07-05-2013, 10:39 AM
The Tuas situation raises the question: are clever deals overshadowing clever technology? Hyflux has not invented some totally new method of desalination for Tuas II, but the “first-year water price” it has published – US$0.35/m3 – might make some onlookers think that it had. In fact, I would be surprised if the US$0.35/m3 covered even the energy costs of the plant.
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Christopher Gasson takes his hat off to Hyflux’s Olivia Lum for her Tuas II bid.
Singapore - based Hyflux has pulled off something of a coup by securing preferred bidder status in the race to build the Tuas II desalination plant. Although the proposed “first-year water price” of US$0.35/m3 is absolute nonsense, even Hyflux’s competitors such as IDE of Israel must acknowledge that CEO Olivia Lum has put together a proposal of true genius.
The situation was as follows. The Singapore Public Utilities Board invited bids to build and finance a 318,500m3/d desalination plant. This on its own would not be a major problem for Hyflux; the company knows about desalination. But there was a catch: the request for proposals specified that there would be no passthrough on the power. Instead, if one bidder could obtain electricity at a lower price than the others, it would have an advantage. This specification seemed to put local power station owners Keppel and Sembcorp in a better position to win the project than Hyflux, which does not have any power interests.
But Hyflux was not going to take this lying down. The company looked at the price of buying electricity from the grid, and looked at the price Keppel and Sembcorp are paid for supplying electricity to the grid, and decided it could do better. Just as IDE decided to build a captive power station for the Ashkelon desalination plant in Israel in order to keep the power costs down, so Hyf lux decided that building its own power station would also be the best way of holding the power costs down at Tuas II. But whereas IDE ordered an 81MW plant to supply the 330,000m3/d Ashkelon desalter, Hyf lux went one step further. It is proposing a 411MW power plant for Tuas II. This would imply that it is intending to sell a whole lot of electricity back to the grid.
Credit Suisse analysts reckon that in order for the numbers to add up, around 50% of the project’s revenues will have to come from electricity sales. What makes it particularly delicious is that the expected level of utilisation of the plant is quite low – in assessing the bids, PUB assigned a 70% weighting to the water price if the plant was being utilised at only 10% of capacity. At this utilisation level, there would be a whole lot of redundant power to sell on to the grid at a profit. These power sales profits could then be used to cross-subsidise the water price, enabling Hyflux to deliver a knockout low bid.
Keppel and Sembcorp are probably wondering what hit them. Not only did they lose a bid that they were probably expecting to win, but they have also found themselves with a new competitor in the power market. It is the price of complacency.
In my view, this deal shows that Hyflux can be at least as creative as ACWA Power of Saudi Arabia when it comes to innovation at every level to deliver the lowest water price. Indeed, we may soon see the two companies competing directly: Hyflux intends to enter the independent water and power plant market globally.
The Tuas situation raises the question: are clever deals overshadowing clever technology? Hyflux has not invented some totally new method of desalination for Tuas II, but the “first-year water price” it has published – US$0.35/m3 – might make some onlookers think that it had. In fact, I would be surprised if the US$0.35/m3 covered even the energy costs of the plant. Both the company and PUB concede that the figure was not the price on which the bid was determined. We don’t know the levelised water price of the plant, which is the more usual benchmark for the cost of water from a privately financed desal plant. It is likely to be at least US$1.00/m3, given the low level of expected utilisation. What we do know is that Hyf lux came up with the best deal for PUB, and clever deals are often more important in this business than clever desal.
Is that a bad thing? In my view, you can’t have one without the other. It is because clever deal-makers like Olivia Lum and Mohammed Abunayyan (of ACWA Power) continually find new ways of keeping the cost of everything else down, that advances in technology actually show up on the bottom line.
********
Christopher Gasson takes his hat off to Hyflux’s Olivia Lum for her Tuas II bid.
Singapore - based Hyflux has pulled off something of a coup by securing preferred bidder status in the race to build the Tuas II desalination plant. Although the proposed “first-year water price” of US$0.35/m3 is absolute nonsense, even Hyflux’s competitors such as IDE of Israel must acknowledge that CEO Olivia Lum has put together a proposal of true genius.
The situation was as follows. The Singapore Public Utilities Board invited bids to build and finance a 318,500m3/d desalination plant. This on its own would not be a major problem for Hyflux; the company knows about desalination. But there was a catch: the request for proposals specified that there would be no passthrough on the power. Instead, if one bidder could obtain electricity at a lower price than the others, it would have an advantage. This specification seemed to put local power station owners Keppel and Sembcorp in a better position to win the project than Hyflux, which does not have any power interests.
But Hyflux was not going to take this lying down. The company looked at the price of buying electricity from the grid, and looked at the price Keppel and Sembcorp are paid for supplying electricity to the grid, and decided it could do better. Just as IDE decided to build a captive power station for the Ashkelon desalination plant in Israel in order to keep the power costs down, so Hyf lux decided that building its own power station would also be the best way of holding the power costs down at Tuas II. But whereas IDE ordered an 81MW plant to supply the 330,000m3/d Ashkelon desalter, Hyf lux went one step further. It is proposing a 411MW power plant for Tuas II. This would imply that it is intending to sell a whole lot of electricity back to the grid.
Credit Suisse analysts reckon that in order for the numbers to add up, around 50% of the project’s revenues will have to come from electricity sales. What makes it particularly delicious is that the expected level of utilisation of the plant is quite low – in assessing the bids, PUB assigned a 70% weighting to the water price if the plant was being utilised at only 10% of capacity. At this utilisation level, there would be a whole lot of redundant power to sell on to the grid at a profit. These power sales profits could then be used to cross-subsidise the water price, enabling Hyflux to deliver a knockout low bid.
Keppel and Sembcorp are probably wondering what hit them. Not only did they lose a bid that they were probably expecting to win, but they have also found themselves with a new competitor in the power market. It is the price of complacency.
In my view, this deal shows that Hyflux can be at least as creative as ACWA Power of Saudi Arabia when it comes to innovation at every level to deliver the lowest water price. Indeed, we may soon see the two companies competing directly: Hyflux intends to enter the independent water and power plant market globally.
The Tuas situation raises the question: are clever deals overshadowing clever technology? Hyflux has not invented some totally new method of desalination for Tuas II, but the “first-year water price” it has published – US$0.35/m3 – might make some onlookers think that it had. In fact, I would be surprised if the US$0.35/m3 covered even the energy costs of the plant. Both the company and PUB concede that the figure was not the price on which the bid was determined. We don’t know the levelised water price of the plant, which is the more usual benchmark for the cost of water from a privately financed desal plant. It is likely to be at least US$1.00/m3, given the low level of expected utilisation. What we do know is that Hyf lux came up with the best deal for PUB, and clever deals are often more important in this business than clever desal.
Is that a bad thing? In my view, you can’t have one without the other. It is because clever deal-makers like Olivia Lum and Mohammed Abunayyan (of ACWA Power) continually find new ways of keeping the cost of everything else down, that advances in technology actually show up on the bottom line.