Powering up the grid. National Energy Transition Roadmap (NETR) requires the transmission grid to support its six long-term aspirations by 2030 through: i) 5GW transmission connected solar, ii) 8GW distribution connected solar, iii) 2.4GW storage, iv) 3GW data centres, v) 250k electric vehicle, and vi) energy efficiency saving. The peninsular grid also plays a vital role as part of the ASEAN power grid initiative by integrating regional power resources and enhancing cross-border renewable energy (RE) trade. Thus, upgrading the transmission grid network is crucial to ensure the resilience and flexibility of the grid system. On this note, Tenaga Nasional Bhd (TNB) estimates upgrading the grid as part of energy transition initiatives’ capital expenditure (capex) requires RM36bn over 6 years on top of RM54bn of investment allocation for non-energy transition.

Surging power demand. Over the last 3 years, electricity demand has grown by 3.0% CAGR, back to above pre-pandemic levels in 2019 mainly driven by commercial users at +6.3% CAGR, offsetting contraction from industrial users (- 0.3%). In 1QFY24, commercial users continuously led the growth by +11.2% YoY, which we believe is due to the demand from data centres. In March 2024, 2 data centres (~535MW) were completed under the Green Lane Pathway initiative. Current energy loads for the projects are about 115MW and expected to increase gradually as more tenants sign up for the data centres. This trend is expected to continue with 9 projects worth 700MW energy demand expected to be completed in 2024. It is also noteworthy that new peak demand was just recorded at 20,045MW on 29th May 2024, shortly after recording its previous peak of 20,028 on 29th April 2024.

RP4 tariff set to be equitable. Throughout the Regulated Period 3 (RP3) 2022- 2024, we estimate that electricity demand will grow by 5.1% CAGR, way above 1.2% CAGR set by the regulator for forecasted base sales. Due to the mismatch, TNB has “returned” about RM1.5bn to the government, owing to the Regulated Business Entities (RBE) under-revenue cap mechanism. We believe RP4 will commence with a step-up in forecast base sales to equalise the current demand. The regulator may also apply a higher growth rate throughout RP4 as the demand outlook remains robust due to the influx of the data centre investments in the Peninsular. This measure would provide sufficient funding to upgrade the transmission network to meet the demand aligned with NETR and ASEAN power grid aspirations.

Third party access (TPA) to stimulate investments and grid utilisation. The government is set to implement the long-waited liberalization of TPA in September 2024. TPA will allow independent power producers (IPP) to sell electricity directly to customers via the transmission line, bypassing the current Single Buyer regime. This will enable power producers, especially in the RE segment to seek higher returns, setting its own tariff directly with customers. In this case, solar players will have its own flexibility to seek its customers and increase its own generation capacity without waiting for new tenders or programs from the government such as Large Scale Solar (LSS) and Corporate Green Power Purchase (CGGP), Net Energy Metering (NEM). Meanwhile, the expected increase in grid utilisation would require higher regulated capex, thus TPA implementation would stipulate a justifiable wheeling charge for grid operators to maintain its resiliency.

Maintain NEUTRAL. RP4 and TPA are the policies that will be monitored closely by industry players in 2H2024. RP4 holds the key for TNB’s regulated entities to have sustainable tariff for capex investments in the next 3 years, which will boost orderbooks across the infrastructure supply chain, such as electric cable suppliers (Southern Cables), cabling contractors (MN Holdings, UUE Holdings, Jati Tinggi) and substation contractors.

In addition, TPA will be new catalyst for solar players to grow further beyond rooftop installations on a larger scale to support the green energy demand domestically. This will be complemented by the establishment of the Energy Exchange Malaysia (Enegem) for cross-border electricity sales as the pilot auction of 100MW to Singapore is on-going until next year.

Within our coverage, our earnings estimate on TNB possesses upside risk upon the implementation of RP4 and TPA. In our view, RP4’s new tariff and forecast base sale would be more reflective and equitable with current demand, generating sustainable cashflow to support higher regulated capex.

Meanwhile local IPP players like TNB GenCo, Malakoff and Cypark would be able to further increase its RE capacity, riding on TPA without waiting for new LSS bidding cycles or for another CGPP alongside with Enegem framework for export electricity to Singapore.

Mega First has a unique proposition given its main earnings contributor, Don Sahong Hydropower has commenced trial run for its 5th turbine. More favourable power purchase agreement would be finalised soon to include the new contribution from the increasing capacity.

Source: PublicInvest Research - 26 Jun 2024