Published on 07 Apr 2022.
RAM Ratings maintains a stable outlook on the Malaysian power sector given the healthy performance of national and state utility companies Tenaga Nasional Berhad (rated AAA/Stable), Syarikat SESCO Berhad (wholly owned subsidiary of Sarawak Energy Berhad (AAA/Stable)) and Sabah Electricity Sdn Bhd (unrated).
The sound business and financial profiles of these utilities ultimately underscore the credit strength of independent power producers under offtake arrangements. Save for some projects under construction, the power sector has been less impacted by the pandemic in view of the essential nature of the business. The ratings of affected issuers in our portfolio have been backed by additional liquidity support received from shareholders to bridge temporary cashflow deficiencies.
Looking ahead, we expect renewable energy (RE) to drive the growth of the power sector. We hold an optimistic view of Malaysia’s ambition to grow its RE capacity to 31% of installed capacity by 2025 and 40% by 2035 (end-2020: 23%). The country is committed to bringing its greenhouse gas emission intensity (measured against GDP) down 45% by 2030 from levels seen in 2005, targeting net zero carbon emission by 2050. We believe supportive government policies, the continued rollout of large-scale RE projects, the extension of fiscal incentives and strong market participation in a relatively mature RE ecosystem will underline the success of the country’s green agenda.
The main highlights of RAM’s Power Industry Insight: Gearing Towards Net Zero, include the following:
As of end-December 2020, Malaysia’s RE capacity stood at 8.5 GW, dominated by large and small hydro plants (73%) and with solar plants (18%) displaying the strongest growth. The government will need to add close to 10 GW from renewables to achieve its 40% RE capacity goal. Solar power would lead the initiative, with 60% of plant-ups (or 5.7 GW) in the pipeline, bolstered by large-scale solar programmes and the net energy metering scheme. New business models would also emerge to further spur growth of the sector. “We see planned RE plant-ups as a positive measure to diversify the country’s generation sources, particularly for Peninsular Malaysia and Sabah, while helping to moderate the impact of rising fuel prices in the future. Energy security concerns brought on by recent coal supply constraints and escalation of commodity prices should also accelerate the pivot to RE,” highlights Chong Van Nee, co-head of Infrastructure and Utilities Ratings.
The government’s green agenda is envisaged to result in cumulative investments of about RM53 bil between 2021 and 2035. In this regard, we expect the local power sukuk market to be steered by RE projects, although smaller in issuance value, compared to conventional fossil fuel power plants. We foresee more transactions aggregating multiple small-scale RE projects into a single funding structure and more pure play RE companies tapping the debt capital market. “A growing commitment towards sustainable investing as well as increased familiarity with the risk exposures of RE assets would mean more market willingness to fund RE projects, easing financing hurdles over time,” adds Awang Za’aba Awang Mahmud, RAM Ratings’ Chief Executive Officer.
The Malaysian power sector saw an average annual issuance of RM7.35 bil for 2017-2021. It is among the most active sectors to enter the domestic bond market. Outstanding power bonds and sukuk summed up to RM76.50 bil as of 31 December 2021, making up about 10% of Malaysia’s total outstanding corporate bonds and sukuk. Zooming into the green and sustainable sukuk/bond landscape, RE projects accounted for 13 out of 27 issuances and 43% of the outstanding issue amount as of 26 January 2022.
RAM’s Power Industry Insight is available for download at www.ram.com.my.
Chu Jia Ying
(603) 3385 2519
Chong Van Nee, CFA
(603) 3385 2482
(603) 3385 2505
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