Higher Base Tariff From July 2025

Based on a latest announcement by Tenaga Nasional Berhad (TENAGA), base tariff will be increased to 45.62sen/kwh under Regulatory Period 4 (RP4), effective July 2025. Base tariffs are temporarily maintained at the previous 39.95sen/kwh for the 1HCY25 period and the differential will be funded via the Electricity Industry Fund (KWIE). The new base tariff will come in conjunction with the introduction of a new tariff schedule to be implemented from 1st July 2025 onwards and reflects a 14.2% increase against the previous base tariff.

Key Parameters Looking Favourable

TENAGA also shared some details on selective RP4 parameters:

(1) Total allowed capex for RP4 was increased to RM42.82bn consisting of RM26.55bn base capex and RM16.27bn contingency capex. The higher capex is to prepare the electricity network to facilitate the energy transition.

(2) The regulatory rate of return was maintained at 7.3% as per RP3.

(3) RP4 entails allowed opex of RM20.78bn, an increase of +16% against RP3

(4) Generation cost remains the largest component of the electricity tariff with gas and coal remaining the primary fuel sources for generation.

A Step-up in Capex for RP4

On the RP4 allowed capex, we gather that RP4’s base tariff is based on the base allowable capex of RM26.55bn (or an average capex of RM8.85bn per annum). Still, the base capex alone already reflects a +29% increase against RP3 allowable capex of RM20.55bn (average RM6.85bn per annum), which will contribute to accelerating TENAGA’s regulated asset base growth. Not much clarity has been shared on the nature and conditionality of the RM16.27bn contingency capex at this juncture. However, should it be spent in RP4 eventually, the total allowed capex could rise to RM42.82bn (average RM14.27bn per annum) representing a +108% increase compared to RP3, which could be an additional catalyst further out. It would also closely reflect TENAGA’s earlier broad indication of a doubling in capex to RM90bn for the period 2025-2030 (an average RM15bn per annum) compared to the RM45bn spent in the 2018-2024 period.

Possibly a Mix of Fuel Price and Demand Growth Increase Factored in

TENAGA’s announcement fell short of outlining fuel price assumptions, generation mix and demand growth assumptions, which are part of the key variables in forming TENAGA’s allowable revenue and the 14.2% increase in RP4 base tariff. The announcement also fell short of outlining the tariff breakdown between transmission and distribution (which is based on a revenue-cap mechanism) and retail revenue (which is a price-cap and exposed to demand upside or downside). On first thoughts, we reckon there could have been a mix of increases in coal price assumption and demand growth – the former, given that market coal prices have remained above the previous RP3 projected coal price of USD79/MT. About the latter, we believe RP4 demand growth could have outlined a more aggressive growth rate compared to RP3’s +1.7% per annum, which is more reflective of latest electricity demand growth trend.

Shortlisted for Largest LSS5 Package

Separately, TENAGA has been shortlisted to develop a 500MWac large scale solar (LSS) project at Kuala Muda, Kedah, under LSS5. We reckon this is under Package 3 of LSS5, which entails a total auction of 1000MWac, the largest allowable bid of 500MWac per bidder and a minimum 51% domestic shareholding requirement. We expect the project to come online within 2026- 27, in line with COD deadline set by the Energy Commission. The latest LSS5 project is expected to add to the pipeline of RE projects that TENAGA is developing, including the 2500MWac hybrid hydro-floating solar and 100MWac x 5 centralised solar park projects which are part of the National Energy Transition Roadmap’s flagship catalyst project. On preliminary estimates, the 500MWac LSS5 project could contribute circa 7-8sen/share value accretion upon completion, based on mid-single digit PIRR and 80:20 debt:equity.

Impact

We conservatively leave our projections unchanged for now pending further granularity of RP4 parameters. The base RP4 allowable capex is close to our current assumptions, but inclusion of the contingency capex, depending on nature and conditionality, could spell further upside to earnings.

Valuation

We are broadly positive on the outcome of RP4 based on the initial details shared by TENAGA given the step-up in RP4 allowable capex coupled with a sustained allowable rate of return, which underpins TENAGA’s regulated earnings growth. Re-affirm Buy on TENAGA at unchanged DCF-derived TP of RM17.30 (WACC: 7%, TG: 2%). The latest development underscores our thesis of TENAGA being one of the key beneficiaries of the energy transition from a step-up in grid capex given its monopoly of the domestic power grid infrastructure. In addition, we believe Genco is well positioned to benefit from data centre-driven demand growth. At just 6.0x FY25F EV/EBITDA, TENAGA is currently trading at a discount to historical mean of 7.2x. Key risk to our call is unfavourable changes to the policy and regulatory framework.

Source: TA Research - 27 Dec 2024