We recently had the opportunity to visit Tenaga Nasional’s (TENAGA) Chenderoh hydropower station. We walked away from the visit with more clarity on: (i) TENAGA’s hybrid hydro floating solar project, which is outlined as a flagship catalyst project under the National Energy Transition Roadmap (ii) TENAGA’s Sungai Perak Hydro Scheme Life Extension Program, which will prolong the life and earnings generation capability of the group’s hydro assets. Maintain Buy on TENAGA at unchanged DCF-based TP of RM17.30 (WACC: 7%, TG: 2%).

Background of Chenderoh Hydropower Plant

Located in Kuala Kangsar, Perak, the Chenderoh hydropower station is the oldest hydropower station in the country commissioned in 1930, originally supplying power for tin mining activities in Perak. It is one of a total seven hydropower stations that make up the Sungai Perak hydropower scheme with a capacity of 40MW consisting of 4 turbine units. Chenderoh makes up 3% of the entire Sungai Perak hydropower scheme capacity of 1249MW, which in turn, accounts for 49% of TENAGA’s total large hydropower capacity. The Sungai Perak scheme is designated as a direct hydro intertrip scheme, which essentially compensates any shortfall in output from the country’s main generation complex in Janamanjung.

TENAGA’s hydropower plants are managed by TNB Power Generation Sdn Bhd (Genco), which also manages TENAGA’s other domestic conventional generation portfolio. Total contracted capacity under Genco stands at 13.8GW currently, consisting of 4.4GW gas fired capacity, 6.8GW coal capacity and 2.5GW total hydro capacity (comprising the Sungai Perak, Kenyir and Cameron Highlands hydro schemes).

Part of the NETR flagship catalyst project

Chenderoh is designated as one of the hydropower dams to house TENAGA’s 2.5GW hybrid hydro floating solar (HHFS) project, which has been outlined as one of the National Energy Transition Roadmap’s (NETR) flagship catalyst project back in 2023. Phase 1 of the Chenderoh HHFS development entails a capacity of 30MW, which will be followed by a second phase involving another 40MW, targeted for completion by 2026. Chenderoh HHFS is developed concurrently with another 1340MW HHFS capacity mainly housed at the Kenyir hydropower dam in Terengganu which is targeted to reach commercial operation date (COD) in 2027. Another 540MW and 440MW capacity of the HHFS project are targeted for COD in 2029 and 2031 respectively, located at TENAGA’s Nenggiri and Temengor hydropower dams.

Chenderoh hybrid hydro floating solar

Chenderoh’s Phase 1 HHFS has completed pre-engineering, grid and power system studies and is currently in the process of tendering out engineering, procurement, construction & commissioning (EPCC) contracts. We gather that TENAGA is open to both local and foreign EPCC contractors albeit it aims to maximise local content in the project. We were guided that capex is expected to be around RM3.5mn/MWdc, which could see Chenderoh’s 30MWac Phase 1 HHFS requiring total estimated capex of circa RM158mn, while the larger Phase 2 Chenderoh HHFS may require another RM210mn capex. The floating solar system is expected to have a 20-25year life.

TENAGA has yet to finalise the route to market for its HHFS project but does not rule out the Corporate Renewable Energy Scheme (CRESS) as an option. While still too early to gauge, we note that large scale solar projects typically generate PIRR in the mid-to-high single digit range. The most recent LSS4 ground-mounted solar plants entailed mean tariffs of circa 20sen/kwh. Given higher cost for floating solar, we reckon tariffs for TENAGA’s HHFS could be at a premium at circa 25-30sen/kwh, on our estimates.

Complements hydro generation

Floating solar PV is essentially a solar based power production mounted on floaters and placed on the surface of water bodies. The system consists of main components such as solar modules, central inverters (either floating or shorebased), underwater cables, floaters as well anchoring and mooring systems. A key advantage of TENAGA’s HHFS scheme is it complements the existing hydropower production, taking over peak load functions and allowing freed up hydropower capacity to be deployed at night or during solar off-peak hours. This improves generation security and allows longer green energy production. In addition, a floating solar PV system offers higher solar panel efficiency (by 10- 15% given water cooling effect) and leverages on existing infrastructure available to TENAGA’s hydropower plants.

Sungai Perak Life Extension Program

The visit also highlighted TENAGA’s Hydro Life Extension Program (LEP). Six hydropower stations from the Sungai Perak hydro scheme (consisting of the Temengor, Bersia, Kenering, Chenderoh, Upper Piah and Lower Piah stations) are undergoing the LEP involving rehabilitation, modernisation and uprating of equipment which will extend the life of these stations by another 30-40 years. In addition, the LEP is expected to improve reliability and efficiency of existing plants with the latest technologies and best practices which can increase capacity by up to 10%. The program will also enhance integrity and safety of civil structures such as dams, spillways and intakes as well as associated structures to meet latest safety standards in terms of flood controls, seismic activity, dam monitoring and climate change.

PPAs for the stations involving a total 650.75MW capacity were extended for five years until 2027, after which they will enter into new 40year PPAs upon commercial operations. It is understood that the new tariffs for hydropower plants under the LEP will be higher, at a range of 45-71sen/kwh, which is almost double the old rates. This is partly due to a different PPA structure that will lean heavier towards energy payment (which is based on the amount of power  generated) rather than capacity payment (which is based on the plant’s availability regardless of generation) previously.

Undemanding valuations, still one of our top sector picks

The HHFS and LEP are long-term positives for TENAGA, underpinning the group’s RE expansion (current group RE capacity: 4.3GW) and extending returns from the group’s hydro assets. We keep our Buy call on TENAGA at unchanged DCF-based TP of RM17.30 (WACC: 7%, TG: 2%). We believe TENAGA is well positioned to benefit from a step-up in grid capex to accommodate the energy transition while Genco is positioned to benefit from data centre-driven demand growth. Key potential re-rating catalysts are the upcoming RP4 decision and new generation capacity additions. At 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 - 12 Nov 2024