It was reported in the press that the government has approved a 10- year masterplan to reform the domestic power industry, MESI 2.0. Although there is still lack of details, the Energy, Technology, Science, Climate Change and Environment Minister Yeo Bee Yin did reveal some insights during a briefing. Changes will be implemented gradually, but ultimately the key objective is to lower overall tariffs for end users, in our view. Reiterate Neutral.

End of the Power Purchase Agreement (PPA) Regime

There will be drastic changes to the PPA for new power plants, as the government intends to shorten the tenure of a PPA from the typical 21- years previously. The new PPAs will also no longer be entitled to lock-up guaranteed electricity payments, as moving forward, IPPs are able to procure their own fuel source, and the single buyer would then in theory procure electricity from the cheapest generator. Although the move would likely lower the guaranteed return of the new PPAs, it would help to promote competition and efficiency among generators. We view the decision to move to a hybrid model as positive, as the government still controls/restricts the overall availability of capacity, limiting the risk of an overcapacity. Current PPAs will be allowed to be completed based on their existing terms.

Some Changes to Tenaga’s Role

The changes to Tenaga (TNB MK) under MESI 2.0 did not came as a surprise to use, as TNB has shared some of these changes when they announced their reorganisation plan. We are delighted that the government agrees that the transmission and distribution (should remain) as a natural monopoly (not introducing new players), and as such believe that bulk of Tenaga’s profits will remain intact, as it is likely to be regulated under the current Incentive Based Regulation (IBR). Although the government is breaking up TNB’s monopoly role as the main retailer and fuel purchaser, the drop in its profit is likely to be marginal, at least for the mid-term.

Pushing for More Renewable Energy (RE) in the System

To further incentivise the demand for renewable energy, the government will create a framework for third-party access (TPA), to allow RE plants to sell their power directly to end users, by-passing the single buyer (TNB). We believe that this could help to lower the tariffs for domestic users, despite the increased contribution from RE, as those who prefer RE can negotiate directly without burdening the system, given that RE tends to be more expensive than conventional generated power. Under the current single buyer system, all users contribute to the fund to procure RE based on overall usage. RE plants under LSS1 and LSS2 can start selling directly as early as 1Q2020, for a combined of 100MW.

Introducing Competition But Not Destroying It

We believe that the objective of MESI 2.0 is to lower tariffs by introducing some competition and risk, rather than create disruption to the current system. Certainly some of the changes are likely to lower TNB’s profitability albeit marginally (3-5%), but the overall structure of TNB remains intact. The decision to introduce a hybrid model instead of a fully liberalised wholesale market model has likely eased concern about future overcapacity. As such, we are keeping our Neutral call for the sector unchanged.

Source: Affin Hwang Research - 18 Sept 2019