RAM Ratings: MESI 2.0 has no credit implications on Peninsular Malaysia’s power sector

Published on 20 Sep 2019.

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RAM Ratings sees no credit impact on the RM47 bil of outstanding sukuk issued by the power sector in Peninsular Malaysia, pursuant to the Cabinet’s recent approval of a 10-year power reform masterplan. Dubbed as Malaysian Electricity Supply Industry 2.0 (MESI 2.0), the ultimate objective of the masterplan is to ensure the affordability of electricity in the long run. 

MESI 2.0 will gradually introduce competition throughout the value chain – fuel procurement, generation, transmission and distribution - and also retail segments. In addition, it will facilitate the supply of green energy in Peninsular Malaysia, in support of the Government’s target of achieving a 20% mix of renewable energy (RE) by 2025.

Notwithstanding the above, the Government will continue to uphold the terms of all existing power purchase agreements (PPAs) between various independent power producers (IPPs) and Tenaga Nasional Berhad (TNB) – a key credit anchor for IPP sukuk ratings. Under the current PPA structures, IPPs are entitled to receive availability-based capacity payments, regardless of the amount of electricity sold. They are also allowed to fully pass through their fuel costs to TNB via energy payments received from the sale of electricity, so long as their plants operate within stipulated heat rates. 

Under the reform initiatives, however, existing IPPs will be given the option to procure fuel from other suppliers, instead of purchasing it from only Tenaga Fuel Services Sdn Bhd (for coal) or Petronas Energy and Gas Trading Sdn Bhd (for gas). Pending the finalisation of incentive mechanisms vis-à-vis existing PPA terms, the level of participation by existing IPPs will also depend on factors such as the performance and credit risks of new suppliers.

Notably, TNB’s monopolistic position - through the ownership of critical transmission and distribution (T&D) assets as well as its role as the sole off-taker for existing IPPs - will keep underscoring its strategic foothold as Malaysia’s national electricity company. While third-party access to the grid could be enabled for RE producers to sell electricity directly to customers by next year, access to all generators remains unclear at this juncture. We believe TNB will remain the incumbent T&D asset owner given its commendable operating track record and the capital-intensive nature of the grid business. 

RAM opines that any potential implications from the liberalisation of the retail market will be minimal for TNB given its long-established presence and the limited profits from this segment. All said, we believe that TNB’s credit strength will stay underpinned by a very high likelihood of extraordinary government support in the event of financial distress, given its pivotal role in the economy. 

In the longer term, however, the Government intends to discontinue the existing PPA framework, under which new plant-ups are awarded shorter-tenured contracts with variable and competitive energy payment structures. With this change, future IPPs will be exposed to market and pricing risks. Those with expiring PPAs will also be allowed to auction their excess capacity through the improved New Enhanced Dispatch Arrangement (NEDA+) Framework, besides the present energy-payment-only auctions. 

Pending further legislative refinements and detailed market design, we view MESI 2.0 as a positive step towards promoting market efficiency. Nevertheless, the success of its initiatives will hinge on the firm commitment of the authorities and strong collaboration among the various stakeholders, with a view to paving the way for a competitive domestic power industry. 


Analytical contacts
Chong Van Nee
(603) 3385 2482

Media contact
Padthma Subbiah
(603) 3385 2577


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