TENAGA, SAMAIDEN, MALAKOF: Malaysia Power & Utilities Sector Overweight on DC Demand and Energy Transition

Notes from an Afternoon with PETRA

We recently hosted a meeting with YB Akmal Nasir, Deputy Minister of Energy Transition and Water Transformation (PETRA). Key highlights of the meeting include: (1) The Ministry’s approach in managing the rising electricity demand (2) Nuclear as a potential alternative energy option (3) Key challenges in the water supply sector. Meanwhile, we reckon the upcoming 13MP is likely to place focus on nuclear energy as a long-term option, development of the ASEAN Power Grid and measures to improve efficiency in the water supply sector. We keep our Overweight stance on the Power & Utilities sector. Our top picks are TENAGA (Buy, TP: RM17.30), SAMAIDEN (Buy, TP: RM1.38) and MALAKOF (Buy, TP: RM1.08).

Cautious approach in meeting data centre demand

YB Akmal highlighted that one of the factors that attracted data centres (DC) to Malaysia was the country’s green energy initiatives, which is laid out under the National Energy Transition Roadmap (NETR) and was not entirely due to the proposition of cheap electricity, water or land as commonly viewed. Admittedly, however, the growth of DCs is driving strong demand for electricity domestically – both RE and conventional. The Ministry projects DC demand of between 5-13GW in the next 5-6 years. As it stands, TENAGA has already connected 2.8GW DC capacity as of 1Q25 with another 3.6GW in the pipeline that are either under construction or have had Energy Supply Agreements (ESA) signed.

However, YB Akmal noted that the Ministry is mindful of potential discrepancies between capacity demanded by the DC operators and their actual immediate supply needs – the tendency is for DC operators to state their requirement for the next 10 years although DC developments are typically done in phases. Hence, the power supplied is not immediately consumed. To mitigate this issue, the Ministry is exploring penalties for underutilisation of the power supplied to DC facilities.

Figure 1: Status of DC power supply connections (as of March 2025)

Source: TENAGA, EC, TA Securities

Capacity extension on the cards

Given that the demand requirements have changed dramatically since the last published Power Generation Development Plan 2021-2039 (which projected just 0.9-1.7% annual demand growth) and considering the incremental number of DCs that are still in the pipeline, the Planning and Implementation Committee for Electricity Supply and Tariff (JPPPET) now meets on a bi-annual basis (instead of once a year previously) to ensure system demand-supply remains optimal. YB Akmal noted the Ministry is considering the possibility of extending (expiring) generation capacities, which will be done on a case-by-case basis, highlighting that the demand-supply situation in the next 2-3 years will be critical in driving this decision. The Ministry, however, remains committed to no longer introduce new coal power plants. We believe TENAGA (Buy, TP: RM17.30) and MALAKOF (Buy, TP: RM1.08) are among key beneficiaries of any potential PPA extensions given abundance of recently expired/expiring gas generation capacity.

Figure 2: Gas power plant expiries 2022-2030 (MALAKOF)

Source: EC, TA Securities

Figure 3: Gas power plant expiries 2022-2030 (TENAGA)

Source: EC, TA Securities

To further address DC supply requirements, the Corporate Renewable Energy Supply Scheme (CRESS) was introduced, primarily to allow DC operators to procure RE directly from generators and increase the regulator’s flexibility in addressing DC power demand. Although initially, the high System Access Charge (SAC) for CRESS deterred the pace of CRESS take-up, as highlighted in our recent thematic “A Stronger Case for CRESS Adoption”, the higher grid power cost for DCs under the latest RP4 tariff schedule is expected to narrow the cost differential with CRESS. Introduction of carbon pricing from 2026 could further increase the attractiveness of CRESS relative to grid power, in our opinion.

Battery storage now a necessity

To give context, in the past 5-6 years and especially after the NETR was launched in 2023, the government has been making a big push on large scale solar (LSS) and at the same time, allowed consumers to subscribe to the Net Energy Metering (NEM) program, which allows excess rooftop solar generation to be exported to the grid. This is partly because back then the grid had sufficient capacity to absorb intermittent RE sources given sufficient baseload capacity and availability of other sources such as hydro.

However, the grid is now close to reaching its solar penetration limit and from 2025 onwards, the government has started to rollout Battery Energy Storage Systems (BESS) to accommodate solar capacity growth. TENAGA is constructing a pilot BESS project in Terengganu with a capacity 100MW/400MWh for commissioning by December 2026, while the Energy Commission (EC) has opened up procurement of another four BESS projects with 100MW/400MWh capacity each, to be deployed in the next 2-3 years (within RP4).

Moving towards 2030, the Government is looking at more BESS deployment and is currently exploring more strategic ways to deploy BESS. This includes considerations such as the business models to be adopted one potential being considered is an IPP model, while another possibility is the requirement of solar+BESS systems for future LSS programs, as opposed to standalone solar currently.

Figure 4: Installed capacity target under the NETR – solar to see significant growth

Source: Ministry of Economy, TA Securities

Nuclear option is on the table

Nevertheless, with the surge in electricity demand and the need to manage the country’s net zero 2050 target, the country is bound to consider other energy options. Nuclear is one of them, while other potential options include power import from the ASEAN Power Grid (APG) and Carbon Capture & Storage (CCUS) to reduce carbon emission from existing fossil fuel sources.

Initial studies on nuclear energy have been completed, with the Government now moving into the ‘exploration’ or ‘scouting’ stage – this includes active engagement with countries that have strong nuclear energy capabilities such as Russia, China, South Korea, US and France. Following the Minister of PETRA’s recent visit to Russia, a Non-Disclosure Agreement (NDA) was signed with Rosatom (Russia’s state-owned nuclear energy corporation) to allow access to the latter’s technologies for evaluation. Similarly general Letters of Intent (LOI) were signed with nuclear corporations from France and the US, with a potential visit to China next. Among nuclear technologies being considered include floating nuclear power plants (which can address the sensitive issue of nuclear power plant siting), conventional reactors as well as small modular reactors (SMR).

The dynamics of geopolitics is another consideration in pursuing a nuclear energy program, hence the decision on a nuclear technology partner is not dependent on PETRA alone but rather, will involve the government as a whole. In addition, the government is in the midst of fulfilling agreements and conventions required to be ratified. More importantly, PETRA sees the need to start engaging the public on a potential nuclear energy program, while viable models to deliver nuclear power plant projects also needs to be studied.

Notwithstanding the current progress, YB Akmal clarified that any firm decision to pursue a nuclear energy program will only come after comprehensive evaluation and a clear ‘country statement’ on the decision is made internationally. See our recent thematic “Nuclear Renaissance” for our initial thoughts on nuclear energy.

Water

On the water supply sector, the Ministry sees several challenges including state water operators’ reliance on Federal Government funding, high non-revenue water (NRW) and the need to meet rising DC demand. To recap, the 12MP (2021-2025) targeted to reduce national NRW levels to 25%. However, actual NRW levels of 34.3% (Peninsular Malaysia & Labuan) as of 2024, is still a far cry from hitting the target.

To assist the industry in reducing NRW, the government has been disbursing grants (under the 12MP) for NRW reduction. Currently, the grant is disbursed for free (under Approach 1 of the 12MP’s NRW Reduction Program) to states with distressed NRW levels (>40% NRW) such as Perlis, Kelantan, Kedah and Pahang with an allocation of RM535mn, while states with low NRW levels (<40%) such as Johor, Selangor, Perak, Penang, Negeri Sembilan and Melaka, are rewarded matching grants (to cover 50%-75% of annual NRW reduction cost) under Approach 2 of the NRW Reduction Program if their respective NRW targets are met - Approach 2 involves a total allocation of RM1.37bn. However, there is a gap in this approach in states with average performances and unable to hit their NRW targets are left out, leading to hiccups in their ability to reinvest revenue into asset maintenance, which eventually affects their NRW performances.

As such for the upcoming program, assistance is expected to be made available to all states, but those that intend to do more will be able to access matching grants. This could effectively widen the reach of government assistance for NRW reduction, potentially leading to more NRW contracts being dished out by state water operators going forward. The Ministry also intends to place a specific focus and to use Labuan as a proving ground on the effectiveness of AC pipe replacements in achieving NRW reduction, which will in turn raise operators’ revenue and drive further reinvestments into asset maintenance.

Figure 5: Malaysia’s NRW by State (2024)

Source: SPAN, TA Securities

Exploring recycled water

On complementing water supply to the DC industry, the Ministry is exploring the use of recycled water, with the possibility of operationalising this via working arrangements between national sewerage operator Indah Water Konsortium (IWK) and the respective state water operators. There are, however, potential challenges such as the requirement for new pipeline connections between the sewerage plant and recycled water facilities to the offtaker, siting of the recycled water facility itself as well as the lack of a clear regulatory and jurisdictional framework for recycled water currently. At this juncture, the plan is to introduce recycled water on a small scale in selective states with high DC concentration such as Johor, Selangor and Negeri Sembilan.

What are we anticipating under the upcoming 13MP?

We believe there are several key areas of focus within the Power & Utilities (P&U) Sector that are likely to be highlighted under the upcoming 13th Malaysia Plan (13MP), scheduled to be tabled by end-July 2025.

1. Nuclear Energy

We believe the country’s consideration of nuclear as a long-term energy option is likely to be highlighted in the 13MP. While we note that MyPower has been mentioned as the country’s Nuclear Energy Program Implementing Organisation (NEPIO) in various media reports, we anticipate further clarity on this in the 13MP, including organisations that will be spearheading the effort, potential budgets and timeline. We reckon the 13MP period (2026-2030) is likely to reflect Phase I of the International Atomic Energy Agency’s (IAEA) Milestone Approach involving pre-feasibility & project development studies, public communication & engagement on nuclear energy, human capacity development as well as safety, legal and regulatory infrastructure studies among others, before the country is ready to make a knowledgeable commitment to a nuclear power program with a clear understanding of the obligations, requirements and strategies needed to proceed.

Figure 7: The IAEA’s Milestone Approach in nuclear infrastructure development

1. MILESTONE 1: Ready to make a knowledgeable commitment to a nuclear power programme.

   Phase 1: Considerations before a decision to launch a nuclear power programme is taken. Covers pre-project activities.

2. MILESTONE 2: Ready to invite bids/negotiate a contract for the first nuclear power plant.

   Phase 2: Preparatory work for the contracting of a nuclear power plant after a policy decision has been taken. Covers project development.

3. MILESTONE 3: Ready to operate the first nuclear power plant.

   Phase 3: Activities to implement the first nuclear power plant. Covers final investment, construction, commissioning, operation, and decommissioning.

Source: IAEA, TA Securities

2. ASEAN Power Grid

Further advancement of the APG is potentially another area of focus under the 13MP, we believe. Sub-projects that may potentially involve the Malaysian grid include the Vietnam-Peninsular Malaysia subsea interconnection to export RE from Vietnam to Peninsular Malaysia and Singapore. To recap, a Joint Development Agreement was signed at the ASEAN Summit 2025 between leading companies from Malaysia (consisting of TENAGA and Petroliam Nasional Berhad), Singapore (Sembcorp Utilities Pte Ltd) and Vietnam (PetroVietnam Technical Services Corporation) to explore the export of RE from Vietnam to Malaysia and Singapore, with each potentially taking 300MW and 1300MW respectively of a total 2000MW wind power export from Vietnam.

Other potential major projects might include the Sarawak-Singapore and Sarawak-Peninsular Malaysia interconnection projects. The former is understood to be in the technical research and survey stage involving a 720km undersea cable from Tondong, Sarawak to Changi, Singapore through Indonesia’s Muri-Midai corridor with an aim to export up to 1000MW of electricity to Singapore and a targeted commercial operation by 2031. Meanwhile, the latter, which involves potential capacity of not less than 1000MW, is still undergoing preliminary studies by Sarawak Energy and TENAGA. In view of Malaysia’s ambition to be a hub for regional RE trade, there are also possibilities of grid projects involving upgrades of interconnection assets with Thailand and Singapore. An interconnection project linking Peninsular Malaysia and Sumatera has also been mooted.

Figure 8: ASEAN Power Grid Map Data

Source: ACE, TA Securities

3. Water Supply Infrastructure

In the water supply sector, we believe the 13MP’s focus is likely to continue to revolve around: (1) Solving the industry’s high NRW issues in particular old Asbestos Cement (AC) pipe replacements (2) Improving water supply to the DC industry including a push for recycled water, expansion of raw water sources and improving water treatment plant reserve margins (3) Flood mitigation projects.

Recommendation

We re-affirm our Overweight stance on the P&U Sector premised on: (i) Demand-supply tightness in the power generation market (ii) Record RE rollout (iii) A step-up in grid capex to accommodate the energy transition and demand growth (iv) Potential expansion of gas supply infrastructure (v) Potential nuclear addition to the energy mix. Broadly, the P&U sector will continue to be driven by the energy transition backed by the NETR’s aggressive 70% RE mix target by 2050, which necessitates a quadrupling in annual RE build-up to 2.2GW per annum. In addition, the influx of DCs and expiring coal PPAs underpin demand for new generation capacity.

Key risks to our sector call include:

(i) Unfavourable changes to current policies favouring RE and the energy transition (ii) Volatility in coal prices (iii) Delays in RE project rollout (iv) A spike in supply chains cost for RE.

Figure 9: Sector Valuation Summary

Source: TA Securities