Monday 02 Oct 2023
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This article first appeared in The Edge Malaysia Weekly on September 19, 2022 - September 25, 2022

NATIONAL utility company Tenaga Nasional Bhd is working on corporatising its new energy division in the next 12 to 18 months, and is exploring bringing in new investors to take up a minority stake to fund its ambitious renewable energy (RE) push overseas.

The new energy company (NECo), with a global generation capacity of 491 megawatt peak (mwp) from solar and 165mw from wind and growing, is eyeing new equity of around US$500 million within that period, and up to US$1.5 billion in 2022-2025.

NECo has an earnings before interest and tax (Ebit) target of RM2.5 billion by 2025 — on a par with the target for TNB Power Generation Sdn Bhd, which houses Tenaga’s core fossil fuel and hydro power plants, and making up 20% of the group Ebit target of RM12.3 billion in 2025.

Speaking to The Edge in his first media interview, Tenaga chief new energy officer Mohd Zarihi Mohd Hashim says that the group “looks forward” to raising fresh capital at the NECo level, with the other option being to sell down direct stakes in assets bought at the operational stage.

Tenaga is looking for investors with RE experience, presence and market access, or with technological capabilities such as wind and battery solutions, he says.

“We are still gauging investor appetite towards its RE growth plan. I believe there is no shortage of RE capital; it is more about project pipeline and investor appetite as to which market they want to go into,” says Mohd Zarihi, an engineer by training who served in senior investment positions at Ekuiti Nasional Bhd and Permodalan Nasional Bhd prior to joining Tenaga in January.

Improve returns, expertise and opportunities

Under NECo, Tenaga aims to develop new RE projects (80% to 90% of the 3.6gw project pipeline are greenfield projects), rather than buying into operational assets, as it pursues a higher economic internal rate of return of 7%-9% from 7% currently.

In the near term, Tenaga is eyeing operationalised and pre-approved RE plus battery projects in Ireland and Australia, but it is not discounting undertaking mergers and acquisitions to expedite talent and asset growth. Expansion in other parts of Western Europe is also on the cards.

Asked if the plan is too aggressive, Mohd Zarihi explains, “... different countries have different bid cycles, and going into different countries at a different timing may provide a steady growth profile”.

“Knowing where to play along the value chain is very important. Where we don’t [have the expertise], we will seek out partners,” he says.

“In advanced markets like the UK, other than megawatt (capacity), we are exposed to different PPAs (power purchase agreements), rolling subsidy schemes and to a small extent, the merchant market.

“If we know how to win in those markets, we will be ready to defend our home market [as it undergoes further liberalisation]. It is also important for us to go where wind resources are high [as] it will be a very big part of RE globally.”

Additionally, Tenaga is looking at Asean markets such as Vietnam, the Philippines and Thailand, which will help the group to establish its footprint in preparation for the establishment of the Asean grid interconnection agenda in the coming years.

“We don’t just look at RE; we also look at grid opportunities, for example,” Mohd Zarihi says. “Like in Vietnam, we know their grid is congested, we know the government is enticing new investors. Hopefully, looking at those together will make our blended returns more competitive as we can add more value.”

Foreign players looking to invest in Asean are now taking a wait-and-see approach as the countries finalise their industry frameworks, such as the Power Development Plan in Vietnam, where there are calls for even more RE installation but a shortage of grid capacity. In comparison, Europe, which has RE policies in place, already has plenty of foreign players.

Apart from the majority-owned RE assets parked under the new energy division, Tenaga also has associates in Turkey and India with a combined capacity generation of 26mwp of solar and another 116mw from wind.

Another subsidiary under its retail arm, GSPARX Sdn Bhd, also has solar rooftop projects for commercial, industrial and residential clients, with a total secured capacity of 146.2mw as at July 2022.

Good timing for RE but not for the group

It is a critical time to pursue RE growth as part of a wider decarbonisation strategy at Tenaga, which is facing pressure from financing and valuation perspectives, with 45% of its 24gw generation capacity coming from coal.

It is also competing with the big guys that are vying for smaller-scale RE projects owing to a scarcity of a project pipeline, Mohd Zarihi says.

Coincidentally, high electricity selling prices globally due to elevated fuel costs further support demand for RE generation, resulting in favourable rates for RE producers.

There are other examples of utility groups spinning off their RE divisions. Energias de Portugal SA raised US$2.4 billion in its renewable arm listing in 2008, Italy’s Enel SpA raised €2.2 billion from its green energy division’s 2010 IPO, while France’s Électricité de France SA raised €340 million in 2006 when it listed its RE unit.

Unfortunately, Tenaga’s balance sheet is under some pressure in the current environment, as it gets paid later for its fuel costs given that the government has kept electricity tariffs largely unchanged.

As at end-June 2022, group borrowings rose 21% to RM62.61 billion from just RM51.68 billion at end-2021. In the same period, current receivables rose 81.8% to RM19.17 billion, from RM10.55 billion. Its net gearing rose to 0.92 times, from 0.77 times, albeit with higher cash of RM7.36 billion, from RM6.71 billion.

While Tenaga aims to increase RE capacity (excluding hydro) tenfold to 7gw by 2030, it might not have the luxury of keeping its RE ventures to itself and spinning them off only when they mature for a better valuation. Further, it also needs to prioritise capital expenditure to future-proof its Malaysian grid, which spans almost 750,000km and includes more than 86,000 substations, in order to take on incoming RE capacity.

Its UK RE unit, which owns 530.4mw of solar and wind generation capacity, posted an earnings before interest, taxes, depreciation and amortisation (Ebitda) of US$45.16 million (RM204.4 million) in 1HFY2022 — an encouraging result but still small at 2% of group Ebitda of US$2.48 billion during the period.

With a lot of funds and players chasing the same assets, it will be interesting to see how Tenaga’s transition to being an active contender in the volatile global RE market will pan out in the coming years.


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