Sembcorp, Keppel stand to benefit as Singapore steps up energy infrastructure investments

Sembcorp Industries and Keppel could potentially benefit from Singapore's ambitious plans to bolster its energy infrastructure over the next five years, as the power market remains tight due to increasing electricity demand and fuel security concerns. The Energy Market Authority (EMA) unveiled a comprehensive five-year strategy on October 26, covering electricity generation, natural gas supplies, the power grid, solar energy deployment, energy storage, and electricity imports.

In 2026, Singapore's peak electricity demand was 8.6 gigawatts (GW), and projections suggest it will grow between 9.9GW and 13GW by 2031, primarily driven by data centers, semiconductor manufacturing, and electric transport. Morgan Stanley analysts anticipate tighter power markets will lead to increased power margins for Sembcorp and Keppel, whose power contracts are set to renew in the coming quarters.

The analysts estimate a 15% surge in contract power spreads, which could potentially lift their earnings estimates for Sembcorp and Keppel by 15% to 20% in the second half of 2026 and throughout 2027.

Power spreads represent the difference between the revenue generators receive for electricity and the cost of the fuel used to produce it. Although wider spreads can improve margins, actual profits depend on plant efficiency, operating costs, and contract terms. Morgan Stanley expects power margins to stabilize around $45 to $50 per megawatt-hour, up from their previous estimate of $40, as the market remains tight despite new generation capacity coming online.

Under the EMA's plan, five natural gas-fired power plants are slated to become operational between 2026 and 2031, expanding Singapore's electricity generation capacity by approximately 26% from the current 12GW. The EMA is also evaluating additional gas-fired plants that could begin operating by 2032, contingent on continued strong demand growth.

Natural gas constitutes around 95% of Singapore's electricity needs. To enhance supply security, Singapore plans to augment its liquefied natural gas (LNG) regasification capacity from 10 million tonnes yearly to 15 million tonnes upon the second LNG terminal's inauguration at Jurong Port by 2030. This initiative is prompted by Indonesia's supply cuts, which have reduced piped gas exports to Singapore by 31 billion British thermal units per day since October 24, representing less than 2% of the Republic's daily gas requirements.

While Indonesia supplies about 70% of Singapore's piped natural gas and 30% of its total natural gas imports, analysts believe Singapore should have sufficient reserves to compensate for the shortfall, as it could import more gas from Malaysia or acquire additional LNG on the spot market. However, global gas supplies remain tight, according to Macquarie Capital research analyst Zhiwei Foo.

Morgan Stanley forecasts gas costs will persistently rise until 2027, potentially followed by a global glut and lower prices due to increased US exports.

Higher import costs could contribute to domestic inflation, according to Standard Chartered Bank chief economist Edward Lee, who emphasized economists' monitoring of whether imported inflation would push up overall inflation. If inflation broadens while economic growth remains robust, the Monetary Authority of Singapore may tighten monetary policy as early as January, although Standard Chartered expects policy to remain unchanged.

Sembcorp, which obtains about two-thirds of its gas needs for power generation and piped natural gas from Indonesia, could be impacted by the supply cuts, potentially affecting 4% to 5% of the group's gas requirements. In contrast, Keppel is less vulnerable to Indonesian gas due to its reliance on Malaysian supplies and LNG imports, as per JPMorgan analysts. Sembcorp shares dipped more than 4% when the market opened on October 26, while Keppel shares climbed 1%.