• Still O/W; Top Picks: YTL Power, Samaiden. The potential announcement of third-party access (TPA) is a significant step in the power industry’s reform to a more liberal and competitive market. While near-term earnings should still be safeguarded by the Incentive-Based Regulation (IBR) framework and contracted power purchase agreements (PPAs), wheeling charges’ pricing determination is crucial to entice energy trading with new power suppliers.

• TPA. According to reports, Deputy Prime Minister Fadillah Yusof said independent energy producers will be allowed to start selling electricity directly to consumers from September. The Government is expected to implement the TPA in the electricity supply industry in September, and an announcement should be made in July. Other parties can supply energy to their own customers without going through or buying from Tenaga Nasional (TNB), but will need to rely on TNB’s transmission lines.

• IPPs: More competition. The TPA could benefit Malaysian consumers and the power industry as a whole, as it would lead to more competition in the power generation sector, and other players can establish their PPAs directly with end consumers. This may pressure existing independent power producers (IPPs) such as TNB and Malakoff to strive for higher generation efficiency and provide cleaner energy alternatives with more players entering the space. This is also an opportunity for existing IPPs to sell their power output to new clients upon the expiry of their PPAs. The TPA could also attract more players to become power producers (including green energy) as they could possibly set their pricing. Still, we think green energy trading under the TPA may not be implemented so soon, as the latest connection points and power system study can only be identified following the Large Scale Solar 5 (LSS5) award. We believe the single buyer role, at some point, will be carved out from TNB, but the impact is unclear as the single buyer role is currently part of the regulated business.

• Neutral impact on transmission and distribution (T&D) unit. While IPPs generate power, they will not necessarily build their own distribution networks – they are likely to rely on TNB's transmission lines to deliver electricity to consumers. We believe the TPA is not a threat, as TNB will still be the infrastructure owner and may have to incur capex to upgrade existing infrastructure. TNB would charge IPPs a fee for using its grid infrastructure. The impact to TNB’s T&D arm should also be neutral, assuming the utilisation of T&D assets will be compensated fairly with wheeling charges.

• Energy Commission will need to set clear procedures on fair competition, grid access, and consumer protection to ensure a smooth transition. Pricing of wheeling charges is crucial to entice end consumers to take up energy output from new suppliers. TNB’s earnings impact is unclear as Regulatory Period 4 may have to account for such changes. Risks: Lower-than-expected new RE capacity rollout, higher-than-expected operating costs.

Source: RHB Securities Research - 28 May 2024