TENAGA Nasional Berhad (TNB) has big ambitions. It is reimagining itself to be among the top 10 utilities in the world by 2025. Not bad for a homegrown powerhouse that will be 70 years old next month.
The reason for reimagining TNB: the utility world — power generation, transmission and distribution — is changing around the globe. Malaysia may not be spared.
TNB may end up having three entities — one each for making, distributing and selling power. This is not unlike what has been happening in Europe where traditional business models are giving way to new ones. As one utility company chief executive officer there put it to the Financial Times on Feb 28, each part of the energy market is in movement.
Climate change hasn’t helped either. The world is decarbonising, and so must we. This means our fuel mix must change. Today, TNB uses 55.86 per cent coal, 40.17 per cent gas and 3.89 per cent hydro. Happily, TNB uses what is called the ultra-supercritical technology in its coal-fired power plants.
The balance is made of solar and other renewables. The shift in fuel mix will be dictated by market forces — such as economics of generating power out of gas and coal — and extra-market forces such as climate change. No power company is an island.
Even in a less disruptive market environment such as Malaysia, the traditional practice of making, distributing and selling power may have to give way. One company may not be able to have it all for long. Besides, more players may mean better efficiency and competitive pricing.
This is the experience of Europe where vertical integration of the utility value chain has gone the way of the dinosaurs. There may be no cogent argument for Malaysia to be otherwise.
According to McKinsey & Co’s analysis of 50 global utilities, they turned in an average total cumulative return to shareholders of just one per cent from July 2007 to July 2017. The report does not make it clear if the global analysis involved TNB.
The management consulting firm sees many reasons for this poor performance. Three of them are: the rise of renewables, entry of new players from other sectors such as oil and gas companies (Petronas’ acquisition of Singapore-based Amplus Energy Solutions Pte Ltd, a renewable energy entity, is one example) and new entrants as a result of digitisation and market liberalisation.
McKinsey’s recommendation? First, aim for scale either in terms of geography or areas such as retail. Second, take up new technologies. Third, adopt new business models, such as partnering with financial players who can offer cheap capital. The last may be a bit too outside-the-box thinking, for Malaysia at least.
In an article dated Nov 16, 2018, on “Power plays: How utilities can face the future” , McKinsey consultants Tiziano Bruno, David Frankel and Sébastien Léger deliver this warning to power companies: “The utility industry is facing many big disruptions all at the same time.
For the future to be different and better than the recent past, utilities must be ready and willing to change. If they do not act decisively, they will face big — and maybe existential — risks.”
TNB appears to be listening.