Power Potential Dampened By Environmental And Viability Concerns

Malaysia's Electricity Commission (EC) is seeking bids for the development of two coal-fired power plants with a combined generation capacity of 3000 megawatts (MW) in Peninsular Malaysia. We believe that both projects highlight the growth opportunities in Malaysia's power generation sector, but see downside risks for both projects, namely from environmental and viability concerns.

The request for qualification, announced on the EC's website on December 18 2012, will end in Q113. The first project, known as Project 3A, involves the construction of a 1000MW supercritical/ultra-supercritical coal-fired power plant near an existing transmission substation. The second project, known as Project 3B, involves the construction of a 2x 1000MW coal-fired power plant at a separate site. Project 3A is scheduled to be in operation in October 2017, while Project 3B is due to become operational in stages in October 2018 and April 2019.

Coal To Play A Part
Malaysia - Electricity Generation, By Type, Terawatt hours (TWh)

We believe that both projects highlight the growth opportunities in Malaysia's power generation sector. The Malaysian government has long been concerned about a potential electricity shortage taking place in Peninsular Malaysia and has been keen to increase the region's power generation capacity. According to the EC in January 2012, the country wants to increase the power generation capacity in Peninsular Malaysia by 4,500MW by 2017. As a result, we have seen several large-scale thermal power plants being awarded. The latest of these contract awards was in October 2012, when Malaysian national utility Tenaga Nasional (TNB) secured a MYR3bn (US$978mn) contract from the EC to construct, own and operate a 1071MW gas-based power plant in the northern state of Penang.

These two large-scale power projects, combined with power plant developments in east Malaysia, are likely to drive up our forecasts for Malaysia's energy and utilities infrastructure industry. We are forecasting real growth for Malaysia's energy and utilities infrastructure industry value to average 5.7% per annum between 2013 and 2017.

Upside Potential
Malaysia - Power Plants And Transmission Grids Infrastructure Industry Value Forecasts

There is, however, potential for construction delays in both projects, due primarily to environmental concerns. While the EC did not state a specific site for Project 3A, we believe that Project 3A could have originally been scheduled to be located adjacent to the existing Mukim Jimah coal-fired power plant in the state of Negri Sembilan. Since 2010, the Malaysian government has stated that it plans to expand three large-scale coal-fired power generation complexes by 1,000MW, in order to avert a power shortage in Peninsular Malaysia: TNB's Manjung coal-fired power plant in Perak, MMC Corp's Tanjung Bin power plant in south Johor and the Mukim Jimah power plant, which is owned by Jimah Energy Ventures. The Tanjung Bin and Manjung plants have since started construction, while the Mukim expansion project has stalled, partly because the proposed site for the plant is located near the Bagan Lalang coastline - a popular holiday and fishing spot - and near the site of several protected mangrove swamps ( see our online service, May 17, 'Jimah Power Plant Sale: Not A Compelling Story For Sime Darby').

The profitability of both projects could also be a concern for independent power producers (IPP). Malaysia's electricity sector is set to become more competitive over the coming years as the government is not only looking to start large-scale electricity trading with its neighbours, but also requires Malaysian IPPs to bear a greater burden for increases in fuel costs ( see our online service, June 25, ' Malacca-Riau Cable MoU Increases Competitiveness' and August 15, 'Declining Attractiveness Prompts Genting Power Sale').

Malaysia remains unwilling to raise electricity tariffs, even though the price of electricity sold to consumers is still below the cost of production. In October 2012, the Malaysian government rejected a review of the electricity tariff rate, with the rate to remain at the current level until June 2013. We believe that this unwillingness to raise tariffs is due to a fear of losing popular support and could resurface again as a downside risk to profitability when both projects are completed.

These concerns could mean that IPPs are deterred from taking on both projects, making it more likely that state-owned enterprises would secure the projects. Only state-owned TNB has so far announced that it will submit bids for both coal-fired power plant projects.

This article is tagged to:
Sector: Infrastructure, Power
Geography: Malaysia, Malaysia, Malaysia, Malaysia

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