Energy and Power Supply Papua New Guinea 1

PNG Power Limited PNG Power Ltd  is a State owned Corporation with the Government’s ownership interest held by the Independent Public Business Corporation.  is a vertically integrated utility – generation, transmission, distribution and retail;  has major transmission and distribution networks in Port Moresby, Ramu Valley and Gazelle Peninsula (Rabaul) that are supplied by major hydro power plants;  also supplies electricity to 16 regional centres predominantly by diesel powered thermal generation (over 170 generating units).  PPL currently supplies around 100,000 customers with 1080 GWH of electricity from 390 MW of nameplate generation capacity. 2 History and Ownership PNG Power was created in July 2002 when the electricity assets, liabilities and undertakings of the Government owned statutory corporation Elcom (formerly the Electricity Commission of PNG) were transferred to PNG Power Limited. At the same time, the assets, liabilities and water use permits of the Sirinumu Dam and Yonki Dam were transferred to PNG Dams Limited. Both PNG Power Limited and PNG Dams Limited are:  companies incorporated under the Companies Act  100% owned by the General Business Trust of which the Independent Public Business Corporation (IPBC) is the trustee.

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4 PPL has successfully established a K476m debt facility with a syndicate of local financial institutions and over the past 5 years invested K692m in infrastructure refurbishments, expansions and extensions. Financial and Infrastructure Investment Milestones

Under the existing Regulatory Contract with the ICCC, increases in fuel costs (about 40% of the operating costs in 2012) are not passed through to tariffs until the following year after a recalculation in December – effectively up to a 15 month lag. PPL was required to manage any cost increase throughout the year making it very difficult to operate the business and to make long term maintenance and infrastructure investment commitments with such a large swing in earnings associated with volatile world oil prices. In 2011/12 the Regulatory Contract was reviewed. PPL sought to change the methodology used to pass on costs through fuel cost changes to mitigate this risk. This review approved and effected in 1 st January 2013 enabling PPL to review tariffs every quarter 5 Volatile World Oil Prices lead to “Rollercoaster” Financial Returns

PNG Power’s operation is subject to a range of legislation including:  Electricity Industry Act 2002 – this covers licensing of electricity undertakings, licensing of contractors and electricians, safety and technical requirements;  Independent Consumer and Competition Commission Act – this covers price and service regulation, competition and fair trade practices;  Companies Act – for corporate governance and statutory requirements;  Income Tax Act – covering taxation matters; and  Independent Public Business Corporation Act – sets out reporting and other requirements and the basis for appointment of Directors. PPL holds four licences under the Electricity Industry Act 2002 for the generation, transmission, distribution and retailing of electricity. The key terms of the licences are:  access to transmission and distribution networks must be granted to third parties on non discriminatory terms – a third party access code is in currently in development by the ICCC through a World Bank funded project  PNG Power has an exclusivity to sell electricity within 10 km in any of the 35 designated service areas to premises where the demand is less than 10 MW. Projects for supply outside of the 10km boundary and/or to customers larger to 10MW can be developed by any interested party. 6 Industry Governance

The Electricity Industry Policy of Papua New Guinea The Government of Papua New Guinea (GoPNG) has adopted an Electricity Industry Policy (EIP) that encourages competition and private sector investment in power generation. The means of achieving this in an efficient and cost effective manner is to develop generation projects through a competitive procurement process in accordance with international best practise procedures. The procurement process will be based on transparent rules designed to maximise fairness and competition and on standard model documents that minimise transaction and development costs. Overall, the goal is to encourage investors to accept reasonable risks that they are well able to manage in terms of efficient financing, construction and operation of power plants that maximise generation availability and flexibility. In accordance with the EIP, PNG Power Ltd has initiated three procurement processes for Independent Power Producers (IPPs) for Port Moresby, Lae and Kavieng. 7

Key challenges and opportunities Challenges Replace/refurbish aging assets base, meet demand growth and improve supply reliability without excessive impact on the price of electricity. –ADB is funding PPL with US$150 million for small hydro schemes in diesel based supply centers as well as US$80 million for upgrades to generation, transmission and distribution in Port Moresby. –JICA is providing US$70 million of low cost funding for refurbishment and strengthening of the Ramu transmission system. Support private investments in generation through transparent and fair processes. Maintain a stable and supportive policy environment. –Appropriate implementation of the EIP –Generation development policies, e.g. geo-thermal policy, grid code, third party access code, etc. Support mineral projects with access to cost-effective power supply solutions. 8

Key challenges and opportunities Opportunities Privatize and incentivise the generation space through competitive bidding processes for Independent Power Producers. Fund and construct (PPL and/or private investors) major power plants (hydro, geo-thermal, gas) on the back of mineral projects. Potential flow on effects (e.g. surplus power) to existing customers in PPL’s grid. Example projects: –Yanderra mine – 100MW –Wafi Golpu – 200MW Leverage domestic gas supply to provide affordable power to businesses and the people of Papua New Guinea. –Gas in Port Moresby could more than halve the current fuel bill of K120 million –Gas in Ramu system could meet major mining loads as well as offer cost effective incremental supply to load growths 9

Total 403,943.0 IPP 42,112 Total PPL 361,831.0 Total Available 224,377 56% PPL Hydro 169,096 42% PPL Thermal 192,735 48% IPP 42,112 10% Last 5-years Capex budget K110-K200m 60% internal and 40% external

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