Singapore’s, Energy Market Authority is implementing a new price cap mechanism for the wholesale electricity market from Jul’23 till 3QCY25 to curb excessive price volatility from temporary capacity outages and gas supply shortages. The new price cap is essentially a switch from the current SGD4500/MWh to a dynamic cap on cost-plus model at 1.5x-3.0x a CCGT’s long-run marginal cost (fuel and non-fuel variable cost) under varying gas spread scenarios.
MIDF’s view, firstly, based on simulations by the EMA for the period Oct’22- Apr’23, market prices breached the theoretical price only 0.6% of the trading period observed, while the impact on average USEP was -3.2%, meaning the majority of the time, the market is “well behaved”. While it said it believes the new cap will weed out temporary extreme spikes, it still gives sufficient room for returns as the multiplier is some 3x a CCGT’s LRMC in periods of stable gas prices. Secondly, the house also estimates ~75% of YTL Seraya’s revenue is tied to long-term contracts (ranging from half a year up to 2 years), which entail stable rates and margins. Given the still tight electricity market expected in the next 3 years with minimal new capacity additions, MIDF thinks renewal prospects of the long-term contracts remain favourable. Thirdly, it also believes the long-term impact of the new price cap is mainly on the less efficient generators which are typically the last get on the grid, while incumbents such as Seraya should be less impacted.
The house makes no changes to its projections, which has factored in some normalisation in earnings for Seraya from FY26F in line with expectations of stabilising fuel prices over the mid-term. As it believes the bulk of Seraya’s recent quarterly results still reflected the long-term contracts locked in 1-2 years ago, MIDF reckons it has yet to fully capture the strong rates in the wholesale market.
YTL Power is well positioned to benefit from Malaysia’s lifting of the RE export ban given its advantage in having existing generation and retail operations in Singapore. Near-term, earnings are set to be boosted by a recovery in Wessex Water’s earnings from its recent Apr23’ tariff hike and still strong Seraya earnings from a tight Singapore electricity market, while near-term, the group could temporarily benefit from a weaker Ringgit against the SGD and GBP.
The valuations have yet to factor in YTLP’s 45%-owned Jordan shale oil power plant, which the house believes could start contributing to earnings soon.
