IPPs plug back in

GAS-FIRED power is returning to the fore in Malaysia’s energy mix as policymakers move to extend ageing plants and roll out new capacity to meet surging electricity demand.

Malakoff Corp Bhd is the latest to secure extensions until Dec 31, 2029, for three of its gas-fired power plants, with a combined effective capacity of about 2.1GW.

These comprise the 1,303MW Segari combined cycle gas turbine (CCGT) plant in Perak, the GB3 open cycle gas turbine plant in Perak and the Prai CCGT plant in Penang.

Similar approvals were granted to Tenaga Nasional Bhd (TNB) late last year.

The utility secured letters of notification (LON) for three gas-fired plants, with a combined capacity of about 1.3GW, under the Energy Commission’s (EC) Category 1 tender in May last year to award extensions of concession periods to existing gas-fired plants with expired or soon-to-expire power purchase agreements (PPAs).

Analysts expect the three TNB plants to begin commercialisation in mid-2026 until 2030. Analysts also see scope for TNB to secure extensions for a further 1.2GW of capacity.

Interestingly, this week, Petroliam Nasional Bhd (PETRONAS) announced plans to buy more liquefied natural gas (LNG) from Qatar Energy, securing long-term supply to meet the rising gas demand fuelled by the coal-to-gas shift and expanding data centre (DC) capacity.

Apart from extensions of ageing plants, another 6GW to 8GW of greenfield gas projects are expected under the EC’s Category 2 tender – the first such developments in over a decade.

The renewed focus on gas is in line with the government’s National Energy Transition Roadmap, which sees gas playing a critical role in the power mix as a flexible, lower-emission bridge between coal and renewable energy (RE).

“Even with more solar coming online, gas remains essential to maintain baseload and reserve margins,” one industry player tells StarBiz 7.

After receiving the LONs, the extended plants will sign PPAs with TNB for their contract periods. Fully depreciated, they require minimal capital expenditure to maintain operations, which makes them highly value-accretive for the owners, despite being less efficient than newer units.

“But will the tariffs stay lower or rise for certain plants?” one industry player asks. Sources say the EC has set conditions for these extensions, which will be taken into account during negotiations.

“The economics of the extensions also hinge on the plants’ levelised cost of electricity (LCOE), which takes into account fuel consumption, operational efficiency, and capital costs. While these ageing units are fully depreciated, their lower efficiency can push up LCOE compared with newer plants, a factor likely considered in the tariff negotiations.”

In a report, CGS International (CGSI) Research estimates each extension for Malakoff’s smaller plants can generate around RM20mil per year in net profit on average.

This is based on an assumption of a 45% to 55% reduction in capacity payments – which is the fixed payments that plant owners receive for making electricity available to the grid – relative to the initial PPAs.

However, these plants are a stopgap ahead of new gas projects slated for award by the first quarter of 2026 and commissioning in 2029 to 2030.

Malaysia is not unique in this approach. In the region, Indonesia is planning to shift existing thermal generation towards gas to support reliability and energy transition goals.

Elsewhere, such as in parts of Europe and the United States, older gas plants have been kept in service or delayed for retirement to maintain grid stability.

Looking ahead, power demand in Malaysia is expected to grow strongly, with CGSI Research projecting around 7% per year between 2024 and 2030, driven in part by the multi-phase ramp-up of contracted DC loads.

The research firm says its LCOE analysis shows that solar remains the lowest-cost generation option, though solar paired with battery storage is increasingly competitive with CCGT during peak-demand hours.

Despite this cost parity, CCGTs remain essential for baseload power to keep the grid stable, some opine.

Coal and gas still account for the bulk of generation.

Notably, the country’s reserve margin, which is the cushion of capacity above peak demand, fell to 29% in 2024, the first reading under 30% since 2016, as demand surged.

Still, the extension news did little to lift Malakoff’s share price, which remains weighed down by lingering operational issues and is trading near the lower end of its 10-year historical range.

Shares of peer YTL Power International Bhd, have also underperformed due to low energy tariffs in Singapore.

TNB, Malakoff and YTL Power are seen as front-runners for the new gas power plants given their proven track records, sizeable balance sheets, access to sites with existing grid infrastructure and already secured gas turbine slots.

However, industry players say new or non-traditional independent power producers (IPPs) may also emerge.

One name being touted is PETRONAS Gas Bhd (PetGas), which could leverage its upstream gas resources, midstream infrastructure, and strong balance sheet to compete.

PetGas made its entry into power generation, albeit in a smaller scale, with the 285MW Kimanis Power Plant in Sabah.

Its second gas-fired plant in Kimanis, a 100MW peaking facility, is to come online in 2026, the company’s annual report stated.

PetGas runs re-gasification terminals (RGT) in Sungai Udang, Malacca, and Pengerang, Johor, and intends to build a third in Lumut, Perak.

It is understood that Gas Malaysia Bhd, which is involved in the distribution and sale of natural gas and liquefied petroleum gas, and counts MMC Corp Bhd and PetGas as major shareholders, is also keen to participate in future RGT developments.

Beyond the traditional IPPs, CGSI Research says additional capacity needs could create opportunities for unlisted players such as Edra Power Holdings Sdn Bhd and Selangor government-backed Worldwide Holdings Bhd, operator of the 1,200MW Pulau Indah Power Plant, which began commercial operations recently.

Winners of the upcoming greenfield awards are likely to spend 2026-2028 focused on fundraising, execution, and construction, and thereafter earnings contribution to kick in upon commissioning.

However, the cost of gas turbines for a CCGT plant has doubled in recent years, now estimated at US$1mil to US$1.5mil per MW, according to AmResearch.

The global shortage of gas turbines is due to the surge in orders from the United States and the Middle East, as well as rising labour and material costs. However, it says local companies such as Malakoff and YTL Power have locked in their gas turbine supply.

Still, industry players cautioned higher capital costs may put upward pressure on base tariffs over time, although a stronger ringgit could help moderate some cost pressures.

For plant owners, the economics remain favourable: based on current PPAs for CCGT plants, AmResearch says a 1,400MW plant could earn RM200mil to RM300mil per year before interest and taxes in its early years of commissioning, with annual capacity payments of RM500mil to RM600mil.