KUALA LUMPUR: Local power demand is expected to rebound with a 6.0 per cent growth in 2021 following an average gross domestic product (GDP) projection at 6.0 per cent next year, said Hong Leong Investment Bank Bhd (HLIB).
Its analyst Daniel Wong said the economy would likely witness gradual normalisation of economic activities with on-going vaccination programme this year with the power demand normalising back to around 2.0 per cent per annum in subsequent years
"We maintain neutral on the power sector, given the earnings and dividend sustainability of the sector in time of on-going market uncertainty," he said in a report today.
Wong said power demand in Peninsular Malaysia had dropped 6.2 per cent in the first nine months of 2020, affected by the Covid-19 pandemic which prompted the government to implement the Movement Control Order (MCO).
This mostly dragged the operations of industrial and commercial segments in the country.
"We believe 2020 year is an exceptional year (similar to 2009 global financial crisis) with a drop of 5.0 per cent," he said.
Wong said the government was committed to renewable energy (RE), targeting 20 per cent of the country's power capacity from RE by 2025. This would be mainly driven by solar power projects in coming years.
However, he said major independent power producer (IPP) players would be affected by the government's aspiration towards RE, as they faced lower capacity replacement (each large scale solar capacity is only up to 50MW) for their expiring power purchase agreements (PPAs) as well as increasing competition.
"During the previous round of LSS3 of 500MW tender, none of the major IPPs were successful in the tender."
He added that within the next eight years (until 2028), all listed power groups were expected to suffer from expiring PPAs with no meaningful replacement capacity.
"The least affected is Tenaga Nasional Bhd (TNB) (-487MW), followed by YTL Power International Bhd (-585MW) and worst hit is Malakoff Corp Bhd (-2,052MW).
"We do not expect the ongoing RE programmes to be large enough to offset the retiring capacity due to limitations in place by the Energy Commission (EC) and increasing entrance and competitors for the RE segment," he said.
On Malaysia Electricity Supply Industry 2.0 (MESI 2.0) liberalisation, he said there would be no more risk-free PPAs going forward.
This is because IPPs will not receive guaranteed capacity and energy payments, and instead are required to participate in capacity and energy auction market.
The initiative effectively increases earnings risks to power generators with uncertainty of fuel supply and sales of capacity/energy generation.
"Nevertheless, retired IPPs (YTL Power and Malakoff) may also participate in the auctioning mechanism to continue generating income."
He said another risk to large IPP players would be the emergence of the "Gentailer" segment, which may resell their excess power generation to the system.
Sustainable Energy Development Authority (SEDA) estimated that some 4.1 million buildings in Malaysia might still accommodate solar panels, and potentially generate a total of 37.4GW peak of electricity vs. our current peak demand of 19GW.
The EC has targeted 7,838MW of RE by 2025 with new requirement for 3,758MW, mainly driven by 2,172MW from solar.
"Large IPP players will be negatively affected by the government's aspiration towards RE, as they face risk of lower capacity replacement (each LSS capacity is only up to 50MW) for their expiring PPAs, while each player is only allowed for one LSS for every tender programme," he said.
He said the upcoming LSS4 of 1,000MW tender result was expected to be announced in the first quarter of 2021, with potential of 27 winners.
"However, the ownership/operation of RE is far less complicated and less capital intensive as compare to conventional coal/gas/hydro power plants, allowing increasingly new entrance and competition into the market. "
The government is expected to hold the first auction by end-2023 to complement the existing PPA structures (hybrid market) before full implementation in 2045, when the last batch of current PPA ends.
"Power generators will inherit the uncertainty of securing the supply and prices of fuel (i.e. coal, gas, etc.) and subsequently uncertainty in their ability to sell their capacity/energy generation and the selling prices under the auction mechanism," he added.