This article first appeared in Capital, The Edge Malaysia Weekly on June 22, 2026 - June 28, 2026

TENAGA Nasional Bhd’s (KL:TENAGA) rising capital expenditure (capex) is widely perceived as a direct consequence of Malaysia’s data centre (DC) boom.

But the utility giant’s challenge is far from just that. Over the next decade, the country must simultaneously power one of Asia’s fastest-growing data centre markets, expand renewable energy (RE) capacity and replace 6,400MW of coal-fired generation scheduled for retirement.

The scale of the task is immense. Analysts estimate the country may require as much as 12GW of new generation capacity by 2031 to maintain a healthy reserve margin, even after accounting for projects already under development.

For investors, the implications extend well beyond DCs. The race to avoid a future supply crunch is creating opportunities across the electricity value chain — from transmission lines and substations to battery storage systems, RE infrastructure and power generation assets.

At the same time, Tenaga’s spending plans illustrate the magnitude of the opportunity. Its three-year capex programme is expected to jump from RM21 billion in 2022-2024 to RM43 billion in 2025-2027 before rising further to RM47 billion in 2028-2030 if all contingent projects are fully utilised.

After spending RM12.04 billion in 2025, Tenaga is expected to deploy a further RM78 billion between 2026 and 2030, underscoring the scale of the grid expansion and energy transition currently underway.

For fund managers and analysts, the spending cycle is not merely about connecting hyperscale DCs to the grid. Rather, it represents the early stages of what could become Malaysia’s biggest power infrastructure buildout since the independent power producer (IPP) expansion that followed the nationwide blackout in 1992.

The origins of today’s investment cycle can be traced back more than three decades.

Rapid industrialisation in the early 1990s pushed Malaysia’s reserve margin below the critical 20% threshold. The vulnerability became painfully apparent on Sept 29, 1992, when a lightning strike on a transmission facility between Paka and Teluk Kalong, Terengganu, triggered a nationwide blackout. The disruption fundamentally changed the country’s electricity sector.

In response, the government ended the generation monopoly and introduced the first generation of IPPs. Between 1994 and 1996 alone, approximately 4,000MW of new generation capacity was added to the grid, followed by subsequent waves of gas-fired and coal-fired power plants.

Those investments helped maintain reserve margins between 30% and 40% for much of the next two decades.

Today, however, that cushion is beginning to shrink as reserve margins have fallen to about 25% while electricity demand is accelerating.

The most visible catalyst is the rapid expansion of DCs.

According to Kenanga Research, Malaysia’s DC pipeline currently stands at about 8.3GW. Of that amount, around 4.5GW has already been completed and 1.8GW remains under construction while another 2GW has secured electricity supply agreements but has yet to commence construction.

Yet, actual load utilisation remains far lower at about 1.05GW.

To some investors, the disparity raises questions over whether electricity demand projections are overly optimistic.

Analysts argue otherwise, given that DCs typically come online in phases. While facilities may be physically completed, electricity consumption ramps up gradually as operators install server racks and onboard customers. Consequently, actual load utilisation often lags construction completion by several years.

This explains why many analysts continue to view the demand pipeline as highly credible despite the apparent utilisation gap.

KAF Investments fund manager Neoh Jia En notes that Tenaga’s existing DC connection capacity of about 4GW is expected to be fully utilised only by 2029, underscoring the long-term nature of the demand trajectory.

For policymakers, the key challenge is not today’s electricity consumption but ensuring sufficient infrastructure exists when future demand materialises.

While DCs dominate headlines, the more consequential issue may be unfolding elsewhere.

Between 2029 and 2031, three major coal-fired power stations — Kapar Energy Venture, TNB Manjung 1-3 and Tanjung Bin Power — are scheduled for retirement. Collectively, they account for about 6,400MW of generation capacity.

Their retirement forms part of Malaysia’s broader decarbonisation strategy, which ultimately aims to phase out roughly 12GW of coal-fired generation by 2044. At the same time, electricity demand continues to climb.

Kenanga Research analyst Teh Kian Yeong estimates that after factoring in projected DC demand, economic growth and the scheduled retirement of existing assets, Malaysia could require about 12GW of additional generation capacity by 2031 merely to maintain a healthy reserve margin.

The situation still appears to be challenging. The upcoming 1,400MW Paka combined-cycle gas turbine project, the 300MW Nenggiri hydro project and the 648MW Sungai Perak hydro extension will help narrow the gap. Yet, they remain insufficient to fully offset the combined impact of rising demand and coal retirements.

In short, Malaysia must simultaneously build new generation capacity while replacing a significant portion of its existing fleet. That reality explains why the market increasingly views the power sector as a decade-long structural theme rather than a short-term cyclical trade.

Meeting these challenges requires far more than simply building new power plants. The national grid itself must also expand.

According to Neoh, RE currently accounts for about 31% of installed generation capacity, leaving a long runway to achieve the government’s target of 70% by 2050.

RE presents unique infrastructure challenges. Unlike conventional power plants, solar generation is intermittent and often located far from demand centres.

Each megawatt of RE, therefore, requires significantly more grid infrastructure to transport and balance electricity across the system, which is why Tenaga’s capex plans have accelerated sharply.

Neoh notes that each megawatt of RE requires considerably more grid capacity than conventional generation because of its lower capacity factor. The implications extend beyond transmission towers and substations.

Kenanga’s Teh estimates that around 4GW of additional solar capacity will come from the Large-Scale Solar 5 (LSS5) project and LSS5+ programmes. While these projects will help support daytime demand, they are not sufficient to replace retiring baseload generation on their own.

As such, Battery Energy Storage Systems (BESS) are increasingly becoming a critical component of the solution. By storing excess solar energy during daylight hours and discharging it during evening peak periods, BESS helps smooth intermittency and improve grid stability.

For many industry participants, large-scale storage is no longer optional but essential if Malaysia hopes to achieve its RE ambitions without compromising reliability.

Meanwhile, another emerging catalyst for the power industry is the Asean Power Grid development, an increasingly practical solution for balancing supply and demand across Southeast Asia.

The concept is simple: connect national electricity grids and allow countries to trade power more efficiently. Projects such as the Lao PDR-Thailand-Malaysia-Singapore Power Integration Project have already demonstrated the feasibility of cross-border electricity trading.

For Malaysia, the benefits are significant as regional interconnections can effectively function as a virtual reserve margin, providing additional flexibility while navigating the retirement of coal plants and the integration of RE.

The initiative could also create a new source of demand for transmission infrastructure, benefiting contractors involved in high-voltage projects.

Against this backdrop, fund managers believe transmission and substation contractors offer some of the clearest exposure to the theme. Unlike conventional construction segments, barriers to entry for this segment remain high.

The pool of contractors capable of executing high-voltage transmission and substation projects is relatively small, creating favourable industry dynamics.

Neoh believes transmission and substation projects offer among the most attractive risk-reward profiles in the market. Gross margins can exceed 20% for substation projects and more than 40% for transmission works due to their specialised nature.

Affin Pheim Asset Management fund manager Khoo Zing Sheng says the market has entered a new phase of the infrastructure cycle.

In 2024, investor attention was largely focused on land sales, foundation works and initial grid connections for DCs. Today, the focus is shifting towards high-value electrical systems, busducts, switchgear, cooling infrastructure and mission-critical power equipment.

“Those massive concrete shells built over the last 24 months are now ready to be transformed internally. The bill of materials for high-voltage busducts, advanced cooling systems, backup generators and complex switchgear has started to come in,” says Khoo.

That transition increasingly favours experienced engineering firms. Among the names highlighted by Khoo is MN Holdings Bhd (KL:MNHLDG), which has built a strong position in power infrastructure and high-voltage engineering works.

The company entered 2026 with a record order book of RM1.7 billion and is expected to benefit from upcoming 500kV substation projects as well as growing demand for internal DC mechanical and engineering works.

Kenanga shares a similarly constructive view on the substation segment, estimating a RM5 billion to RM7 billion addressable market opportunity over the next few years. Among its preferred names is substation contractor CBH Engineering Holding Bhd (KL:CBHB).

Khoo also sees opportunities for Cheeding Holdings Bhd (KL:CHEEDING), particularly given its exposure to high-voltage infrastructure and potential participation in future Asean Power Grid developments.

Meanwhile, Kee Ming Group Bhd (KL:KEE­MING) has emerged as a notable beneficiary of the DC boom, having successfully expanded into hyperscale projects while maintaining exposure to industrial facilities, solar interconnection works and utility-related contracts.

The investment opportunity extends beyond contractors. Every new substation requires significant volumes of power cables, switchgear and switchboards, creating a second layer of beneficiaries across the electrical equipment supply chain.

Among the names highlighted by Kenanga are cable manufacturers Southern Cable Group Bhd (KL:SCGBHD) and Master Tec Group Bhd (KL:MTEC) as well as switchgear and switchboard suppliers such as Pekat Group Bhd (KL:PEKAT) and Powerwell Holdings Bhd (KL:PWRWELL).

The beneficiaries of Malaysia’s power buildout are not limited to transmission contractors and equipment suppliers.

As attention shifts towards the country’s future generation needs, investors are also focusing on NewGen26, the latest power generation tender that is expected to play a critical role in maintaining grid stability towards the end of the decade.

Kenanga believes existing gas-fired IPPs stand a good chance of securing contract extensions. Among the frontrunners are Malakoff Corp Bhd (KL:MALAKOF) and YTL Power International Bhd (KL:YTLPOWR).

Both companies have reportedly secured gas turbines ahead of time despite global shortages of generation equipment. In an environment where turbine availability may become a bottleneck, early procurement significantly improves the ability to deliver projects on schedule.

Some analysts also believe regulators may consider short-term extensions for retiring assets if replacement capacity cannot be commissioned quickly enough.

Despite the favourable outlook, analysts caution that the investment cycle remains dependent on the continued execution of both DC and energy transition projects.

A significant portion of Tenaga’s contingent capex remains linked to actual electricity demand. As such, a widespread cancellation or postponement of DCs could result in certain investments being deferred, although analysts currently view such a scenario as unlikely.

Having said that, analysts say the more immediate challenge may be execution rather than demand.

As Tenaga’s spending accelerates, contractors are required to take on larger projects while managing increasingly demanding working capital requirements. Neoh notes that Tenaga has begun requiring contractors to procure high-voltage equipment themselves, increasing funding needs and performance bond commitments.

However, most believe the risks are manageable. Many listed contractors have strengthened their balance sheets through equity placements and fundraising exercises over the past two years, providing additional capacity to undertake larger projects.

Furthermore, DC and utility projects typically feature compressed execution timelines of between 12 and 18 months, allowing contractors to recover cash more quickly than traditional infrastructure projects such as Mass Rapid Transit (MRT) or Light Rail Transit (LRT) developments, which often stretch over five years or longer.

Margin pressure remains another key consideration. Rising prices for copper, steel and other raw materials could weigh on profitability while stronger competition may lead to more aggressive bidding. Nevertheless, industry participants generally expect margins to remain healthy.

The current pipeline of projects continues to exceed the available pool of qualified contractors while Tenaga’s vendor qualification framework and local-content requirements should limit competition from foreign players in higher-value contracts.

In addition, most contractors lock in material costs shortly after securing project awards, reducing their exposure to commodity price volatility.

Save by subscribing to us for your print and/or digital copy.

P/S: The Edge is also available on Apple's App Store and Android's Google Play.