Malaysian IPPs may lose out in liberalised retail electricity market, says expert

If a wholesale electricity market is introduced it would force existing IPPs, alongside new players having to outdo each other to sell their electricity output


MALAYSIAN independent power producers’ (IPPs) earnings will come under pressure if the retail electricity market is liberalised as higher competition is expected to force rates to come down.

An industry analyst said the dismal projection would be applicable if a wholesale electricity market was introduced, which would force existing IPPs alongside new players having to outdo each other to sell their electricity output.

It would certainly differ from the current arrangement that allow producers to sell their generation capacity at a fixed price to a single buyer, namely national utility company Tenaga Nasional Bhd (TNB), which in turn would retail electricity to consumers, the analyst added.

“IPPs enter into power purchase agreements at a fixed rate with TNB which provides visible and stable income and recurring earnings for these producers.

“Opening up the wholesale market will bring in more competition as newer players are allowed into the market. This will push tariffs down as producers need to be cost competitive to sell their electricity,” one source told The Malaysian Reserve.

While the new arrangement could benefit consumers, a wholesale market would potentially translate into lower earnings and returns for Malaysian IPPs, the source added. Local media outlet Malaysiakini reported earlier this month that the government is studying a proposal to liberalise the country’s electricity retail industry.

The report stated that the government is mulling over whether to allow new energy suppliers to come into the domestic market, quoting a parliamentary written reply by the Energy, Science, Technology, Environment and Climate Change Ministry dated July 3 this year.

If Malaysia were to liberalise its retail electricity market, it is expected to emulate Japan and Singapore where a wholesale market was first introduced to ensure an efficient and cost competitive market.

Japan opened up its eight trillion yen-valued retail power market in 2016 and since saw top electric companies — namely Tokyo Electric Power Co Holdings Inc, Kansai Electric Power Co Inc and Chubu Electric Power Co Inc — reporting declining sales and dwindling market shares.

Meanwhile, Singapore fully launched its Open Electricity Market in November last year.

Singaporeans can now choose to buy electricity from state-owned electricity distributor, Singapore Power, at a regulated tariff or buy from the wholesale electricity market.

On the local front, the consensus among analysts is that TNB will not be materially impacted by a liberalised retail market as their exposure is minimal.

Hong Leong Investment Bank Bhd research analyst Daniel Wong said the liberalisation of the power retail market does not pose material earnings risks to TNB.

“The allowable return for the segment under the second Regulatory Period is RM18.8 million to RM22.6 million per annum, translating into an equity return of RM12.6 million to RM15.2 million per annum for 2018 to 2020,” he wrote in a report last Friday.

“(This is) only 0.2% of TNB’s annual earnings of RM5.6 billion to RM5.8 billion.”

Since losing RM3.07 billion in market capitalisation when the news of the proposed retail liberalisation first broke, TNB’s share has recovered approximately RM455.2 million in value to close at RM13.68 last Friday.

YTL Power International Bhd and Malakoff Corp Bhd are among the listed IPPs in Malaysia which stand to be negatively impacted by the wholesale electricity market if it were to materialise.

Both companies made headlines last week for different reasons.

YTL Power’s 60%-owned unit, YTL Communications Sdn Bhd, recently saw its 1Bestari Net contract to provide Internet connectivity to 10,000 schools terminated by the government.

In a statement, the company said it waited for a tender to be called out for the project only for the contract to be awarded to Telekom Malaysia Bhd, Celcom Axiata Bhd and Maxis Bhd.

Wong said impairments are possible following the termination, while YTL Communications is already a lossmaking company.

“We do not anticipate any satisfactory outcome from the tussle. We believe there is possibility of impairments and higher losses in its 2020 financial year due to the loss of the contract,” he said in the report.

Meanwhile, Malakoff bid US$70 million (RM287.7 million) — to acquire Khazanah Nasional Bhd’s investment vehicle Desaru Investments (Cayman Isl) Ltd, to effectively raise it stakes in Shuaibah Water & Electricity Co Ltd and Shuaibah Expansion Project Co Ltd.

Both companies are the main water suppliers for the Makkah Province in Saudi Arabia and provide 13% of the country’s power and water capacity.

If the acquisition is completed, Malakoff’s total effective generation capacity for power and water will increase to 6,708MW and 544,375 cu m per day respectively against its existing capacity of 6,600MW and 420,925 cu m per day.

YTL Power, meanwhile, operates two gas-fired combined cycle power plants in Paka, Terengganu, and Pasir Gudang, Johor, with a combined 1,212MW generation capacity.