KUALA LUMPUR: Electricity demand is likely to register growth, albeit at a slower-than-expected pace due to the enhanced movement restrictions.

       However, utility players are expected to continue expanding their renewable energy (RE) exposure given that energy transition will remain one of the key priorities for the industry, according to RHB Research.

       Electricity demand contracted 0.3% year-on-year (2.1% drop quarter-on-quarter) in the first quarter of 2021.

       On a quarter-on-quarter basis, industrial and commercial consumption fell 2.4% and 5.2% while domestic consumption improved 2.1%.RHB Research said electricity demand recovery overall could be slower, in view of the implementation of the lockdown since June, as well as from the Energy Commission’s approved demand forecast of 2.9% under the regulatory period (RP) two plus plan.

       “We understand the impact is less severe this round as compared to the first movement control order from March to May 2020. However, the recovery path may be patchy, especially when the number of new Covid-19 cases remains elevated, ” said the research unit.

       The reserve margin is estimated at 52% in 2021, and is set to drop below 25% in 2030 before settling at 21% by 2039, according to RHB Research.

       Also, tariff rates may continue to be under pressure, with intensifying competition as more new players venture into the RE space.

       Meanwhile, as the cost of solar modules remain elevated due to higher commodity prices, the margins of solar engineering, procurement, and construction players are expected to be affected – especially for Large-Scale Solar (LSS) 4 projects contracted earlier on.

       Solarvest engineers at work

       For new contracts, the players can negotiate with clients to transfer the higher material costs.

       RHB Research noted that players with a higher proportion of consultation works tend to fetch better margins.

       The research unit’s top sector pick is Tenaga Nasional Bhd (TNB).

       Its “buy” call on the counter has a target price of RM12.49.

       “We continue to favour TNB for its earnings defensiveness under the incentive based regulation mechanism. We see its ambitious RE targets possibly fuelling medium to long-term growth, ” said the research unit.

       TNB is trading at slightly above its seven-year low and foreign shareholdings are at 12.2% as of May (December 2019: 18.4%).

       The research house also pointed out that the details for RP 3 (2022-2024) for electricity rates will be known by the second half of 2021.

       RP three will largely be similar to RP two with a higher asset base and lower weighted average cost of capital, according to RHB Research.