This article first appeared in The Edge Malaysia Weekly on November 27, 2023 - December 3, 2023

AT Tenaga Nasional Bhd’s new headquarters — a green building on the site where its previous office stood in Pantai Hill, Kuala Lumpur — Datuk Seri Baharin Din is relaxed and chatty during his conversation with The Edge, compared with his maiden interview three years ago when he was appointed president and CEO of the company.

The chieftain is confident that the utility giant will continue to play a vital role in the domestic power industry while acknowledging that the structure of the industry is likely to be vastly different moving forward. Furthermore, he is of the view that government policies are supportive of the industry and that makes it easier for Tenaga, a public-listed government-linked company (GLC), to strike a balance between enhancing shareholder returns and serving the national interest — an uphill task that all Tenaga CEOs had to deal with in the past.

Baharin had a rough start when he took the helm in March 2021. While facing unprecedented pressure to reduce carbon emissions, he also needed to bear with the uncertainties involving public policies due to the country’s political scene back then. A lack of clarity in government policy had a big impact on Tenaga’s highly regulated business.

Making his job tougher, Tenaga was called upon to serve the national interest during the Covid-19 pandemic when fuel costs for power generation escalated given the big leap in coal prices. The government also delayed the electricity subsidy payment to the utility giant, resulting in the company having to operate with extremely tight cash flow.

Three years on, most of these concerns have largely abated and Tenaga’s prospects seem much brighter.

“Here is a much greener picture of Tenaga,” says Baharin. “Data centres, electric vehicles (EVs), renewable energy (RE) … two years ago, we were worried [about the changing landscape with the ESG (environmental, social and governance) agenda and energy transition] but when we looked further into it, we found that it was actually a good thing.”

Instead of worrying about the possibility of losing its turf, he actually sees a growing pie from which Tenaga can grab a fair share despite the fact that more players are expected to emerge in the RE generation space.

Baharin, who has held on to his Tenaga shares, believes electricity demand will grow at a faster pace. He points to the adoption of EVs and the estimated consumption of up to 7,300mw — equivalent to 36% of peak demand in Peninsular Malaysia in 2022 — from the data centres that are sprouting in the country by 2030.

The strong power consumption will make up for any revenue lost from the installation of rooftop solar panels by businesses and households, he says. In short, electrification will boost Tenaga’s return on assets, which fell to 2.2% in 2022 from 6.6% in 2015. “It revitalises us,” he says.

The National Energy Transition Roadmap (NETR) and the lifting of the RE export ban have set the stage for a larger RE pie, which was previously too small for large independent power producers (IPPs) to lean into. The NETR “is a huge opportunity for us domestically”, which is poised to unlock the potential of both Tenaga and the RE industry, says Baharin.

He is already making a move. The utility giant is in discussions with state governments and smaller players to kick-start its 500mw solar park project that will be split between five locations nationwide.

This will add to the more than 400mw of Tenaga’s constructed and committed domestic Large-Scale Solar capacity in its portfolio. It is significantly different from previous LSS projects, where the maximum capacity of each project was only 50mw.

Tenaga has identified 12 locations for solar energy farming and each of these locations in the transmission network is able to have a capacity of up to 500mw, plus hundreds of other sites along the distribution network to cater for smaller projects with a capacity of 10mw to 30mw, says Baharin.

Nonetheless, others in the industry, particularly newcomers, are of the view that Tenaga’s first task is to look at the national grid and make sure it can handle the intermittencies as RE consumption rises.

Like it or not, Tenaga is being accused of not putting in enough capital expenditure (capex) to upgrade the national grid. Consequently, this has become a stumbling block and has slowed RE capacity building in the country.

Baharin totally disagrees with this perception. “We are a world-class grid,” he says, pointing out that contrary to public perception, Tenaga’s transmission and distribution network can support an additional 12,000mw of new solar generation capacity.

“Today, our physical infrastructure is able to support an additional 12gw of new solar plant-ups (6gw transmission and 6gw distribution network) on top of the over 4gw currently connected and committed,” he explains.

Aligned with the NETR target, Tenaga intends to expand the nodes during Regulatory Period 4 (RP4) 2025-2027, in tandem with the growth of the RE segment, says Baharin. “This is under discussion with the regulator.”

The country’s grid readiness is acknowledged by the International Renewable Energy Agency (Irena). In March, its director-general Francesco La Camera said Malaysia’s national power grid had the capacity to take on more RE until 2030 without affecting grid stability.

Malaysia has to be “responsible in its uptake”, Baharin notes. In countries such as Vietnam, poorly planned RE installations have accelerated to levels more than what the national grid can handle, resulting in solar generation being curtailed, which in turn impacts the returns of the affected power producers.

“It’s not about speed here, it’s about the appropriate quantum at the right time. It cannot be about ‘the more you do, the better you are’. To us, let’s have a balanced, responsible and well-structured development,” he says.

The discussion on RP4 is expected to happen soon as Regulatory Period 3 (RP3) 2022-2024 will end by December next year. Tenaga has submitted its proposal to the government. The major items on the agenda include the grid capex, rate of return of its regulated assets, fuel costs and tariff structure.

Meanwhile, Tenaga is taking a deep dive into energy transition by investing in large-scale battery storage installations along the national grid, says Baharin. The missing ingredient is the battery storage system, which is a “prerequisite” to unlock the aforementioned RE capacity installation as consumers, especially industrial users, need to be assured of a secure and steady supply of electricity at all times, he points out.

“Initial calculations estimate that for 1gw of solar, you require about 500mw of battery storage to be paired with it. However, this ratio will increase as the system will need to manage greater intermittency with larger solar capacities coming online,” says Baharin.

Under the current incentive-based regulation (IBR) model introduced in 2014, Tenaga owns and operates transmission and distribution assets in the country, and is allowed a regulated rate of return for a finite amount of investments in those assets.

“I believe the tested, proven formula of IBR should be extended to cover ET (energy transition) investments. Why change something that is proven? And if you look at the practice worldwide, IBR or the rate-of-return-based model has been the dominant model,” says Baharin.

However, energy transition investments such as batteries are uncharted territory. These are expensive affairs. Who is to fund such investments and how to do it is still up in the air. Should Tenaga be the one to do so as it is the sole grid operator in the country?

To modernise the entire grid, Malaysia reportedly needs an estimated RM180 billion in investments until 2050, or an average of RM6.7 billion a year. But one thing is sure — battery installations, plus other capex requirements, will add to the electricity tariff, which comprises two components, power generation and grid infrastructure costs.

For RP3, 13.75 sen/kWh out of the total average base tariff of 39.95 sen/kWh goes to Tenaga’s regulated business (transmission and distribution) while the remaining sum covers its power generation costs. Since 2015, an average of 33% of the tariff has been for its regulated business.

There have been calls for LSS developers to take on the battery storage installations through the corporate green power programme (CGPP) — essentially a solar project that requires the developer to find a long-term off-taker — according to the information guide issued by the Energy Commission. In this model, the battery storage investment (which can provide at least one hour of supply) will be paid for using the tariff imposed by the project developer on the long-term off-taker.

However, it is understood that there has been little interest, given that battery installation is not compulsory under CGPP. Furthermore, the capex could double the project’s tariff to more than 40 sen/kWh and make the entire project uncompetitive for off-takers.

Moreover, the project-based installation does not address the battery cost for LSS that is pooled into the grid for public use. Affordability is another consideration by the government, as exemplified by the near RM16 billion in electricity subsidy this year alone.

To alleviate some of the upward pressure from future tariffs, it is understood that the government is considering allocating part of the development expenditure to fund the grid capex. This is apart from a proposed energy transition fund to be derived from profit margins received from RE exports.

In theory, this model would make the “modernised” portion of the grid such as batteries a public infrastructure rather than Tenaga’s regulated asset base (RAB), although the utility giant may still be tasked with maintaining the assets. The national grid operation is part of Tenaga’s regulated business portfolio, which consists of transmission and distribution infrastructure assets.

Baharin does not discount project-based battery installation. Having said that, grid-based installation by the utility giant would allow better planning of the battery functions beyond just the short-term stability response proposed in the CGPP, according to the electrical engineer who has built his career with Tenaga for more than 30 years.

For example, a grid-based battery storage system can be utilised by two different solar power plants, instead of being kept exclusively for just one.

For RP4, it has proposed to invest in 900mw of battery storage over the next five years. If it is to fully cater to the new capacity, this suggests at least 1,800mw of new grid-level solar installations during that period.

Tenaga expects an overall regulated asset capex of RM90 billion in the next five years,  from 2025, compared with RM48.2 billion from 2018 to 2022. However, Baharin is swift to insist the whopping sum may not mean a steep rise in the tariff instantly.

“The recovery of capex via the tariff happens over the life of the asset,” he stresses. “This means the cost recovery is spread out over up to 40 years, hence, has minimal impact on the annual tariff. In the future, when the energy transition fund is in place, sourced from green premiums and so on, this fund can be used to supplement the overall capex determined under IBR.”

Apart from Tenaga’s RAB, RP4 is also likely to weigh on other industry segments, including the third-party access (TPA) framework that is slated to open up its grid infrastructure.

One example of the TPA model can be seen in the country’s internet broadband space, where different players pay a “toll” to rent from the fibre network infrastructure owner Telekom Malaysia Bhd to provide internet services to their subscribers.

Earlier this month, the government indicated that the TPA model would require more time to implement in view that the current tariff structure is not cost reflective. In the meantime, the government has opted to carve out a Single Buyer from Tenaga — currently the sole entity responsible for pooling the nation’s electricity supply from IPPs — to pave the way for it to independently manage Malaysia’s RE export market.

Baharin reiterates that Tenaga is supporting and helping to facilitate the TPA framework. However, he stresses that cross-subsidies in the country’s tariff model must be addressed first.

The framework is meant to streamline the existing mechanisms for all players to utilise the grid to sell and procure RE, and will “clearly outline the connecting parties’ access rights, as well as commercial and operational arrangement”, he says.

“TPA is an enabler … We also want to see that [being implemented] because otherwise the pie doesn’t grow. So, we wouldn’t want to block it. But cost allocation is key. The TPA framework will need to be seen in totality, taking into account system costs,” he says.

Baharin explains that in a cost reflective tariff, two key elements for cost recovery are fixed and variable costs. “Currently, there is a mismatch between the cost and revenue structure in the tariff.”

For example, 50% of costs are fixed. However, customers are only paying about 9% of the fixed costs via the tariff. The remaining fixed costs are recovered through the variable energy charge, he explains.

It is noted that all residential customers in Peninsular Malaysia are not imposed a fixed charge, while commercial and industrial customers are currently paying a minimal demand charge. Consumption patterns, which could put stress on power infrastructure, are not as big a determinant of the final electricity bill as it should be.

“This is an issue of social fairness because without correct cost allocation, costs incurred by one party, if not recovered, will have to be borne by the rest of the public,” says Baharin. This is essentially the public paying for the rich or the corporations, he points out.

Any imbalance in the cost reallocation will jeopardise the parties in the electricity ecosystem, of which Tenaga sees itself as a custodian.

With the deadline for the tariff restructuring (and potentially the TPA framework) pushed to 2025, like it or not, the winds are blowing in Tenaga’s favour right now because of the stability in its current operating landscape. Nonetheless, there are many upcoming changes in the brave new world of energy transition.

A complete tariff restructuring should realistically include further unbundling of the subsidy or fuel costs in the power industry, such as the “blanket” fuel cost discount enjoyed in the form of capped gas prices to the power sector. Others include the introduction of a rooftop leasing model for solar companies, which could further entice adoption as it puts cash in the hands of customers.

This is more attractive than net energy metering credits for additional kilowatts generated but not used, which cannot be converted to cash and cannot be brought forward, meaning it is burnt every year end.

Another forgotten liberalisation push is in the retail electricity market, which was prioritised in 2019 but has taken the back seat since the energy transition took centre stage. “A lot of things that have been put in place … I think the rate of change will be a lot faster than ever before,” says Baharin.

If others see the energy transition and industry liberalisation as a threat to Tenaga, its president and CEO appears determined to paint a better picture of its prospects given its incumbent advantage. 

Save by subscribing to us for your print and/or digital copy.

P/S: The Edge is also available on Apple's App Store and Android's Google Play.