Gas, Water & Multi-Utilities (Utilities)
Utilities Sector - Harnessing Opportunities in Growing Energy Demand
Tue, 24-Dec-2024 08:58 am
by Ong Tze Hern • Apex Research

Summary

  • The Utilities Sector is primed for robust growth, driven by:

  • (i) Surging electricity demand from data centres,

  • (ii) The increasing adoption of electric vehicles, and

  • (iii) The energy transition, which necessitates the development of new gas-fired plants and grid upgrades.

  • We initiate coverage of the Utilities Sector with an Overweight stance. Our top picks are MALAKOF (TP: RM0.96) and TENAGA (TP: RM16.00).Palm oil inventory dropped below the 2m tonnes mark, thanks to strong export demand from China, India and EU. 

 

Key Drivers

  • Surging Demand from Data Centres. Growth of the digital economy, cloud computing, and Malaysia’s advantageous undersea cable connectivity has fuelled surging demand for energy-intensive data centres. TENAGA expects potential electricity demand from data centres to exceed 5GW by 2035. Considering that data centres operate consistently, even at night, 5GW of electricity demand translates to 43,800GWh per year, which is equivalent to an impressive 35.6% of the total electricity demand recorded in 2023. 

  • Electrification of Vehicles. In the pursuit of net-zero emissions, electric vehicles (EVs) play a pivotal role in reducing emissions from the transportation sector. In 2023, Malaysia consumed an estimated 17bn litres of petrol, with approximately 90% sold in Peninsular Malaysia, as most vehicles in Sabah and Sarawak are diesel-fuelled. If 5% of this petrol consumption were replaced by EVs, using a conversion factor of 8.9kWh/litre of petrol, this would result in an additional 6,808.5GWh of electricity demand, equivalent to 5.5% of the total annual electricity demand in 2023. 

  • Gas as a Transitional Fuel. Our conservative estimate indicates that at least 8.5GW of new generation capacity will be required in Peninsular Malaysia by the end of 2030. Assuming 60% of this capacity is met by RE, the remaining 3.4GW will need to be supplied by gas-fired plants, which are essential to ensure grid stability and reliability.

  • Energy Transition Driving the need for Grid Upgrade. Under the NETR, Malaysia has set an ambitious goal to achieve a 70% RE capacity mix by 2050. As the share of RE in both capacity and generation mix increases, the need to upgrade and modernise the grid becomes critical. A total investment of RM340bn in transmission and distribution is required from 2023 to 2050, averaging RM12.1bn annually.

  • We initiate coverage of the Utilities Sector with an Overweight stance. Our top picks are MALAKOF (TP: RM0.96) and TENAGA (TP: RM16.00). The sector is set for robust growth, driven by rising electricity demand from data centres, the electrification of vehicles, and the ongoing energy transition.

     

Recommendation: Overweight
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