We maintain OVERWEIGHT on the renewable energy (RE) sector, supported by the robust execution of RE initiatives and the increasing quota allocation, particularly in solar. Key initiatives under the National Energy Transition Roadmap (NETR) are progressing well, with the recent Corporate Renewable Energy Supply Scheme (CRESS) playing a pivotal role in advancing the third-party access (TPA) mechanism. Based on the timeline, we believe that investors should focus on the 800MW Corporate Green Power Programme (CGPP) in 4QCY24, valued at RM2.4b, while the RM5b LSS5 EPCC contract awards are expected in 1QCY25. These initiatives are expected to sustain sector growth throughout 2028. Meanwhile, declining panel prices due to oversupply will boost margins of solar EPCC contractors and stimulate investment in solar systems. Our sector top picks comprise SLVEST (OP; TP: RM1.91) and SAMAIDEN (OP; TP: RM1.51).

CRESS serves as a catalyst for expanding RE beyond solar. The CRESS, freshly unveiled in September, marks a significant step towards energy market liberalisation by broadening corporate access to green electricity. Through the concept of open grid access system, corporate consumers can now buy green electricity directly from RE developers via the grid with a predetermined system access charge (SAC) and reducing the reliance on TNB's conventional electricity supply. RE developers utilising TNB’s grid are required to pay the SAC and provide firm output to maintain grid stability at RM0.25/kWh, while non-firm output incurs a premium SAC of RM0.45/kWh due to the lack of dispatchable capacity. However, the SAC shall be reviewed in every regulatory period, and we anticipate a reduction as TNB’s infrastructure matures. Additionally, CRESS eliminates the competitive bidding process of the LSS program, enabling developers and consumers to negotiate tariffs through mutual agreements.

Based on our estimates, solar power producers would need to set prices at a minimum of RM0.64/kWh to achieve 8% project IRR for both firm and non-firm outputs, exceeding the current conventional electricity tariff (~RM0.55/kWh) and retail price of green electricity (GET) (~RM0.59/kWh). Despite the lower SAC for firm output, the same tariff is required to reach the 8% project IRR as the SAC difference reflects the cost of battery energy storage systems (BESS). Given the substantial premium for green electricity under CRESS, we foresee increased diversification by the government into other RE sources, such as bioenergy and hydropower. For instance, solar power producers may explore partnerships with other RE sources to achieve firm output, thereby benefiting from the lower SAC of RM0.25/kWh. Based on our estimates, a combination of solar and biomass energy could allow RE producers to price competitively with conventional electricity at ~RM0.55/kWh while maintaining 8% project IRR, driven by the lower SAC. Overall, we look forward to potential collaborations between solar and biomass under CRESS, which could result in more competitive tariff rates while ensuring an 8% IRR.

Surge in job contracts ahead. Within our coverage universe, we observed a significant increase in orderbooks mainly driven by EPCC jobs under the CGPP. Over the immediate term, we expect more EPCC contracts from the CGPP to be awarded as early as this month with a completion deadline by end-2025. Based on our estimates, the 800MWp capacity under the CGPP will translate to RM2.4b solar EPCC jobs. Thereafter, the Energy Commission will embark on the 2GW LSS5, the largest LSS programme thus far, in four packages (see Exhibit 1). Under LSS5, developers could bid up to 500MW (vs. only 50MW previously) with operations scheduled to commence in 2026. We expect bidders to submit rates that are comparable to LSS4 (i.e. at a project IRR of 8%). We estimate that there will be at least RM5b worth of PV system EPCC jobs coming from the LSS5.

Solar panel prices near inflection point though likely not before 2025. There are early indications that the severe oversupply in the solar industry may be starting to ease. The top 3 leading Chinese solar manufacturers (i.e. Longi, Tongwei and JA) reported a combined loss of USD1.3b in the 1HCY24 reporting season weighed down by weak panel prices falling below production costs. This pressure stems from years of aggressive factory expansions, leading to excess capacity and intense competition. While this financial pressure may lay the groundwork for a potential recovery, a meaningful rebound is unlikely before next year. We anticipate that industry consolidation and upcoming factory closures will contribute to rebalancing the market.

Moreover, Chinese solar manufacturers are halting production at Southeast Asian plants due to weak export outlook, following a US tariff increase on solar panels imported from China—rising to 50% from 25% as of 1 Aug 2024. Recall, Longi has halted all five production lines at its plant in Vietnam and is winding down its operations in Malaysia, Trina is shutting down its plants in Thailand and Vietnam. Despite this adjustment, global solar panel supply remains excessive (see Exhibit 2). We maintain our forecast for average solar module price in CY24 relatively unchanged at 10 US cents/W vs.18 US cents/W in CY23, an extension to its multi-year decline (see Exhibit 3 & 4).

Hidden potential for renewable energy certificates (RECs). Meanwhile, there is a growing market for renewable energy certificates (RECs) backed by demand from corporations as they commit themselves to the RE100 initiative (i.e. the goal of using renewable resources for one’s all energy needs) as well as data centres (to achieve the “green” status). Already, >100 companies in Malaysia, predominantly local units of multinational companies with a combined electricity consumption of 4,334 GWh annually, have committed themselves to RE100. At present, RE only makes up about 36% of their total energy consumption, pointing to rising demand for RE and RECs. Moving forward, electrifying the entire economy will require at least three times the current electricity usage by 2050, driven by the shift to electric processes and rising power demands from AI technologies. SLVEST offers RECs at a competitive price of USD5-6/MW, vs. USD10/MW of Green Electricity Tariff (GET) of TENAGA.

Our sector top picks are SLVEST and SAMAIDEN where we see near term prospects will be centred on the upcoming EPCC contracts from the CGPP which are expected to see a more active flow of contract awards in the coming months, followed by the 2GW LSS5 project.

• SLVEST for its strong market position, execution track record, clientele and value proposition of its PV system financing programme, and its strong earnings visibility backed by sizeable outstanding order and tender books, and recurring incomes from a growing portfolio of solar assets.
   
• SAMAIDEN given its focus on residential and commercial projects that typically fetch higher margins, and similarly, its ability to provide end-to-end solutions, including financing to its customers and strong earnings visibility backed by sizeable outstanding order and tender books.

Source: Kenanga Research - 2 Oct 2024