Changes on track: Implementing sustainability measures in energy production

While sustained economic expansion has created unprecedented opportunities for many Malaysians and given rise to more value-added industries, the energy infrastructure underpinning this growth is under increasing stress. To address the escalating challenge and stem mounting subsidy payments, the government and various stakeholders are formulating strategies to ensure an adequate and stable supply of electricity. Many of these reforms are a continuation of past policies, like market liberalisation and unbundling of state power champion Tenaga Nasional Berhad (TNB), which have been stalled over the years due to the highly sensitive and politicised nature of reforms. As of early 2014, proposed changes aim to rouse the electricity sector from its comfortable status quo, which costs the government tens of billions of ringgit each year in energy subsidies while breeding inefficiency in power operations.

Curbing Consumption

Providers are pinched by policies designed to both lure industrial investment with cheap energy and mollify the local population with below-cost electricity. In the past, the government prohibited TNB from passing production costs or purchase prices on to end consumers to make up any shortfalls, while natural gas supplier Petroliam Nasional (Petronas) was required to earmark a portion of its gas for discounted sale on the domestic market. As a result, the government kicks in over RM20bn ($6.24bn) each year to subsidise energy costs. In 2014 the Ministry of Finance allocated RM24.8bn ($7.74bn) in its budget.

As part of the effort towards subsidy rationalisation, consumers will be paying higher electricity bills in 2014 with the implementation of a fuel cost pass through (FCPT) mechanism that will mean consumer prices more closely reflect market fuel costs. The programme allows power producers to increase or decrease tariffs charged to consumers depending on fuel costs according to a pricing formula reviewed every six months. The FCPT will be supplemented by incentive-based regulation (IBR), which alters TNB pricing mechanisms so that the company charges customers competitively priced electricity tariffs. The IBR also aims to improve stability and reliability of power supply by imposing penalties on producers that fail to meet a certain level of guaranteed service (such as availability rate) to be paid into a stabilisation fund. As a result, TNB tariffs averaged RM0.38 ($0.12) per KWh across all electricity categories starting January 1, 2014, a 14.89% increase over the previous tariff of RM0.33 ($0.10) per KWh.

Cutting Costs

Much of the government’s strategy is focused on reducing the cost of electricity production. This includes issuing more equitable financial terms for recent generation of independent power producers (IPP) contracts, as well as commissioning newer power plants that employ technology and fuel sources that reduce generation costs. The first agreements resulted in impressive rates of return of around 15-17% for IPPs and ultimately squeezed TNB, leading Malaysia’s National Energy Commission (NEC) to be more cautious in structuring the most recent generation of contracts. Rates of return for the third generation of power purchase agreements have fallen to a range of 8.75-11%, and the current fourth generation is expected to yield even less along with more restrictions on plant development.

Another way to reduce the overall cost of electricity generation is to encourage independent spare parts (ISPs) manufacturing. “Introducing ISPs against original equipment manufacturers (OEMs) is a good way to reduce generation costs,” Nor Azman Mufti, managing director of TNB Remaco, told OBG. “However, OEMs are at the forefront of the technology curve by one or two steps, sheltering them from the lower cost ISPs.”

Gaining Ground

The most recent round of bidding for large-scale power projects is expected to result in internal rates of return of 5.8-6%. The contract for the 1071.43-MW combined-cycle gas turbine Prai power plant was awarded to TNB and is scheduled to commence commercial operations in March 2016.

In addition, a TNB subsidiary also won the contract for the Manjung 4 project – a 1000-MW brownfield coal-fired station slated to come on-line in 2015. As a result of the new, more competitive PPAs, along with the renegotiated first generation contracts, the average rate paid in PPAs for coal-fired power plant electricity dropped from RM0.22-0.224 ($0.068-0.069) per KWh to RM0.182-0.213 ($0.057-0.067) per KWh based on a coal price of $87.50 per tonne.

A similar trend is apparent in gas-powered power plants in which the average price has declined from RM0.455-0.471 ($0.142-0.147) per KWh to RM0.347 ($0.108) per KWh based on RM44 ($13.73) paid per million British thermal unit.

Diversity

Alongside large-scale IPP coal and gas-powered projects, the government is taking steps to develop Malaysia’s largely untapped alternative energy sources. If exploited, renewable energy (RE) could provide a substantial amount of the country’s energy needs emission free with a RE capacity estimated to include 1340 MW of biomass, 360 MW of municipal solid waste, 490 MW of mini-hydro (along with about 20 GW of large hydro) and small-scale solar photovoltaic (PV) of up to 8000 MW, according to Malaysia’s Sustainable Energy Development Authority (SEDA). Another target of viable technology is to raise RE contributions to the energy mix to 17% (4000 MW) by 2030.

Although relatively more expensive in terms of upfront capital expenditure costs, renewable energy has the advantage of zero fuel costs in the long term, making it immune to the market price volatility inherent in hydrocarbons-based power generation. Apart from older large-scale hydro plants, renewable energy promotion has so far been targeting only small-scale projects utilising PV solar, biomass, biogas and small hydro. But there are other promising areas for growth as well. “Sarawak has a large potential in hydro energy; if a submarine cable could be built connecting it with the peninsula, energy costs would be reduced considerably,” Enrique Pescarmona, group CEO of Industrias Metalú rgicas Pescarmona, a Latin America-based renewable energy company, told OBG.

As of 2014 the country’s renewable energy incentive programme – a feed-in tariff (FIT) which pays out higher power rates for qualified producers – had produced limited results and accounted for less than 1% of the country’s overall power output. These shortcomings were due to a number of factors, including ongoing tinkering with the programmes framework, lengthy and costly approval and permitting process, challenges of grid connection for projects not located in the immediate vicinity of the existing network, and limited distribution of FIT funding.

“At the moment, solar PV is the most popular among the four RE sources approved under the RE Act 2011,” Badriyah Hj Abd Malek, CEO of SEDA, told OBG. “We have improved the FIT rates for both biogas and biomass to make them more attractive to RE developers.”

Moving Ahead

According to Ahmad Shadzil Abdul Wahab, president of the Malaysian Photovoltaic Industry Association (MPIA), there are four points of action that could go a long way towards shoring up the incentive framework for solar power. The first of these is to restrict the FIT system to residential units, limiting the programme to smaller rooftop installations in the range of 12 KW and below. The second point is extend tax breaks through 2020 – specifically the investment tax allowance and capital allowance, which are currently set to expire by 2015. These benefits would be bolstered by the application of personal tax relief for solar PV investors in the form of rebates or tax refunds. Lastly, open tender bidding for larger utility-scale solar PV projects similar to that available for conventional plants.