KUALA LUMPUR, Oct 26 — Malaysia is well positioned to play a key role as a regional data centre hub if it can maintain its competitive advantage, Moody’s Ratings said.

It said Malaysia’s competitive advantage stems from competitively priced, readily available power and supportive government initiatives. 

Moody’s Ratings assistant vice president - ratings Chelsia Ng said the country’s policy framework and approval requirements already focus on data centre efficiency, with eligibility for tax incentives under the Digital Ecosystem Acceleration (DESAC) scheme linked to power and water efficiency benchmarks.

“Johor, which houses most of the country’s data centre capacity, also applies more stringent requirements for project approvals.

“These measures should promote more efficient resource use, which should help moderate the incremental pressure on power and water infrastructure as the sector grows,” Ng told Bernama in a recent interview.

Moody’s Ratings estimated that around 14 gigawatts (GW) to 17 GW of additional generation capacity will be required by 2035 to meet the incremental demand in Peninsular Malaysia, which could entail around RM80 billion to RM95 billion of investments to be undertaken by Tenaga Nasional Bhd (TNB) and independent power producers.

Ng noted that data centre-led demand growth would be credit-positive for utilities over the long term, but the elevated capital spending would also entail execution and funding risks and raise financial leverage during the development phase.

She noted that based on government projections, data centres could account for around 31 per cent of total electricity consumption in Peninsular Malaysia by 2035, up from 4.0 per cent in 2025.

“This will underpin structural electricity demand growth, and we expect demand in Peninsular Malaysia to grow at a compound annual rate of around 5.8 per cent over the next decade, although the scale and pace of growth will remain subject to market and execution risks,” said Ng.

She noted that the need for firm baseload capacity to meet data centre power demand would keep gas relevant as a transition fuel, whilst Malaysia continues to scale up solar capacity and battery energy storage systems (BESS) to support system reliability.

Ng said the procurement of new and extended gas-fired capacity under NewGen25 and NewGen26 also underscores the importance of gas in maintaining system reliability as electricity demand rises.

“However, Malaysia will need to balance this requirement (to phase) down coal generation and the need to replace retiring generation capacities over the next decade, which will add another layer of investment and execution risk to the energy transition,” she added.

Ng said renewable energy (RE) could also meet part of the additional electricity demand, as solar capacity could be deployed relatively quickly, adding that data centre operators also have their own net-zero and decarbonisation targets, which could drive demand for RE-linked power procurement over time.

Although solar remains a modest contributor to Peninsular Malaysia’s generation mix, she noted that the mandatory inclusion of BESS in the recently launched large-scale solar (LSS) tender programme points to the growing role for solar-plus-storage in meeting incremental demand while supporting Malaysia’s decarbonisation initiatives.

“However, the intermittent nature of renewable generation and current battery storage technologies are unlikely to provide sufficient backup to fully meet data centres’ round-the-clock power requirements in the medium term,” she added.

In June, the government announced that Malaysia will require all future solar power projects under its sixth LSS programme to include BESS, as the government moves to strengthen grid stability alongside RE expansion. 

Ng noted that data centre-led demand growth would be credit positive for utilities over the long term, but the elevated capital spending would also entail execution and funding risks and raise financial leverage during the development phase.

“For TNB, annual capital spending is likely to increase to around RM18 billion, driven by higher investment in grid infrastructure and generation capacity.

“Its regulated transmission and distribution investments benefit from a cost-recovery framework which underpins revenue growth,” she added.

Although unregulated generation projects carry greater risk because they take longer to build before generating cash flow, Moody’s Ratings expects TNB to have sufficient financial headroom to manage sizable capital spending over the medium term. — Bernama