IPPs get short end of the stick from new govt plan, says HLIB

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KUALA LUMPUR (Jan 14): While growing power demand is expected in Malaysia, the government's aspiration of more renewable energy (RE) is neutral to transmission and distribution players but negative to independent power producers (IPPs), which will have the short end of the stick, said an analyst.

In a note this morning, Hong Leong Investment Bank research analyst Daniel Wong said with the government targeting 20% of the country's power generation from RE (inclusive also of large scale hydropower generation) by 2025, more solar power projects are expected in the coming years partially to replace outgoing power plants and to fulfil the growing power demand.

As such, large IPPs face potentially lower capacity replacement for their expiring power purchase agreements (PPAs).

"The government has recently announced the award of 550 megaWatt (mW) LSS (Large Scale Solar) for Peninsular and Sabah (part of its existing target 2,200 mW LSS for 2017-2020 for Peninsular and Sabah) and Net Energy Metering (for private solar photovolatic projects), while Tenaga Nasional Bhd (TNB) also initiated SARE (Supply Agreement for RE) for solar energy products.

"[However,] large IPP players would be negatively affected as they face the risk of lower capacity replacement (each LSS capacity is only up to 30 mW) for their expiring power purchase agreements (PPAs)," it said.

According to HLIB, Peninsular Malaysia in the first nine months of 2018 registered power demand growth of +2.7%, driven by industrial and domestic segments.

Such growth is in line with its +2.5% expectation for 2018, and forecast a +2% to 2.5% growth in 2019, based on the 0.5 times gross domestic product forecast of +4.6% for the year, it added.

"We maintain 'overweight' on the power sector, given the earnings and dividend sustainability of the sector in time of increasing market uncertainty in 2019," read the report.

Wong reiterates "buy" calls on TNB and YTL Power International Bhd, at target prices of RM16.40 and RM1.25, respectively.

At the time of writing, TNB is down four sen to RM13.82, while YTL Power is down one sen to 87.5 sen.