Key take aways of CEPSI 2018 (Conference of the Electric Power Supply Industry) are: 1) adapting RE generation and power storage; 2) decentralizing grid system to address the new “prosumer” in the market; 3) shifting towards electrification and electric vehicles; 4) transforming into digitalization, data and automation to improve reliability, efficiency and lower cost structure; and 5) interconnectivity to provide for customer experience. Malaysia power generation (TNB & IPPs) needs to diversify into RE while power transmission (TNB) needs to invest into future grid requirement, work together with telcos (achieves synergies and lower cost) and monetize new value-add services to consumer. We maintain Overweight on Power sector with BUY on TNB (RM17.50) and YTLP (RM1.45).

Improving energy intensity. As global economy (GDP) grows, the demand for energy will continue to grow. However, there is a trend of decoupling GDP growth rate vs. energy growth rate due to improving energy intensity (increase in efficiency in both energy production and consumption per unit of GDP). The key aspects of future energy trends are:

1) Renewable energy & storage. Governments around the world are shifting their energy policy towards renewable energy (RE) while more and more producers and consumers are adapting to being RE friendly. The shortcoming of RE (due to intermittence and downtime) can be addressed with Battery Storage development. The exponential costs reduction for both RE and Storage over the years (Figure #1) has made the technologies become economical viable nowadays. Going forward, the costs are expected to reduce further and would be replacing conventional fossil fuel energy to meet future energy demand growth.

2) Prosumer & grid decentralization. As RE cost become more feasible, consumers have become producers of electricity (“Prosumer”) for their own consumption and exporting (for income) into the grid. With the many prosumers, future grid system development will become decentralized (vs. the existing hub and spoke grid system concentrating at major power plants), in which, grid will be 2-way flows enabled at each connecting point and allow for more interconnection. Grid operator of the future will have to address the power quality and reliability of the grid system (continuous monitoring at every point), which may strand the grid assets (higher costs).

3) Electrification & electric vehicle. Electrification promotes higher energy efficiency and environmental friendliness. Governments are implementing policies to shift from burning fossil fuels (e.g. coal and oil) to electrification for heating and transportation purposes (development of electric vehicle), in addressing carbon emission and global climate change. Several leading countries (Figure #3) have announced the banning of gasoline/diesel-powered vehicles sales in the near future. Future electric vehicles are envisioned to have the ability of autonomous; inter-connectivity; personalised workspace/entertainment experience; as well as charging/discharging electricity (for energy trading purpose).

4) Digitalization, big data & automation. Digitalization is the way forward in order to integrate the whole eco-system of power generation, energy storage, system grid and end users. Various data will be collected at every point at any time and being monitored, processed and analysed in order to ensure system reliability and stability. Artificial Intelligent (AI) and robotic technology will be put in place to protect the system and allow for autonomous flow and process, which in turn improve system efficiency and lower operational costs.

5) IoT & securities. Internet of Things (IoT) is imminent as all devices, equipment, vehicles, home appliances and other physical items are being integrated into the system and enabled to connect, collect and exchange data with each other (Figure #4). IoT will improve operation management and decision making process, while allow for better consumer experience. With all these interconnectivity, cyber security has also become of great concern and risk, in which utility players need to invest heavily.

Reshape business model. The major implication to the power industry (especially TNB) is to re-shape their existing business model as the conventional business model is being disrupted (diminishing revenue, obsolete business model and increasing costs). They need to establish new revenue streams in providing new innovative value-add services to their consumers (or potential customers), by leveraging to the key aspects – RE, decentralization, digitalization, big data, electric vehicle and etc.

Redefine workforce. The changing business model will involve workforce transformation with more high skilled staff, including digital talent and new pool of talent for new revenue stream. At the same time, workforce in the industry is also expected to reduce significantly by up to 55% due to business model restructuring and technology embracement.

Working together with telco. Future grid technology requires data service providers (i.e. telcos) for data connection, collection and exchange; allowing efficient and timely process/analysis and decision making. Furthermore, telcos and power companies share similar cost structure, where there can be strong synergies and collaborations. Huawei estimated that telcos can help power cos in >50% of non-terminal costs (Figure #6) and power cos can help telcos in 59% of total costs (Figure #7).

Implications towards Malaysia Power Sector. Power generation (TNB and IPPs) will have to diversify into RE generation. Power transmission and distribution (TNB) will have to invest heavily in building up the next future grid system and integrating with IoT for efficiency and provide for customer experience. Furthermore, TNB needs to relook into its business model and monetise new value-add services to customer. TNB may collaborate with telcos for new revenue stream and cost-savings initiatives.

Maintain OVERWEIGHT on the sector. We maintain overweight on the sector given the earnings and dividend sustainability of the companies under our coverage. We have BUY recommendation for TENAGA (BUY; TP: RM17.50) and YTLP (BUY; TP: RM1.45).

Source: Hong Leong Investment Bank Research - 4 Oct 2018