KUALA LUMPUR (Oct 17): TA Securities said the government should consider the feasibility of a second, larger-capacity interconnection facility for exports of renewable energy (RE) between Peninsular Malaysia and Singapore, as the interconnection capacity is rapidly "depleting".

The research firm noted that while Singapore's plans to import up to six gigawatts (GW) of clean electricity over the next decade, Malaysia currently has a 1GW interconnection with Singapore to accommodate electricity trade. 

"However, this interconnection capacity is fast depleting with only an estimated 100MW remaining capacity that can be further utilised," it said in a note on Thursday.

TA Securities noted that half of the 1GW interconnection capacity is reserved for grid balancing, while 100MW for Tenaga Nasional Bhd’s (KL:TENAGA) export to Singapore via YTL Power Seraya, 100MW for the pilot Energy Exchange Malaysia (ENEGEM) scheme and another 200MW is reserved for the Laos-Thailand-Malaysia-Singapore Power Integration Project (LTMS-PIP). 

"Considering the 6GW clean electricity import potential by Singapore over the next decade, we see reason for the government to consider the feasibility of a second, larger capacity interconnection facility between Peninsular Malaysia and Singapore," it added.

TA Securities believe YTL Power Bhd (KL:YTLPWR) (Buy, TP: RM6.39) is one of the beneficiaries of potential RE exports to Singapore, having an advantage of existing generation and retail operations in the Singapore market.

"YTLPOWR could benefit from both RE export margins from Malaysia and at the other end, sale of green electricity to the Singapore market," it added.

Furthermore, YTLPOWR attains a strong balance sheet that can support expansion in its RE capacity for exports, which was beefed up by the RM3 billion proceeds from the sale of its 33.5% stake in Electranet, coupled with rising cash flows from a strong recovery in Power Seraya’s earnings. 

"Meanwhile, Tenaga (Buy, TP: RM17.30) is a beneficiary of wheeling charges for RE export and investments into potentially a second, larger interconnector between Peninsular Malaysia and Singapore," it added.

Overall, TA Securities has maintained an “overweight” call on the Power and Utilities backed by the government’s firm policy support and the sector’s strong ESG profile.

Key players such as Samaiden Group Bhd (KL:SAMAIDEN)(TP: RM1.30), Solarvest Holdings Bhd (KL:SLVEST)(not rated), Sunview Group Bhd (KL:SUNVIEW)(not rated), Tenaga, Malakoff Corp Bhd (KL:MALAKOF)(TP: RM1.05) and YTLPOWR (TP: RM6.39) are among beneficiaries poised to play leading roles in this transformation, with analysts from TA Securities maintaining a “buy” call on the sector.  

As the sole grid operator, Tenaga is well-positioned to benefit from increased grid capex to accommodate higher RE integration and strong demand from data centres.

Similarly, asset owners such as Malakoff and YTLPOWR stand to benefit from rising demand for domestic and export-driven RE generation capacity.

Despite ongoing efforts, “Malaysia's significant dependence on fossil fuels presents a key challenge particularly in the power sector,” TA Securities flagged, noting that the country continues to rely heavily on coal-fired power plants due to longstanding policies aimed at energy diversification.  

Nonetheless, TA Securities noted that Malaysia’s energy transition plan is spearheaded by The Malaysian Renewable Energy Roadmap (MyRER) and the latest National Energy Transition Roadmap (NETR), both of which lay the groundwork for the nation’s commitment towards the Paris Agreement NDC and Net-Zero 2050 ambition.

As part of the Nationally Determined Contributions (NDC), Malaysia has pledged to reduce its greenhouse gases (GHG) emissions by 45% by 2030, and according to TA Securities, “Decarbonising Malaysia’s power system is crucial to achieve these targets.”

Under the MyRER, Malaysia aims to add 9GW of RE capacity to the power system, targeting 31% of its RE mix by 2025 and 40% by 2035, providing a clear pathway for the country’s energy transition efforts and creating ample opportunities for domestic RE players, especially in the solar and hydro space.

Underpinning the sector’s prospectus further, the NETR is pursuing a more aggressive target of 70% RE capacity mix by 2050, which will demand an additional 60GW of RE capacity, predominantly from solar energy, signalling a seismic shift in the country's energy landscape.

Looking forward, Malaysia is also positioning itself to become a key player in the regional energy trade by lifting the RE export ban to pave way for the nation to capitalise on higher green tariffs in Singapore and other neighboring countries.

YTL Power shares were unchanged at RM3.55 at noon break, translating into a market capitalisation of RM29.3 billion. Tenaga's shares gained 12 sen or 0.8% at RM14.58, valuing the group at RM84.8 billion.