Moody’s sees Malaysia as key regional data centre hub if edge maintained

Malaysia is well-positioned to become a key regional hub for data centers if it can maintain its competitive advantage, according to Moody's Ratings. The country's competitive edge lies in its affordable, readily available power supply and supportive government policies. Assistant vice president - ratings at Moody's, Chelsia Ng, highlights that Malaysia's policy framework and approval requirements already prioritize data center efficiency.

Tax incentives under the Digital Ecosystem Acceleration (DESAC) scheme are tied to power and water efficiency benchmarks. Johor, which hosts most of the country's data center capacity, enforces stricter project approval requirements, potentially promoting more efficient resource utilization and alleviating pressure on power and water infrastructure as the sector expands.

Moody's estimates that around 14 gigawatts to 17 gigawatts of additional generation capacity will be needed by 2035 to accommodate the projected demand in Peninsular Malaysia, requiring investments between RM80 billion and RM95 billion from Tenaga Nasional Bhd (TNB) and independent power producers. Though data center-driven demand growth is expected to benefit utilities long-term, the substantial capital expenditure poses execution and funding risks, potentially increasing financial leverage during the development phase.

According to government projections, data centers could account for about 31 percent of total electricity consumption in Peninsular Malaysia by 2035, up from 4.0 percent in 2025, driving a compound annual growth rate of around 5.8 percent over the next decade, though market and execution risks will persist. Data centers are likely to consume around 31 percent of total electricity in Peninsular Malaysia by 2035, compared to 4.0 percent in 2025.

The demand for firm baseload capacity to meet data center power requirements will keep natural gas relevant as a transition fuel, and the expansion of gas-fired capacity under NewGen25 and NewGen26 further underscores gas's role in maintaining system reliability. However, Malaysia must balance the need to phase down coal generation and replace retiring generation capacities while facing additional investment and execution risks in the energy transition.

Renewable energy, particularly solar, can meet some of the additional electricity demand, as solar capacity can be deployed relatively quickly. Data center operators also have their own net-zero and decarbonization targets, which could drive demand for RE-linked power procurement. Although solar remains a modest contributor to Peninsular Malaysia's generation mix, the inclusion of BESS in the recently launched large-scale solar (LSS) tender program indicates the growing role of solar-plus-storage in meeting incremental demand and supporting Malaysia's decarbonization goals.

However, the intermittent nature of renewable generation and current battery storage technologies may not fully meet data centers' round-the-clock power requirements in the medium term. In June, the government announced that all future solar power projects under the sixth LSS program must include BESS to strengthen grid stability alongside renewable energy expansion.

Despite the risks, Moody's expects TNB to have sufficient financial resources to manage substantial capital spending over the medium term.