ON the cusp of the biggest transformation in its 70-year history, Tenaga Nasional Bhd (TNB) is powering ahead towards inevitable changes on the horizon.
The utility giant, which has enjoyed an almost absolute monopoly in many areas in the country since its earliest days, must now figure out where it fits in the government’s vision of a new, liberalised power sector.
Its president and CEO, Datuk Seri Amir Hamzah Azizan, who took the helm of the company in April this year, says TNB has been through several transformations before and will manage the impending changes – just as it has done successfully in the past.
“The key message is that we have seen changes before, and we have managed them.
“The next evolution is not something that is unique only to Malaysia... it is happening in many countries throughout the world today, whereby the market is being deregulated, and where efficiency is the focus, ” the 52-year-old says in an interview.
From the setting up of the Central Electricity Board in 1949 to the privatisation of the organisation, then known as the National Electricity Board of the States of Malaya (NEB) in the 1980s, and the subsequent establishment of TNB as its successor, the journey of power generation in Malaysia has indeed seen many changes along the way.
TNB, which has become synonymous with the power industry in Malaysia, is today among the largest electricity companies in Asia, serving some 9.65 million in Peninsular Malaysia, Sabah and Labuan.
Given its undisputed position all these years, the government’s recent announcement of plans to liberalise the sector understandably created some panic among its investors, who feared that the company, which is 27.3% owned by Khazanah Nasional Bhd, would end up a casualty of the transformation.
The company’s share price suffered as a result, slipping to a one-year low of RM11.11 in May, but later recovering as more clarity emerged on the government’s plans and as TNB revealed its own strategies to cope with the changes.
Prior to this, one major change in the sector was the privatisation of power generation, which saw the entry of the independent power producers (IPPs) into the market following the landmark 1992 power blackout.
TNB, ahead of the government’s recent announcement of its 10-year master plan for the industry, had announced a corporate restructuring exercise in July.
Financial discipline for the generation and retail segments
The company said it would set up independent generation (GenCo) and retail business (RetailCo) entities for a more focused approach on the two core businesses.
Last week, the group entered into agreements to transfer its domestic power generation and electricity retail business to GenCo and RetailCo, respectively, a first step among others to ensure it can run these new entities in good order come July 1 next year.
The industry reforms, under the Malaysia Electricity Supply Industry 2.0 (MESI 2.0) framework recently approved by the Cabinet, aims to accomplish three agendas – increasing industry efficiency; future-proofing the industry structure, regulations and key processes as well as empowering consumers; and democratising and decentralising the electricity supply industry.
The 10-year master plan seeks to ultimately liberalise the sector across the value chain, lower electricity costs and encourage the supply of green energy.
Among the reform initiatives include allowing IPPs to source their own fuel; moving towards capacity and the energy market from the current power purchase agreement (PPA) regime; enabling third-party access for transmission and distribution; liberalising the retail segment; and increasing transparency between Single Buyer and Grid System Operator.
As these reforms take place, Amir says TNB will still account for about 50% of the country’s total generation capacity.
Even so, this space is seen as matured, given that yields for the second-generation PPAs are not as generous as what IPPs had enjoyed in the first round of contracts.
Future PPAs will also have a shorter tenure instead of 21 years and going forward, a more competitive merchant market would gradually be introduced, similar to Singapore, where the government had progressively opened up the electricity market to promote more competitive pricing as well as provide consumers with more options.
The two set-ups – GenCo and RetailCo – which will have their separate boards and management teams, will force discipline, greater accountability and bring about an innovative culture, says Amir.
“What is most important for us is that the mindset has to change, and we have to be very transparent because the segment numbers will appear in the annual account reports, ” he says.
Currently, TNB’s accounts do not show how much is made in these segments, as the figures are integrated.
“When you are transparent, it holds people accountable to their performance. That discipline is very important, ” he asserts.
Amir adds that the government, via MESI 2.0, has also confirmed that TNB’s grid and distribution network remains a national monopoly.
“It is not a good idea to break this up into little bits because then, you would have issues like overlapping capital expenditure, which can be inefficient.
“There are also operational issues to deal with on how to maintain the grid and this creates risks such as blackouts, ” he says.
Reforms to the retail side of the business, he says, will be more exciting as TNB will be forced to reinvent itself, be more innovative and compete for customers who will be able to choose which provider to buy their power from - a break from the current model.
“Malaysia is not a pioneer in retail liberalisation.
“There are many other markets that have done this and we have observed what needs to be done, ” he says.
But while consumers stand to get more attractive or bundled offerings, Amir says it may not necessarily translate to lower tariffs because about 70% of the electricity tariff is still made up of fuel costs.
“We don’t know that, but are doing the best to remove inefficiencies in the system so that the best rate can be given to the consumer, ” he says.
TNB is also embracing digitalisation in the way it operates, to keep up with the changing times, and future-proof the business.
One way it is doing this is through the rollout of smart meters at its customers’ homes, which it kicked off in Malacca back in 2016.
The company plans to set up 9.1 million smart meters at households nationwide by 2026, and is currently installing the smart device at homes across the Klang Valley.
The smart meters, which provide a more accurate reading, also allows consumers to monitor their electricity consumption via their smartphones and help them reduce usage.
Re-tweaking the transformation plan
The group is also adjusting TNB’s transformation plan, Reimagining TNB 2025, to make it more “realistic”, with new and more achievable goals.
“I am trying to put a rigour in terms of providing some clarity about what the game plan is, and then add in detailed plans and targets so we can actually deliver what we promise, ” he says.
An issue with the original transformation plan, he says, was that the measure of success had been predominantly financial.
The element of operational excellence was missing.
“We want to be able to compare with the top-10 utility companies in the world, and improve ourselves wherever we are lacking, ” he says.
Amir adds that some of the financial targets stated in the plan are unrealistic, and need to be relooked.
“By setting achievable targets, you can excite and motivate your people to deliver, ” he adds on the group’s plan to become a top-10 global utility player by market capitalisation by 2025.
Next level for TNBAs part of its future generation sources strategy, TNB is shifting its focus towards renewable energy (RE), both locally and abroad.
It had a total installed RE capacity of 332MW as at the financial year ended Dec 31,2018 (FY18), boosted by its acquisitions in the UK and the commissioning of a 50MW large-scale solar in Sepang.
“In the international space, we have decided sometime back to grow our business, especially in the RE space. However, our first round of forays had challenges.
“In the last six months, we have been refining our portfolio, and have seen encouraging returns from our investments in RE in the UK.”
Amir says the group, which targets to grow its renewable capacity to 1,700MW by 2025, will continue to seek opportunities in this space overseas, but these investments “must meet our financial threshold and strategic focus.”
On which markets it has set its sights on, Amir says there are still opportunities in Europe that the group can explore, while he also sees opportunities coming up in Asia, where South-East Asia is seen to be the largest growth market after China and India with an estimated investment of US$500bil or 4.3% globally, according to Kenanga Research in a recent report.
For now, the contribution from the international business is small, but Amir reckons that in five years, it will be material to the group’s portfolio.
In FY18, TNB made an impairment of around RM1.07bil for its investment related to two of its international associates, namely, Turkey’s GAMA Enerji Anonim Sirketi and India’s GMR Energy Ltd. This dragged down FY18’s net profit to RM3.7bil or a decline of 46% from a year ago. Minus lower regulatory returns and losses from its foreign associates, core profit came in at RM5.4bil.
For context, TNB had been maintaining an average net profitability of about RM6.7bil from 2014 to 2017.
For FY19, Amir says the group is on a more stable platform with “yields coming in the way it should be and we should be able to deliver our normal average for the year”.
TNB shares have rebounded since May, closing at RM13.92, which is about what it was trading at in the beginning of the year.
At this level, its market capitalisation stands at RM78.93bil (US$19.08bil), making it now the second-most valuable stock on Bursa Malaysia after MALAYAN BANKING BHD. The top power companies around the world, meanwhile, have market caps ranging from US$39.26bil to US$111.19bil.
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