• The Edge Financial Daily (TEFD) published a scoop on the highly-anticipated MESI 2.0, providing an overview of the potential reform for the Electricity Supply Industry.

• The proposed changes is sweeping, especially for the Generation and Retail segments, with the sole aim of achieving better efficiency which is expected to translate to even lower tariffs for end users.

• We have a mixed view on the proposed changes; we note several changes that would adversely affect incumbents but also see new potential revenue streams that could be capitalised on.

• We believe the biggest risk to the plan is participation from the IPPs as higher risks would be incurred under the new structure which could either threaten supply security and/or result in higher capacity payments.

• The proposed reforms are extensive and could be drawn out due to pushbacks from incumbents. As such, status quo could be protracted. Stay Overweight.

MESI 2.0: Ambitious revamp plan

The Edge Financial Daily was given a brief by MESTECC on the Cabinet-approved 10- year masterplan that would underline changes to the industry. Findings from the MESI 2.0 would be shared in more detail by the Energy Commission (EC) by end 2019. The proposed changes is extensive and affects the entire Electricity Supply Industry with the biggest disruption taking place at the Generation and Retail segments.

Highlights on key changes

o Generation level. PPA awards would be put on hold until reserve margin eases to 25% (expected in 2025). IPPs may procure fuel on its own. Hybrid PPAs to be introduced sans fuel payment and carries shorter tenures, creating capacity and energy markets (ie. NEDA+). Capacity auction could start at end 2023 (soonest).

o T&D level. Introduction of Third-Party Access (TPA) where the T&D operator (ie. Tenaga) would receive network charges.

o Retail level. Billing transparency to be improved in RP3 (1Q21), detailing rates charged at different times of the day. Ahead of full TPA rollout, a pilot program starting from 1Q20 for RE Generators to sell to end-users (capped at 100MW). TPA would also pave the way for IPPs to enter the retail market (ie. Gentailers).

Our thoughts: mixed for now pending more details

We are mixed on the proposed changes partly due to limited details shared. The introduction of TPA and NEDA+ provides a lifeline to existing IPPs especially those with expired PPAs while ensuring T&D returns. However, more details are needed on the hybrid PPAs. At this juncture, we see that it could be a deterrent to IPPs unless the shorter tenure translates to higher capacity payments or a minimum offtake is agreed upfront at a stipulated tariff. However, this goes against the despatch order which prioritises plants that generates at lowest cost.

Stay OVERWEIGHT; reforms are likely limited if not protracted

We retain Overweight on the sector as we believe some of the proposed changes are likely to be drawn out owing to pushbacks from incumbents. This might see status quo being protracted longer than anticipated as with prior reforms.

Source: BIMB Securities Research - 17 Sept 2019