• Singapore’s Energy Market Authority (EMA) plans to create an entity (Gasco) that will centrally procure and supply gas for the power sector.

• EMA believes that this would ensure sufficient and secure gas supply and offer a long-term solution to the recent spikes in Singapore’s electricity prices.

• We see limited near-term earnings impact to YTLP from this change, but longer-term margins could normalise from the current elevated levels.

Gas to be Centrally Procured for the Power Industry

• According to a media release by EMA on 23 Oct, Singapore’s Ministry of Trade and Industry (MTI) and EMA are looking to set up an entity (Gasco) that will centralise the procurement and supply of gas for the power sector. Gasco will aggregate gas demand from power generators (Gencos) and purchase the required volumes on their behalf. This compares to the current framework that allows Gencos to procure their gas volume requirements independently based on their own commercial terms.

• EMA intends to set up Gasco in 2024 and will consult the industry on the details of the centralised gas procurement framework in the coming months.

• Once implemented, this centralised procurement approach will apply to all future gas demand, including gas contract renewals. That said, Gencos will be allowed to continue with their existing gas supply contracts with their respective suppliers until they expire.

Rationale: To Improve Singapore’s Energy Security and Resilience

• EMA believes the existing gas procurement framework does not ensure sufficient gas supply for the power sector, as evidenced during the 2021/22 global energy crisis.

• The regulator highlighted key benefits of having a Gasco as the sole buyer of upstream gas for the power sector, including: 1) a better position to negotiate more favourable contracting terms and optimise supply needs; 2) greater economies of scale and ability to procure gas from diversified source countries to minimise concentration risks; and 3) ability to enter into longer-term gas contracts for more stable prices and supply.

Our Initial Take on the Announcement

• Similar to the temporary price cap (TPC) implemented in Jul 2023, this new framework looks set to further curb excessive volatility in Singapore’s electricity prices. It may also, in our view, create a more level playing field among the Gencos as it would effectively eliminate any gas price advantage. Profit margins would, thereby, need to be driven mainly by plant efficiencies.

• According to management, YTL Power International’s (YTLP) earliest gas contract expiry is end-2025, with some stretching to 2028/2029; as such, any effect from this new framework would only be felt from 2026F onwards, in our view. Overall, we do not expect any notable impact on YTLP’s near-term earnings, but longer-term margins could normalise from the elevated levels enjoyed in recent quarters. That said, our forecasts currently already assume some normalisation in FY24F/FY25F/FY26F by 6%/13%/14% and a further 25% over the longer term. We have an Add rating on YTLP with an SOPbased TP of RM2.40. Key downside risks: sharper-than-expected normalisation in electricity sales margins, and earnings drag from non-core operations. Re-rating catalysts: better-than-expected quarterly earnings, and new project announcements.

Source: CGS-CIMB Research - 24 Oct 2023