Tenaga Nasional (TNB) announced that the Government of Malaysia has approved and decided via a letter from Suruhanjaya Tenaga (ST) to implement the Regulatory Period 3 (RP3) under the Incentive Base Regulation framework (IBR) for the period of February 2022 to December 2024. The decision was a surprise as ST has just decided to extend Regulatory Period 2 (RP2) for the second time with all parameters of IBR unchanged effective Jan 1, 2022 until "further notice" just few weeks ago. To recap, RP2 which expired in 2020, had been already extended for one year until end-2021 and was supposed to be replaced by RP3 by end-2021. That said, some of the RP3 parameters are still not disclosed yet by ST. For now, we understand that the government is keeping the current base electricity tariff for all electricity users in Peninsular Malaysia throughout the RP3 but with an electricity tariff surcharge of 3.7 sen per kilowatt hour (kWh) for non-domestic users. Details are still lacking for now especially on the rate of return of its regulated asset base (RAB) and capital expenditures (capex) during the period. All told, we maintain our Outperform call on TNB for now pending more details, with DCF-derived TP of RM12.42 unchanged.

• RP3 which is approved for the period from Feb 1, 2022 to Dec 31, 2024 is a mechanism that decides the rate of return of TNB's capex and is considered an important element in the Group's earnings, setting the rate of return of its RAB. In the RP2 (2018-2020), the electricity tariff of 39.45 sen/kWh reflects a WACC of 7.3%, as well as a benchmark coal price of USD75 per tonne, a benchmark gas price of RM27.20 per mmbtu and an allowed capex of RM18.8bn. TNB requested for a RM25.1bn capex allowance in RP2, but was only allowed RM18.8bn. For RP3, we understand that it is proposing a capex allocation of RM24bn for its regulated assets for the three-year period. The details for the RP3 parameters will be disclosed by ST. While RAB is likely to increase, the positive will be negated by the WACC being further lowered from 7.3% under RP2.

• Imbalance Cost Pass-Through (ICPT) is a mechanism which imposes tariff surcharges mainly due to increase in fuel costs. From July to December 2021, the additional amount was RM1.67bn as coal prices touched USD200 (RM838) per tonne in the period. The sharp rise in coal prices in the market resulted in power generation costs rising by 45%, and caused a big impact on electricity tariff in the Peninsula as coal makes up 59% of power generation fuel source. As the average base electricity tariff remains at 39.45 sen per kWh under RP3, the government has allocated RM715m from the Kumpulan Wang Industry Electric (KWIE) fund for the ICPT.

Source: PublicInvest Research - 31 Jan 2022