Tenaga… dated Jan 2013

Its prospects

Escalating fuel costs, which has haunted Tenaga could be a thing of the past following the structural changes in the energy sector.

The price of coal, a commodity which Tenaga purchases at spot price has been fallen below US$100 per tonne. It has been hovering between US$90 and US$95 during Dec 2012 – Jan 2013.

The softer prices will benefit Tenaga as the commodity accounts for about 36% of its total fuel cost. Coal is the second largest source of fuel for Tenaga after gas. Considering that coal is purchased at market prices, a lower price means a better bottom line for Tenaga.

Weak coal prices would give Tenaga’s earnings for current fiscal year a big boost. It is estimated that for every US$1 drop in coal prices, this translates into a cost saving of US$21 million for Tenaga.

Sentiment for Tenaga has improved amid optimism that the risk to the group’s earnings has declined given the reforms in the energy sector. This includes decreasing capacity payments for two first generation IPPs whose power purcahse agreements have been renewed with adjustments on the payments to Tenaga.

It is now (Jan 2013) just a question of timing for fuel cost pass through mechanism to be put in place.
The power capacity payment is expected to save Tenaga about rm500 million to rm600 million a year out of the rm1.4 billion that is paid to the first generation IPPs.

It is understood that the amount saved will be pooled to form a stabilization fund to compensate Tenaga if it is unable to pass on the fuel cost increments to the end consumers.
As the fund snowballs over time, it will help to cushion any adverse impact brought on by a spike in fuel costs. This, to some extent, has reduced concerns that the utility giant’s earnings would always be hard hit by higher fuel costs due to the failure to pass on additional costs to the consumer as it had always done so in the past.

The ongoing sector reform is positive for Tenaga over the longer term with more competitive pricing of power supply from the IPPs. But right now (Jan 2013), it needs the tariff hike to address rising gas costs, in line with the government’s plan to gradually reduce the fuel subsidy.

It is well known that there is a lack of political will to put in place a fuel cost pass through mechanism for Malaysia’s electricity tariff. However the ruling government would have a stronger impetus after the GE when it comes to cutting subsidies to narrow Malaysia’s budget deficit.

By the second half of 2013 expect an acceleration of initiatives to improve Tenaga’s operations. This could lead to higher electricity tariffs and better economic returns for Tenaga.

Nevertheless, the less optimistic believe it is too early to be overly optimistic about Tenaga’s prospects. They say the government still has not shown any firm indication of whether there will be a revival of the gas subsidy rationalization plan. Under the plan, Malaysia’s gas price has to be increased very six months, something that has not been happening.

There is no certainty on gas prices. Very soon, Tenaga will have to import at market prices and it is still not known if the price can be passed on to consumers.

The only concern is Tenaga’s vulnerability to government regulation as the company has virtually no control over its pricing structure or costs.

Passing on the increases in the fuel cost has long been a challenge for Tenaga. Will the scenario be any different after the GE.