industry as well as guaranteed by the tests of independent institutes, both domestically and internationally. Some of its products are certified by the Office of Industrial Standards (TIS) as well. The Company is therefore at an advantage when competing in bids for supply of products to the government agencies and state enterprises, which generally promote and encourage the procurement of products accredited and certified by the Ministry of Industry. For this reason, the chance of the Company to be selected in a project bid of any type is quite high as well.
- Business to procure and construct the power plant and transmission line
Investment in electricity capacity development and supply is regarded as investment in basic public infrastructure that grows continually in the past few years and continually in the next 3 years. Due to the unbalance of electricity production and usage in each region of a country: in south the electricity production as a contract at 3,059 MW and demand of electricity usage at 2,467 MW. In case that any large power plant in south stop working only 1 station in peak time; China Power Plant, that has a capacity at 710 MW will reduce electricity production to 2,349 MW (3,059 - 710) which will cause an insufficient electricity. Also, a promotion of coal power plant production in south to be a reserve capacity is not obviousness yet. Thus, a policy of reserve capacity transfer through transmission system or distribution system from other regions is still necessary for south area. Although, an obviously construction plan of transmission line in other regions and has started to open an auction already in the past year. Also, there have more budgets in the auction of transmission line in this year and next year as well. In this slow down economic condition that has not yet recovered from World economic condition, might result in a necessary of capacity reservation and rapidity in expand a large high voltage transmission line type 230 - 500 Kv. In terms of the Company’s station and transmission line construction, it is considered as a risk to rely on a government customer; in case that, the projects are not completed by the due date of the plan.
In 2017, the company sold products to approximately PEA offices in different areas for the value of 304.19 million baht or equal to 6.38% of the company’s sale income and private sector for the value of 930.13 million baht or equal to 19.51% according to consolidated financial statements.
Major customers of the company are regular customers who have maintained contact and business with the company for a long time and have a good relationship. Maintaining good standards of goods and services quality for over 30 years, the company is confident that it will continue to gain trust of customers. However, the company has a policy to reduce risk of dependence on any particular customer in each market, by constantly seeking new customers in order to expand customer base and to create more business opportunities and development of new products such as development of energy-saving LED light bulbs for distribution to the government sector and private sector, the LED lamps classified under the consumer products with a high market value. The lighting products are available in all buildings. Also, it is a product that has been promoted by the government for purchasing to replace instead of the traditional lamp that uses more electricity or power.
Risk of exchange rate fluctuation
As the nature of business of the group involves export and import from foreign countries, including invest in renewable energy in foreign countries. The Group might be affected by the fluctuation of exchange rates. It might have gains or losses on exchange rates. In order to reduce a fluctuation effect, the Company has the proceeding as follow:
- Make a balance between revenue and expense or debt which is a foreign currency to be natural hedge.
- Manage foreign currency deposit.
- Do the forward currency trading contract.
- Use financial derivatives in order to have a right to trade foreign currency with an appropriate exchange rate.
In addition, the company has implemented the exchange rate policy to serve as a guideline for foreign exchange management of the Group to be effective and perform in the same direction.
Possible risks to the power generation and supply business
The ability to generate electricity of a solar power plant depends on two main parts, i.e. the quality of the solar panels and the amount of losses incurred in the electricity generation system. To prevent such risks, the Group uses solar panels from the top well-known companies which is regarded as one of the best manufacturers of quality solar panels recognized around the world.
Present, the Company has successfully realized its potential and proficiency in solar farm construction, developed the engineering team and subcontractors, as well as meticulously selected key equipment related to solar farm construction from manufacturers who have delivery capability, proper after-sale services and warranty. As a result, the Company can reduce risks from dependence on large contractors in power plant construction, thus being a big step forward in the greater enhancement of managerial competitiveness, cost controlling and efficiency of power plant construction.
After the completion of solar farms, the Company’s joint venture partners and other operators have placed trust in the Company with the signing of operation and maintenance agreements for power plants amount 172.78 MW and making commercial sales. This enables the Company to comprehensively control and monitor the capacity of power supply and efficiency of solar farm operations, thereby mitigating risks from guarantee of minimum supply quantity of each project.
For wind power plant, the Company has chosen high potential technology from the top wellknown and experienced companies. Moreover, the Company has recorded wind speed in continuous space for 4 years; in order to consider a possibility of electricity production from wind power before investing.
For biomass power plant, the Company is in between development and promotion of energy crops plant from agricultural sector with the experienced adviser, in order to have fuel for continuously producing electricity and controlling cost. Also, in order to reduce a competition to fight over fuel with other traders.Risk of power supply
The Group has signed a power purchase agreement with PEA for distribution of power at the amount specified in each contract. The contract is a Non-Firm type for reasons that in the generation of solar-base power, the amount of power generated each time cannot be specifically controlled. There are two groups of contracts: Adder and Feed-in-Tariff. According to the adder agreement, the PEA will purchase all electricity produced by quantities specified for each project. The contract is five years from the date of signing the contract and automatically continues for a period of five years. The PEA does not have the right to terminate the agreement. For FiT agreement, the contract term is 25 years at fixed price throughout the contract period. In case of the company comply with the conditions stated in the contract, It is considered that the company has no risk from the inability to generate and supply electrical power. In addition of being a partner with government department, the company will certainly receive a quite high payment.
For wind power plant, the risk in power generation is similar to solar power plant which is a Non-Firm type because of an unstable wind speed which caused by season factor. However, as the average of wind rate from each projects that the Company has installed wind measurement towers for 4 years. The result is that the areas are perfect for commercial power plant construction with the party, Provincial Electricity Authority and Electricity Generating Authority which have a high stability. It is considered that there has no risk from power generation.
For biomass power plant, the duration of the contract is around 20 - 25 years and a Non-Firm type which has no penalty in case that unable to generate power. Also, with a Feed-in-Tariff purchase form (FiT) that has a stable purchase price throughout the life of the project which can plan a properly management. Moreover, a buyer is still Provincial Electricity Authority, so there has no risk from power generation as well.
Risks of economic and political factors
After the government of General Prayut Chan-o-cha started the administration in the year 2014, it can be seen that Thailand’s overall economic situation was improved with high confidence from both domestic and international investors. The government has set various policies in stimulating the economy as the report of Office of the National Economic and Social Development Board (NESDB) indicated that the economy in the year 2016 expanded at 3.3 percent when compared to 2.8 percent in the year 2015. Both government and private sectors’ investment projects indicated favorable adjustment in the second and third quarter of 2016 while the expectation of Thailand’s economy in the year 2017 shall be expanded to 3.9 percent or increased to 0.5 percent which comes from continuously upward trend of government expense, especially the investment project of transportation infrastructure by rail, road and water. It is expected to start the project in 2017; such as, double track railway project, passenger ships between east to west and urban trains. Moreover, the Company has a major customer, State enterprise that has a lot of budget support. Including, the equipment that the Company produce and distribute will be relevant to government infrastructure investment projects. Therefore, our business is likely to grow as a result of the increased public investment. In addition, the economic outlook for the year 2018, farm income will improve in line with global market commodity prices. This will be a boost to a consumption of private sector recovery. In addition, the economic partner countries are likely to have a better expansion. Also, the Thai baht trend is likely to weaken continuously which expected to affect the volume of export orders. Meanwhile, service exports are expected to continue to expand as foreign tourist arrivals expand on the domestic stability. It is expected that in 2018 the baht will depreciate to 34 baht per US dollar. The appreciation of the baht will be a good advantage to the company in terms of importing goods from abroad and affecting by the power plant projects in abroad. However, other currency In Asia is likely to appreciate as well as Thai baht. Therefore, the appreciation of Thai baht has not impact on the company’s projects.
Moreover, energy policy is one of the significant policies in which the government is concerned about as the Energy Policy and Planning Office has passed the resolution in the Thailand Power Development Plan for the year 2015 - 2036 (PDP2015) in focusing the stability of power distribution by spreading fuel in energy generation, reducing natural gas dependability, adding the proportion of energy generation from clean coal technology, increasing foreign power supply, adding the proportion of energy generation from renewable energy, developing transmission and distribution system in order to support the development of renewable energy, joining in ASEAN Economic Community (AEC), arranging Energy Efficiency Development Plan (EEDP) and Alternative Energy Development Plan (AEDP) to be in the same timeframe with the PDP2015. In the future, these plans shall greatly support the Company’s business
On February 17, 2017, the National Energy Policy Council (NEPC), chaired by General Prayut Chan-o-cha, Prime Minister, approved the purchase of electricity from renewable energy in the form of feed-in tariff ( FiT) for Small Power Producer (SPP Hybrid Firm) (10-50 MW) and Very Small Power Producer (VSPP Semi-Firm) (less than 10 MW).
Small Power Plant Hybrid Firm
With the target of purchasing 568 MW of electricity, it can use more than one type of fuel, unallocated and energy storage system (ESS), only Firm and EGA type contract. Power generation 100% during Peak and not over 65% during Off-peak which may be lower than 65%. This is in line with EGAT’s stipulation, without using fossil fuels for power generation, except for the start-up phase. With the same electricity meter and installed Unit Monitoring (UMM), with appropriate penalty if the electricity can’t be delivered under the contract, including having a fuel supply plan and a plan to develop new fuels more in common areas, such as energy crops, etc. Scheduled Commercial Operation Date (SCOD) will be happen by 2020. The purchase of electricity is in form of Competitive Bidding by using FiT rate for competing with all fuel types. The project that will supply power in 2560 has the purchase rate at 3.66 baht per unit.
Very Small Power Plant Semi-Firm
The purchase of electricity from Very Small Power Producer Semi-Firm will be used only for new power plants, biomass, biogas (waste water/ waste) and biogas (energy crops) that can use energy storage system and must be a 6 months Firm type contract. (Power generation 100% during Peak and not over 65% during Off-peak which may be lower than 65%. This is in line with EGAT’s stipulation). The month is expected to be used up to 4 months (March - June) and for the remaining 6 months it will be a Non-Firm contract by prohibiting use of fossil fuels to generate electricity, except for the start-up phase. Also, must have a fuel supply plan and a plan to develop new fuels more in common areas, such as energy crops, etc. Scheduled Commercial Operation Date (SCOD) will be happen by 2019. The purchase of electricity is in form of Competitive Bidding by using FiT rate divided by all fuel types.
- Biomass fuels at a rate of 4.24 - 4.82 baht per installed capacity unit.
- Biogas fuels (Wastewater / waste) at the rate of 3.76 baht per installed capacity unit.
- Biogas (energy crops) at the rate of Baht 5.34 per installed capacity unit.
FiT Premium is available at 0.30 - 0.50 Baht per unit for the electricity sales in Firm type with duration not exceeding 6 months. For the projects in the three southern border provinces and 4 districts in Songkhla Province will get another 0.50 baht per unit for Fit Premium.
At first, with the electricity purchasing from the small power producer project (SPP Hybrid Firm) at 300 MW, and then open to purchase in the third quarter of 2018, the company expected to bid in the very small power producer project (VSPP Semi-Firm) at 269 MW. By assigning to the Energy Regulatory Commission and the Department of Alternative Energy Development and Efficiency to quantify the electricity purchased by region according to the potential of each area and propose to the Energy Policy Administration Committee to approve before the power purchase announcement as follow the next step.
The results of the meeting of the National Energy Policy Committee, which approved the promotion of renewable electricity generation in the FiT for SPP Hybrid Fifm and VSPP Semi-Firm, on February 17, 2017. Regarding as a policy from the public sector, there are significant changes to the Energy Industry. That must be prepared to accommodate the changes in the above-mentioned policies that, give rise to the following factors:
- Development readiness to enter the full biomass and biological plant business.
- Availability of sufficient raw material for electricity of the generation.
- Prepare to plan and develop energy crops as the key raw materials for biomass and biogas plants.
- Availability of preparation of co-operation areas with semester and communities surrounding the power plant area to ensure the availability and benefit of all parties.
- Availability of personnel preparation and specialists in biomass and biogas plants.
- Preparedness and Participation in Bidding to Acquire of the PPA in Competitive Bidding type.
- The availability of space for construction of the power plants and the construction for the commercial distribution of electricity (SCOD) as scheduled. In this case of the power purchase agreement.
- Availability of funding sources for the project in particular, project loans to supporting construction and capital for renewable energy management.
- Availability of risk management in biomass and biogas power plant management. To be support of electricity generation, it’s possible to distribute electricity at 100%, capacity for some periods, such as Peak season, due to fines if not feasible.
- The readiness to manage the fluctuation of the price of raw materials, that is not stable according to the state Changing demand and supply each year.
All above is a main risk due to the economic and political factors that, led to the government’s policy setting in the purchase of electricity from renewable energy. This is a major risk in the affected business sector, affecting and influencing are the company’s strategy and policy. Next to the field of distribution and production of electrical equipment. The construction of power plants, transmission lines and power stations. Electricity production and distribution including the maintenance of power plants. Which needs to be adjusted, according to government’s policies and measures of the Energy Regulatory Commission.
Risks of investing in solar power plant in Japan.
In case of the development of renewable energy projects submission and the project fails to proceed. Japanese Government has been changing policy to ensure that the company able to distribute the electricity and specify the future policy.
In order to decrease the risk, the Company has consulted the expert lawyer to implement the policy amendment. Refer that, the company proceeding the project management risks are monitored closely by the developer and the project developer is followed up in detail to ensure that the project is successful.Risk from natural disasters
Due to, Japan is located on the boundary of the Ring of Fire, it causes frequent natural disasters such as earthquakes. An earthquake in the sea can also cause a tsunami. And there are also seasonal typhoons that, make it necessary for Japan to manage the potential impact of these natural disasters.
The Company manages the risk of natural disasters by do the insurances. The value of insurance, the company referring to a study conducted by Kyoritsu Insurance Brokers of Japan Co., LTD, a specialist in insurance to ensure that coverage is reasonable with the damage that happen.The risk of project delay
The launch of the solar power project depends on many factors, such as the implementation of the relevant license, power plant construction, sources of funds and all related contracts that concern with the standards of funding. In case of the project couldn’t be carried out, this will affect the delays in the commercial operation. The investors need more investment from the expected funding.
Risk management for construction projects, the company has closely monitored the construction progress. By receiving a weekly reports from the contractor and arrange the construction site meetings to consider the realities of the project, as well as receiving feedback from the contractor every month. Therefore, the company is able to realize the problem and plan to resolve it from the initial stage.
For the project under development, the company has been monitoring the progress of the project development periodically. The contractor will consult with the bank as a source of funds to ensure that the company receives a loan from the bank.
In order to manage the risk and motivate the project developer to achieve their target, the company has signed to provide support until the electricity distribution. The profit of the developer of the power plant project will be based on the success of the project. The developers will overview the development of the project in four areas:
- To provide expertise of the solar power plants contractor, evaluate and considerate to meet the company goals.
- To recruit the expertise of Japanese staff to control and maintenance of the power plant electricity distribution completely.
- To manage the project of power plant construction and to be completed in accordance with the deadline and in accordance with the target period for commercial distribution.
- To manage and control the operating costs in line with the investment budget and completed within the specified time frame.
Therefore, the company has been monitored the progress of risk management and reviewed by the project developer the meet the project complement.Risk from Uncertain Power of Electricity Produced
The company has divided the risk into 2 types:
- The risk of less than expected solar intensity
Due to solar power plants use the solar energy as a main factor in generating of electricity. The lower the intensity of light affect to the lower the amount of electricity produced. The project has lower revenue from electricity sales estimated.
In order to reduce this risk, the Company hired a technical advisor to calculate the average light intensity and bring the estimated and comparable values based on information from industry experts to reduce the risk.
- Risks due to cell deterioration
The cell panels are the primary device for converting solar energy into electricity. By degraded cell panels, it provides the ability to convert sunlight into a drop of electricity. Even in the same light intensity. The power plant has decreased. That will result in revenue from sales and distribution of electricity.
In order to reduce this risk, the company has contracted with the contractor is responsible for maintaining the guaranteed value for the project at the initial stage. As the company can obtain the standard results throughout the program when deteriorated panels are detected.
Due to the construction of solar power plants, that requires expertise in technology. Experience in construction ability to supply materials and operational personnel all processes need to be coordinated, so the company hires a complete contractor to effectively control the work. And the contractors have the flexibility to accomplish their goals.
However, hiring a complete contractor risks of the project. If the contractor is unable to proceed. So, the company manages the risk from selecting a contractor that will be the company that, has been accepted by the bank in Japan. The one of the conditions is that the company has experience in construction for a long time. The Company has also entered into a contract with the Company. An indemnity can be claimed for damages covered by the terms of claim compensation in accordance with industry standards.Risk of Limited Power Purchase (Curtailment)
The limiting purchase of electricity, the company electricity sales can be reduced in volume, resulting in revenue from the sale of electricity. The policy on limiting the amount of electricity purchased in Japan can be categorized into 3 main policies, namely limiting the amount of electricity purchased in unlimited quantities. Limiting the purchase of electricity at 360 hours per year. And limiting the amount of electricity purchased at 30 days per year.
Due to the company that is not possible to predict the time. It will be limited to the purchase of power from an unlimited on the supply system. The company manages the risk by investing in projects that limit the amount of electricity purchased at 360 hours per year or 30 days per year only. To the company is possible to estimate the revenue from the distribution of electricity correctly.Risk from fluctuation of exchange rate
Investing Consideration in a solar power plant project in Japan, for the Company is a fixedrate of power purchase agreement. The Company considers that, the recognition of income in the Yen currency and the re-payment of a loan from a project loan in the same currency. It is considered as a protection of foreign exchange risk at 85% of project investment from using the same currency. The risk for investments in shareholders’ equity at the rate of 15% will be the conversion of the financial statements from Yen to Baht, which will affect to the accounting records only. But without any effect on operating profit or loss in anyway.
Risk Risk Factors for Solar Power Plant Investment in Malaysia
The launch of solar power projects process in Malaysia has similar development processes with Japan, which requires a process of license permission, power plant construction, sources of funds and all related contracts that meet the standards of funding. However, power purchase agreements with Malaysia government will have shortened duration of commercial electricity distribution (SCOD) from Japan and strict regulation, In the case of the electricity couldn’t be delivered on time, there will be a risk of termination from power purchase agreement.
For risk management, the company is closely monitoring the progress of construction and arranges the construction updates meeting every month.
In order to manage the risk, the company has signed to provide support until the process of electricity distribution. The profit of the developer of the power plant project will be based on the success of the project. The developers will overview the development of the project in four areas:
- To provide expertise of the solar power plants contractor, evaluate and considerate to meet the company goals.
- To recruit the expertise of Malaysian staff to control and maintenance of the power plant electricity distribution completely.
- To manage the project of power plant construction and to be completed in accordance with the deadline and in accordance with the target period for commercial distribution.
- To manage and control the operating costs in line with he investment budget and completed within the specified time frame.
Therefore, the company has been monitored the progress of risk management and reviewed by the project developer the meet the project complement.Risk of lightning
Malaysia has a record of frequent lightning in their country. This may affect the power system which is the risk of natural disasters that couldn’t be controlled.
The company has been researched all the factors that could have affected the lightning, hiring the expertise to design a lightning protection system, including other protective equipment. To prevent lightning that will impact on the project.
In addition, the company manages the risk from natural disasters by covering all risk, which covers the damage from lightning as well as reasonable coverage with the the potential damage.Risk from fluctuation of exchange rate
Investing Consideration in a solar power plant project in Malaysia, for the Company is a fixed-rate of power purchase agreement. The Company considers that, the recognition of income in the Yen currency and the re-payment of a loan from a project loan in the same currency. It is considered as a protection of foreign exchange risk at 85% of project investment from using the same currency. The risk for investments in shareholders’ equity at the rate of 15% will be the conversion of the financial statements from Ringgit to Baht, which will affect to the accounting records only and without any effect on operating profit or loss.