KUALA LUMPUR: Demand for utilities (electricity and gas) are likely to rebound in the fourth quarter of 2021 as Malaysia gradually transitions into phase II, III and IV of the National Recovery Plan.

Hong Leong Investment Bank Bhd (HLIB Research) said the rebound would be driven by a continued drop in new Covid-19 cases and a higher vaccination rate nationwide coupled with gradual relaxation in restrictions, and more sectors are allowed to open and commence full operation.

However, analyst Daniel Wong said the recent surge in global fuel energy prices had raised concerns about the impact on the economy and utility sector.

"We expect the surge in fuel energy prices to be relatively short-term and the imbalance cost pass-through (ICPT) mechanisms under the incentive-based regulation (IBR) framework to remain intact, protecting Tenaga Nasional Bhd (TNB) from the surge of fuel costs covered by Kumpulan Wang Industri Elektrik (KWIE) and allowing surcharge to end-users," he said in a research note today.

Nonetheless, Wong said YTL Power International Bhd (YTL Power) and Petronas Gas Bhd (PetGas) would not be directly affected by the fuel energy prices.

"Utility costs are also adhering to government's commitment towards carbon neutrality by 2050," he said.

HLIB Research said global energy prices have recently surged drastically due to overwhelming demand as countries were stocking up on the back of economic recovery and in anticipation of a severe coming winter season in the northern hemisphere, while production problems hit supplies.

It was reported that spot coal price had reached US$230 per metric tonne (mt) (RM920/mt) while spot Asian liquified natural gas (LNG) price hit US$25/mmbtu (RM100/mmbtu).

"We believe the current high prices are unsustainable and will ease in 2022 post-winter season, and production is ramped up.

"The surge has certainly raised concerns on the impact to Malaysia economy and the utility sector in terms of electricity generation cost and demand for utilities at least in the short term."

Under the RAB framework, Wong said the ICPT mechanism allows it to pass through the fluctuation of fuel costs to end-users.

"Historically, the government has been subsidising fully (through KWIE or other funds) or partially and allowed to pass through the higher energy fuel costs to end-users in the form of surcharges."

HLIB Research expected TNB to remain neutral from the recent surge in energy prices (except for short term cash flow impact due to timing recognition mismatch).

At the same time, PetGas and YTL Power would not directly be affected by fuel costs.

Under the recent 12th Malaysia Plan (12MP), the government has highlighted its commitment to reduce carbon emissions intensity by 45 per cent by 2030 and achieve carbon neutrality by 2050.

This can be accelerated by renewable energy (RE) programmes, replacing expiring coal-fired power plants with new gas-fired power plants and RE.

"Higher RE mix will also reduce the impact from the energy fuel price volatility in the future."

To recap, TNB has committed towards carbon neutrality by 2050 in line with the government's policy, while YTL Power has started planning for its first LSS 500MW in Malaysia.

"PetGas is also exploring opportunities for new Co-gen plants while being expected to benefit from the increasing demand for LNG/gas in Malaysia."

HLIB Research has maintained an Overweight call on the utility sector, given the earnings and dividend sustainability of the sector in a time of market uncertainty plagued by the pandemic.