The utilities sector is set to experience robust growth a year after the launch of the National Energy Transition Roadmap (NETR), with strong future prospects. The analysts highlight Tenaga Nasional (TNB), YTL Power, and Samaiden Group as top picks. This positive outlook is driven by a range of factors, including the burgeoning number of data centre (DC) developments, ongoing power grid upgrades, and the significant role of independent power producers (IPPs). Additionally, the expansion of domestic renewable energy (RE) capacity is expected to enhance contractors' job flow.
Analysts remain optimistic about the sector's trajectory, with an OVERWEIGHT rating reaffirmed. The recent advancements following the NETR's introduction, such as the Corporate Renewable Energy Supply Scheme (CRESS) and the establishment of Energy Exchange Malaysia (ENEGEM), are crucial. These developments are set to push third-party access (TPA) mechanisms and facilitate energy exports, particularly to Singapore. Moreover, the continued rollout of solar power programmes and feasibility studies on alternative energy sources like biomass, ammonia, and hydrogen underscore the sector's growth potential.
West Malaysia's electricity consumption is forecasted to surpass the 10-year average growth of 2.4% over the next decade, primarily due to the expansion of data centres. The energy consumption of DCs alone is expected to grow at a compound annual growth rate (CAGR) of 1.6-2.6% from 2023 to 2035, provided that 3-5GW of DCs are fully operational by 2035. In response to this strong demand, the Government has set a reserve margin of 28-36% for 2024-2030. To support this growth, short-term power purchase agreement (PPA) bids are in progress, with the potential for extensions for gas-fired plants. Experienced IPPs, such as TNB and Malakoff Corp, are well-positioned to benefit from additional gas capacity expansions.
The upcoming Regulatory Period (RP) 4, expected by the end of the year, may bring changes to tariffs to accommodate new initiatives such as energy exports and TPA mechanism wheeling charges. The house anticipates a 25-40% increase in average regulated capital expenditure (capex) compared to RP2 levels, reaching RM8.6-9.6 billion annually. This adjustment is expected to reflect an annual demand growth of 3-4% and maintain a weighted average cost of capital (WACC) of 7.3%. The sensitivity analysis suggests that regulatory net returns could rise by 1.34% for every RM1 billion increase in average capex annually.
The solar power sector continues to show momentum, supported by favourable government policies and decreasing panel prices. The rapid progress in large-scale solar (LSS) projects and the upcoming Corporate Green Power Programme (CGPP) EPCC awards indicate significant potential for growth. With the shortlisting of bidders for LSS 5 and the rollout of CRESS and ENEGEM, solar EPCC players are expected to see sustained earnings growth.