This article first appeared in Capital, The Edge Malaysia Weekly on December 25, 2023 - December 31, 2023

IN the country’s fragmented renewable ­energy (RE) landscape, the solar sector shone in 2023. It was a slow start for ­RE-related counters, owing to the global spike in prices of solar panels, but the momentum picked up in May when the government lifted the export ban on RE that had been in place since October 2021.

The government rolled out the National Energy Transition Roadmap (NETR) in July, when it also introduced the plan to further liberalise the energy sector through the third-party access (TPA) framework and an RE exchange.

This has put the RE industry on centre stage, with the government reinforcing the NETR as a new catalyst for the country’s economic growth.

During the launch of the NETR, the government announced 10 flagship projects, such as a potential 1.5gw of solar installations that include 1gw of a mega solar farm to be embarked on by UEM Group Bhd and 500mw of solar parks by utility giant Tenaga Nasional Bhd. In addition, Tenaga has announced a RM2 billion investment in floating solar projects that could see a combined capacity of 2gw.

This development naturally sparked interest in RE counters on Bursa Malaysia, especially the solar engineering, procurement, construction and commissioning (EPCC) players.

Data compiled by The Edge showed that the solar EPCC players, including Solarvest Holdings Bhd, Sunview Group Bhd and Samaiden Group Bhd, have seen their share prices surge 51%, 73% and 53% respectively this year — a pretty handsome return for investors who took positions in the shares of these companies early in 2023, given that the market barometer, the FBM KLCI, declined by 2.1% this year.

In terms of valuation, the solar EPCC players appear to be trading at a lofty level compared with companies that are RE asset owners. Solarvest is trading at a forward price-earnings ratio (PER) of 29.09 times; Sunview at 16.31 times; Samaiden, at 20.98 times; and Pekat Group Bhd, at 22.11 times, Bloomberg data shows.

Meanwhile, among RE asset owners, Tenaga is trading at a forward price earnings ratio (PER) of 14.97 times; YTL Power International Bhd at 7.23 times; and Ranhill Utilities Bhd at 24.44 times. This could be partly due to investment risk that RE asset owners have to take on when embarking on the projects.

This is especially so for companies that are participating in the fourth round of the large-scale solar projects (LSS4), which has come under focus because of elevated cost pressures, following a 30% to 50% rise in solar panel prices in early 2022 — from when bids were submitted in 2020.

This price increase has been a setback for many solar players over the last one year, as solar panel prices account for a significant portion of a project’s cost — so much so that the Energy Commission (EC) has extended the LSS4 power purchase agreements by four years to 25 years, from 21, after bidders of projects said they could no longer meet the expected returns because of escalating prices of solar panels and skyrocketing interest rates.

It remains to be seen if these bidders can meet their project timelines given that the EC has already extended the scheduled commercial operation date to Dec 31, 2023.

It was reported that the LSS4 attracted a total of 138 bids. About 30 bidders were shortlisted in mid-March 2021, 10 of which are subsidiaries of public-listed companies from various industries. The companies include Uzma Bhd, Ranhill Utilities, Tan Chong Motor Holdings Bhd, Advancecon Holdings Bhd, Tenaga, Solarvest Holdings Bhd and JAKS Resources Bhd.

The last round of the LSS projects has also raised the question of whether the government will continue with a similar approach when it comes to new solar capacities. What will happen to the companies that miss the timeline?

Meanwhile, investor interest in companies from other industries that have jumped onto the RE bandwagon has not been as visible as it is in pure-play RE players.

For instance, Uzma is trading at 7.43 times PER, Yinson Holdings Bhd is at 11.8 times and Reservoir Link Energy Bhd is at 14.7 times. It is worth noting, however, that the oil and gas (O&G) segments of these companies are still major revenue and profit contributors. Furthermore, interest in O&G has yet to gain momentum, as seen in previous oil price booms.

Shares in Yinson rose almost 5% this year and Reservoir Link fell 11%, while Uzma fared a lot better, rising 29%.

One company in the utilities sector that is venturing into RE and that stood out this year is YTL Power, which saw its share price triple to RM2.53 last Wednesday from 72 sen on Jan 2. The group saw a significant jump in its profitability from its power generation segment as the Singapore dollar strengthened against the ringgit.

The group is also building a green data centre and developing a solar power facility with a generation capacity of up to 500mw in Johor.

In January, YTL Power announced its collaboration with Tenaga to supply 100mw of electricity from Malaysia to Singapore via the newly upgraded interconnector, which marked the first time electricity from Malaysia will be supplied to Singapore on a commercial basis.

The collaboration is also seen as progress for the energy sector to kick-start the RE export ecosystem and increase the country’s supply of RE to tap the growing demand from Singapore.

Things are looking bright for the RE sector in 2024, especially with the US Federal Reserve signalling rate cuts next year, coupled with solar panel prices having fallen more than 40% since the beginning of the year, owing to increasing manufacturing capacity in China, according to BloombergNEF.

MIDF Research says in a report that the local solar subsector could see several cata­lysts next year, which will drive further demand for rooftop solar and solar EPCC services.

The catalysts include expansion of the net energy metering (NEM) quota, accompanying Budget 2024’s announcement of a one-year extension of the programme; finalisation of a rooftop leasing mechanism to unlock rooftop resources for solar development; and EPCC tenders for the Corporate Green Power Programme (CGPP) asset construction from the second quarter of 2024.

“The expected influx of data centre capacity in the mid to long term is also an RE demand catalyst, though, in the immediate future, these data centres are still likely to be heavily reliant on more stable conventional power sources,” MIDF says in the 2024 outlook report.

“Beyond the demand catalysts, we also see scope for margin improvement, as solar module prices, a key cost component, have been on a steep decline, following the influx of large manufacturing capacities in China.”

Another key area to focus on in the RE sector is the upcoming Tenaga regulatory period (RP4), which would set the plan for its capital expenditure (capex) to accelerate the national grid investment to adopt RE sector growth. Transmission limitations to support solar’s intermittency issue have been widely discussed in 2023, with the government estimating RM180 billion in investments to upgrade the national grid.

MIDF says: “Tenaga has announced that it is upping its capex to RM90 billion between 2025 and 2030 from RM45 billion (2018 to 2024), which is a positive catalyst, as this is expected to expand its regulated asset base meaningfully.

“Nevertheless, key questions remain on the establishment of a transparent cost recovery mechanism and a fair tariff/­cost reallocation to drive a more open RE market domestically, which we believe could be part of the consideration for RP4,” MIDF says.

Having said that, the upgrade of the grid is a catalyst for RE sector growth. Industry players are still waiting for more information about the TPA framework and the RE exchange — two key elements that will facilitate the liberalisation of the local power sector and RE exports.

Details about them are highly anticipated, not only by industry players but also by local and foreign investors, who are holding on to their investments in RE-related stocks. 

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