Malaysia’s feed-in tariff (FiT) to unlock renewable energy

It’s a billion dollar question whether Malaysia’s newly-minted feed-in tariff (FiT) mechanism is designed well enough to fully unlock the renewable energy (RE) potential of the oil-and-gas exporting country that has long subsidised natural gas for electricity generation. 

Certainly, the political will has been demonstrated. The two laws that will enable the FiT – the Renewable Energy Act 2011 and the Sustainable Energy Development Authority (SEDA)Act 2011 – were passed by Parliament end April, and are being gazetted. Certain processes will take their course now before the FiT is finally implemented, probably by next month.

Even funds to support the first-year targets – at RM189 million (US$62.3 million) – have been set aside.

On top of that, it is interesting to note that the government’s economic transformation programme has lately churned out entry-point projects (EPP-10) that include solar power plants of higher capacities than those originally planned under the Renewable Energy Policy. These have been injected into the RE targets for the FiT, significantly raising them (see table on page 15).

There’s a lot riding on this scheme. By 2020, RE is touted to create a host of spin-off benefits, including: 

• Savings of RM2.1 billion in external costs to mitigate CO² emissions

• At least RM19 billion in loan values for RE projects (at 80% debt financing)

• RM70 billion of revenue from RE power

• RM1.75 billion in tax income to the government and 

• 52,000 jobs to construct, operate and maintain RE power plants (at 15 to 30 jobs per MW).

These were the projections that Ahmad Hadri Idris, the chief technical advisor to the National RE/Malaysian Building Integrated Photo Voltaic (MBIPV) project team, presented to the industry in recent months. The success of the national green policy will be measured by the RE quotas uptake, and the realisation of the projections.

Many businesspeople are placing expectations on the FiT: power producers, photovoltaic manufacturers, distributors and installers, palm oil plantations set to make money from their empty fruit branches, logistics providers, bankers and insurers, training institutions and trainers, consultants and even colleges and universities who are heavily into research.

Countdown to implementation

The bees are buzzing around the honey pot, and from what Green Purchasing Asia has learnt, the frenzy of economic activities will start as early as next month. Industry circles and even the lawmakers themselves, however, think the effects will only be felt in a year or so. People need to be trained to set up electrical systems and to handle machinery. Bankers need to be engaged to fund the RE projects as they still see RE as risky projects. 

Hadri calls for patience, saying those interested will need to be familiarised with the application process and do their math and some may want to see how others do it before wading in. As usual, there are some early birds who want to catch the action early and have long been prepared. 

Based on enquiries received so far, Hadri expects 20 to 25 applicants for biomass, biogas and small hydropower. But the biggest attraction is solar, where there will be about 50 corporate players and hundreds of individuals. More than 40 solar photovoltaic installers were listed on the MBIPV website (www.mbipv.net.my) as approved installers. They will now have to seek relisting in the SEDA website after June 30th.

“There is this over-excitement in the market, and some people are going to be frustrated, but that’s the beauty of it because you have competition, and competition means better costs. At the end of the day, it’s an open market, and the market will balance itself,” he says.

The roadmap is simple. SEDA will be set up, probably by next month, after the chairman and CEO and board members have been appointed. The Renewable Energy Fund details would also have been sorted out by then. Next comes the information mechanism – the website – that the public will refer to for guidance on the FiT. Enough time will be given for them to become familiar with it.

Quota system

Malaysia’s FiT is based on the German model (and has reportedly received accolades from the German pioneers) but with a big difference: there is a quota system which will effectively limit the growth of each RE source. The quota system means interested energy producers will have to vie for limited megawatts yearly when they apply to be feed-in approval holders. 

The good thing is once the quota is allocated to a company or individual, it is licensed to make money for the next 20 years, backed by a fixed payment scheme that does not depend on subsidies or economic vagaries. The direct licensee (the main power generator and distributor), which is Tenaga Nasional, is obligated by law to buy the RE from these producers.

That said, 219MW was originally up for grabs this year when FiT was anticipated to start in April 2011 but because the FiT has been delayed, the quota for this year will probably be reduced, and the unused portion carried forward to next year. The figure is likely to be just over half of the original target depending on when FiT actually starts. This has to be shared among four sectors: biogas, biomass, mini-hydro and solar PV (see table on page 15 for the quotas).

There is market fear that the quotas will hinder the development of RE and the creation of related economic opportunities. Detractors accuse those behind the quotas of paying lip service to RE to protect fossil fuels in the power mix. However, if one studies the experience of countries that successfully carried out the FiT and also those that failed, the quota system seems a sensible way for controlled development of RE. This is more so when the Malaysian experiment of renewable energy, via the Small Renewable Energy Project (srep) that started in 2001 has been at best a good experiment and learning opportunity, and at worst, a dismal failure.

The target set by the 9th Malaysia Plan in 2005 targeted 350MW of RE connected to the grid (or 1.8% of the power generation mix) by 2010. What it got was one-sixth of that, 62.3MW, or a mere 0.4% of the energy mix. Given this poor record, setting a quota will give the planner a chance to prepare a strong foundation in the initial years. 

It is learnt that the government is considering passing on the “unused” quotas for 2011, to 2012, since it is already mid-year. It is also considering not imposing the degression for 2012. (Read interview with Energy, Green Technology and Water Minister on page 16.) This will please investors, especially those in the solar PV sector which faces the highest degression rate.

Malaysian Photovoltaic Industry Association president Shamsudin Khalid is concerned about the degression, saying the FiT and degression have to be business-friendly to encourage take-up. “If they (the investors) don’t bite, we cannot achieve our target of 5.5% for RE by 2020,” says Shamsudin, who is also marketing manager for Sharp Solar at Sharp Roxy Sales and Service Company.

Degression principle

The degression principle is based on the expectation that RE technology costs will go down over time, as in the case of solar PV. That is why there is no degression for mini hydro which is a mature technology. However, the Fukushima nuclear plant crisis in Japan may alter the scenario, as some countries have put on hold plans to pursue nuclear and are opting for solar energy, at least for now. This brings up demand for solar PV, which may increase prices. 

These concerns were expressed during an industry dialogue conducted by the Ministry of Energy, Green Technology and Water for some 300 stakeholders in April, and echoed by a potential major player privately to Green Purchasing Asia. However, these legitimate fears may be short-term. If there is a shortage of solar panels, prices may not drop that quickly, but in the medium term, economies of scale will even things out.  

Hadri is optimistic the FiT will deliver. “There’s a difference today. When we did the SREP, they just provided the targets without the means. It’s like providing the food without the tools to eat. Now we provide not only the food, but also the cutlery to enjoy the food,” he says. He credits the willingness and openness of the industry players, especially those who started with the SREP, in sharing their views and even confidential business information with the authorities when the latter developed the laws and the FiT. 

Engaging Tenaga Nasional took two full years and industry discussions were sometimes heated. The end results, however, seemed pleasing to Hadri. “Hans-Josef Fell and the late Dr Hermann Scheer, both pioneers of FiT, came to Malaysia to understand what we were doing and they said we were on the right track. That gives us confidence. Of course, there are limitations, like the quotas, but Hans-Josef said that’s fine. You are starting from a zero base, or even negative base. It’s okay to start slowly.”

If the people want renewable energy badly enough, they will be willing to pay more, the RE fund will be expanded and then the sector will truly soar. For now, the target is 1.2GW by 2015, and 3.1GW by 2020. These alone will mean RM70 billion in revenue from RE power for companies and individuals by 2020.

View all contents of June 2011 issue
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