Issues and Challenges of Renewable Energy ...

PEA-AIT International Conference on Energy and Sustainable Development: Issues and Strategies (ESD 2010) The Empress Hotel, Chiang Mai, Thailand. 2-4 June 2010.

Issues and Challenges of Renewable Energy Development: A Malaysian Experience Siti Indati Mustapa1, Leong Yow Peng* , and Amir Hisham Hashim*

Abstract – As we are facing energy resource shortages around the world, there is an urgent need to develop a more sustainable energy system to cater for growth. The use of renewable energy (RE) sources is one of the feasible options. Malaysia is amply endowed with RE sources and is environment-friendly in nature. However the RE capacities are grossly under-utilized, particularly from biomass and solar energy. The Malaysian Government recognizes the potential of RE as an alternative to ensure the sustainability of energy resources. Thus, the green technology policy was launched to promote the utilization of low carbon energy and technology of which RE has been identified as the promising green energy option. In addition to current RE incentives, concerted efforts are underway to embark on programs to promote the green technology market in Malaysia. This paper will identify the key issues and challenges of RE development in Malaysia and explore the merits of establishing Green Technology Policy in order to adopt a green economy for sustainable future in Malaysia. This paper will look in detail at the barriers of RE proliferation, broad strategies and action plans which will be a catalyst for RE penetration in power generation in Malaysia Keywords – Energy demand, energy policy, green technology, renewable energy, sustainable development. 1.

INTRODUCTION

Energy has been the main contributor towards the rapid growth of Malaysia’s economy. As Malaysia is progressing towards becoming an industrialized country, its dependence on energy sector will also increase correspondingly. Endowed with an abundance of domestic energy resources, especially oil and gas, the growth and development of the Malaysian energy sector will continue to contribute towards industrialisation, socio-economic welfare as well as export earnings. As the economy continues to expand, Malaysia’s primary energy supply is projected to grow at 2.8 percent a year, from 65.9 Mtoe in 2005 to 130.5 Mtoe in 2030, driven mainly by the demand for coal and gas in the electricity generation sector and oil products in the transport sector. Within the last ten years, the energy generating capacity has increased almost 20%, from 13,000 MW in the year 2000 to 15,500 MW in the year 2009. Electricity generation in Malaysia is projected to grow further at an average annual rate of 4.7 percent, from 85 TWh in 2005 to 265 TWh in 2030 and the proportion of coal use in electricity generation is expected to grow from 27 percent in 2005 to 37 percent in 2030[1]. Consequently, as the energy mix has predominantly been based on fossil fuel resources (coal, oil and gas), this will impose tremendous pressure on the depleting natural resources, with alarming consequences of climate change and energy security. Therefore, in order to meet the increasing demand, energy supply infrastructure will need to be continuously developed and at the same time ensuring

* Institute of Energy Policy and Research, University Tenaga Nasional, Km 7, Jalan Kajang-Puchong, 43009 Kajang, Selangor, Malaysia 1

Corresponding author; Tel: + 603 8921 2020 ext 2830, Fax: + 603 8921 2360 E-mail: [email protected].

its long-term energy security and mitigating carbon emission by intensifying energy efficiency initiatives and enhancing development of Renewable Energy (RE) sources such as solar and biomass for sustainable development. Although new alternative and renewable and more efficient technologies are being developed and implemented every year, the strain caused by the rise in energy demand and global consumption outweigh the benefits brought by these improvements. This concern has led to major challenge facing the power industry that is to have a sustainable energy policy and diversified sources of energy mix. The aim of this paper is to identify the key barriers of RE development in Malaysia and explore the broad strategies and action plans implemented by the government which will be the catalyst for RE penetration in power generation. In addition, the paper will also highlight the impact of strategic improvements that have been made by the government so far. 2.

POLICY RELATED TO RENEWABE ENERGY

The Government fully subscribes to the concept of sustainable development. As energy is the lifeblood for economic growth, overall national sustainable development efforts in this context can never decouple from sustainable development of the energy sector. The National Energy Policy was introduced in 1979 with three primary objectives; adequacy of supply, efficient utilization and minimize impact on environmental. The first objective is to ensure the provision of adequate, secure, and cost effective energy supplies through developing indigenous energy resources both nonrenewable and renewable energy resources using the least cost options and diversification of supply sources both from within and outside the country. The second objective is to promote the efficient utilization of energy and to discourage wasteful and non-productive patterns of energy consumption, and the last objective is aimed

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to minimize the negative impacts of energy through efficient energy utilization. The Four-fuel Diversification Strategy was introduced in 1981 as an extension of the National Energy Policy. The rationale for this policy initiative was to reduce over reliance on oil, particularly in the electricity generation sector. This policy aimed for a supply mix of natural gas, hydropower, oil and coal. Figure 1 illustrates the success of the four-fuel diversification strategy where the balance in the fuel mix in the energy consumption has drastically reduced from a high almost 90% dependence on oil in 1980 to less than 15% in 2000. Early initiatives taken towards promoting renewable energy in Malaysia appear during the 8th Malaysia Plan (8MP) between 2001-2005. During that period, the strategy expanded to include Renewable Energy as the fifth fuel to supplement energy supply from conventional energy resources. Concerted efforts were taken to ensure the sustainable development of energy resources, both depleting and renewable, in meeting the energy demand of the economy. With this

objective in mind, initiatives were intensified to ensure greater utilisation of renewable energy as the fifth fuel and to supplement the fuel supply from conventional energy sources. The 8MP had targeted to generate 5% (600MW) of the country’s electricity from RE by 2005, but despite various incentives given by the government, only 2 plants with a total capacity of 12MW were commissioned. The notion was further pursued under the 9th Malaysia Plan (9MP) between 2006-2010 where efforts to utilize RE resources and efficient use of energy were further promoted. The government set a target of 300MW in Peninsular Malaysia and 50MW in Sabah for power generation by 2010 to promote and provide more conducive environment to support the implementation of RE projects. At present, the contribution of RE in the country’s energy mix of grid connected power generation from Small Renewable Energy Programme (SREP) was 56.7MW compared to its large potential of 286MW from SREP projects. In fact, Malaysia aimed to raise RE to about 2,000MW by 2020.

Coal

100%

Hydropower 90%

Natural Gas Diesel Oil

80%

Fuel Oil

70% 60% 50% 40% 30% 20% 10% 0% 1980

1985

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

Y ear

Fig.1.Energy Mix in Malaysia

Table 1. Renewable Energy Resource Potential in Malaysia.

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Renewable Energy

Potential (MW)

Biomass Biogas Mini Hydro (Total Hydro potential is 22,000 MW) Solar PV Municipal waste

1,340 410

6,500 400

Total

9,150

RE POTENTIAL IN MALAYSIA

Since domestic fossil fuel resources (oil, gas and coal) are depleting, efforts to promote renewable energy as a fifth fuel, especially for electricity generation has been intensified during the 9MP. The benefit of increased utilization of renewable energy resources, among others, is for the long term energy sustainability and also acts as a means of pollution control. The utilization of

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renewable energy will help to address the environmental concerns that emerged due to the greenhouse gas emission such as carbon dioxide (CO2), oxides of nitrogen (NOx), oxides of sulfur (SOx) and particulate matters as a result of power generation from oil, natural gas and coal. Thus, the increase in the utilization of renewable energy will minimize the negative impacts of energy generation, transmission, conversion and consumption on the environment.

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A study undertaken by the Government revealed the vast potential of renewable energy options in Malaysia such as biomass, biogas, municipal wastes, solar and mini hydro as shown in Table 1. Nevertheless, the contribution of renewable sources of energy (excluding hydro) in the country’s energy mix is very small compared to its large potential. For example, in 1995, the contribution of RE to Malaysia’s total energy supply was only 13 percent (3,544ktoe) whereas in Thailand and Indonesia, biomass contributed about 20 percent (10,157ktoe) and 29 percent (23,913ktoe) respectively. By promoting the use of RE, its development will improve its share in Malaysia’s energy mix. 4.

GOVERNMENT INITIATIVES AND INCENTIVES TO SUPPORT RE

4.1

Small Renewable Energy Programme (SREP)

To facilitate the implementation of RE projects, a SREP was implemented on 11th May 2001. The programme was among the steps being taken by the government to encourage and intensify the utilisation of renewable energy in power generation. A SREP project can be more than 10 MW in size, but the maximum capacity that will be allowed for power export to the distribution

grid must not be more than 10 MW. Under SREP, the utilisation of all types of RE, including biomass, biogas, municipal waste, solar, mini-hydro and wind, are allowed. As in 2010, 43 projects with target capacity of 286.15MW have been approved by the government using various types of renewable energy (Table 2 & Table 3), with the most coming from biomass and mini hydro. However, only ten 10 projects are currently in operation with a total capacity of 56.7MW. Under SREP, the previous Renewable Energy Power Purchase Agreement (REPPA) ceiling price agreed upon by the National Power Utility (TNB) for all RE grid connected projects, ranged from 14-17 sen/kWh (US4.6 cents/kWh). However, the electricity tariff of 17 sen/kWh (US5.6 cents/kWh) seems not to provide high enough rate of return to attract investors or project developers given the size of the project under SREP. Consequently, the Government has increased the electricity tariff for biomass and biogas projects to 19 sen/kWh (US6.2 cents/kWh) in September 2006 and subsequently the price has been adjusted to 21 sen/kWh (US6.9 cents/kWh) effective August 2007. However, the price for other RE resources such as Hydro and Solar remain at 17sen/kWh. The increase in tariff is expected to intensify further the SREP project development.

Table 2. Status of SREP (in Operation) in Malaysia Mini Hydro 14%, 3 projects

Biogas 7%, 2 projects

Biomass 79%, 5 projects

Table 3. Potential SREP Projects in Malaysia Mini Hydro 23%, 10 projects

Biogas 8%, 7 projects

Biomass 69%,16 projects

Source: Energy Commission, Malaysia (as of February 2010)

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4.2 Biomass Power Generation and Demonstration (BioGen) Project Biomass Power Generation and Demonstration (BioGen) Project was then introduced in October 2002 with the ultimate objective to promote and demonstrate biomass and biogas grid-connected power generation projects and reduce the growth rate of GHG emissions from fossil fuel by utilizing excess oil palm biomass residues. BioGen facilitates development of the gridconnected biomass-fuelled small power systems, disseminates awareness information in palm oil industry, provides building and technical assistance in policy formulation, and financial facility assistance through favourable bank loans and tax exemption among others. Some of BioGen significant projects include the first 14MW (export 10 MW) power plant in Tawau, Sabah which uses oil palm residues (empty fruit bunch, fibre and shell) that successfully mitigate 40,000–50,000 tons of CO2 in 2004 and more recently, a 46.2MW and 500 kW power plants are grid-connected and commissioned in April 2009 and a total of 700MW off-grid electricity has been produced by private palm oil millers. 4.3 Malaysian Building Integrated Photovoltaic Technology Application Project (MBIPV) Furthermore, in 2005 the 5-year Malaysian Building Integrated Photovoltaic Technology Application Project (MBIPV) was launched to reduce BIPV technology cost in the Malaysian market and to generate widespread BIPV applications by creating a sustainable BIPV market in Malaysia. Over the lifetime of the project, the energy generated is expected to be able to avoid 65,100 tons of CO2 emissions from the country’s power sector. The MBIPV programme has been successful in achieving a tremendous increase in solar energy utilisation in the country through its Suria1000 programme. As of Dec 2009, the cumulative gridconnected PV capacity in Malaysia was recorded at 1,416kWp, an increase of 203 percent compared to 468kWp in 2005. At the current pace of achievement, it is possible to attain more than the project’s target of installed BPIV capacity of 330 percent with a 20 percent cost reduction by 2010. From the awarded capacity, 1,084 kWp representing 65 systems have been commissioned and connected to the TNB grid. The unit cost of the grid-connected BIPV system has also reduced to RM 19,120 per kWp from the baseline of RM 31,410 per kWp in year 2005 which translates to 40 percent cost reduction. In addition, a total of 1,070 tonnes of CO2 equivalent GHG emissions have been avoided through the displacement of fossil fuel with the installment of the PV system [2]. 4.4

Fiscal Incentives

Throughout the years, several initiatives and mechanisms have been formulated by the Government to promote RE as to ensure the long term reliability and security of energy supply for sustainable socialeconomic development in the country. RE promotion in Malaysia is based on SREP programmes. Project

developed under SREP programme are eligible for Pioneer Status (PS) or Investments Tax Allowance (ITA). These incentives have been provided by the Government to boost the RE proliferation in Malaysia from 2001 but have been enhanced over the years. However, despite various fiscal incentives, only 10 plants of 56.7MW total capacity been commissioned. Nevertheless, the rate of progress on RE generation has increased significantly in the year 2008 due to the increase in electricity tariff for RE and also attractive incentives given by the government. Therefore, a more proactive approach must be made to accelerate RE power generation in the country. 5.

ISSUES AND CHALLANGES OF RE

The RE development in Malaysia could be hampered by several barriers which are financial, technical, regulatory/institutional and informational in nature that needs to be addresses for the viability of RE development in the country. 5.1 Financial barriers Presently, many green energy projects are implemented With the assistance of grants. This is because new technologies bear a certain amount of uncertainty, thus it creates a barrier for its development. This uncertainty results in high financing costs for research, development and deployment. This in turn artificially raises the price of clean energy options, delaying their full integration into the energy marketplace. Frequently, the initial cost for efficient equipment is substantially higher than the standard alternative and the payback period or economic return may be unacceptable. Renewable or green energy projects generally face difficulty in getting financing and bank loan approval due to the high risk involved and also the lack of technical knowledge on the part of the financiers. 5.2

Technical barriers

Firstly, there are uncertainty in some technologies that may not be suitable because of unreliable power supply of some developing countries. Also, being unproven technology, it may not be able to survive competitively with more established options. Secondly, there is limited local expertise on efficient practices and equipment handling. Thirdly, there is uncertainty of securing the long term biomass supply and price volatility. Project that do not have biomass residues associated with their operation are subject to price volatility in the biomass market. Finally, the nature of the electricity tariff undermines renewable energy efforts. Generation of energy from renewable resources is economically unattractive due to high cost of energy generation and availability of cheaper alternatives energy. The relatively high costs of energy generation from renewable resources, both in terms of investment costs and final energy costs, compared to conventional energy further restrain the efforts to promote the utilization of renewable energy. Example of electricity cost of RE in comparison with conventional energy is shown in Table 4. In this regard, the electricity costs from biomass,

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geothermal and solar sources are within the range of US 7-25 cents/kWh, compared to the conventional

electricity costs of US 4-6 cents/kWh [4].

Table 4. Cost of Renewable Energy

Sources Hydro (Small Hydro) Biomass Solar Thermal Power Geothermal Wind Conventional electricity (Gas and Coal)

Investment Cost (US$/KW) 900 – 10,000 (1,000) 1,700 – 2,000 3,000 1,500 1,000 700 – 1,200

Electricity Cost (US$cents/KWh) 1-12 (5-10) 7 - 15 20-25 7 – 10 1–2 4-6

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WAY FORWARD OF RE

entrepreneurs, industries and the business community in supporting the sustainable energy agenda. This requires broad understanding and involvement at various levels. Meanwhile, the newly launched National Green Technology (GT) Policy on 24 July 2009 helps to spearhead Malaysia’s transformation into a green nation and embrace sustainable development. This policy seems to indirectly accelerate the development of RE through its green technology criteria (i) it minimizes the degradation of the environment; (ii) it has zero or low greenhouse gas (GHG) emission; (iii) it is safe for use and promotes healthy and improved environment for all forms of life; (iv) it conserves the use of energy and natural resources and (v) it promotes the use of renewable resources. The policy covers four key main sectors such as Energy, Buildings, Water and Waste Management and Transport sectors. In promoting GT, the Government has establish a fund called Green Technology Financing Scheme (GTFS) amounting to RM1.5 billion that will provide soft loans to companies that supply and utilise green technology. This scheme has commenced on 1 January 2010 and expected to benefit 140 companies. According to Pusat Tenaga Malaysia (PTM), the feedback is overwhelming and so far nine (9) projects have been certified with GTFS that majority comes from Waste & Water sector followed by Energy sector. As environmental awareness is growing, many consumers will eventually choose the technology option that delivers energy services in a manner more compatible to the environment. Therefore, through GT policy it is suggested that companies in the country’s energy sector should drive forward GT and deployment to benefit the nation.

6.1

Government Leadership

6.2

5.3

Institutional/regulatory barriers

Two points can be raised. Firstly, due to higher commitments accorded to development or expansion plans, renewable energy is given a lower priority by Malaysian enterprises. There is a clear need for refocusing the energy fuel mix in the country’s energy equation to give importance to renewable energy. The government should allocate RE for its energy usage to show its strong commitment. The subsidy for conventional fuel source should be gradually eliminated and/or transferred to RE resources to promote RE installations. Secondly, lack of functioning institutional network on RE could be overcome by encouraging jointeffort between government agencies and private institutions in order to explore the technical and commercial viability of energy generation from renewable resources and enhancing capacity building of key players such as government decision-makers, industries and utilities on RE implementation. 5.4

Information barriers

There is a lack of information and awareness on the benefits of renewable energy. Investment allowances and capital allowances were made available for RE implementation since 2008. However, not many companies are aware of the special incentives. There is a clear need for government agencies to help and advise applicants and potential recipients how to go about applying for RE incentives and the need for more channels for dissemination of information.

By making investments in the early stages of renewable energy development, Malaysia is well positioned to prepare towards the time when its own reserves of hydrocarbon energy are depleted or become too expensive to exploit. Malaysia has instituted various initiatives to promote renewable energy. However, in charting the path forward, collaborative partnerships are vital. The Government leadership is essential in charting appropriate RE policies, but there is equally a need to provide solutions and support to individual

Financial Tools

In terms of project financing that often hinders application of RE technologies, Clean Development Mechanism (CDM) appears as a tool that can provide financial contribution to support RE projects from the sale of Certified Emission Reductions (CERs). According to PTM study, the direct benefits of CDM are linked to the income from the sale of CERs. With the price level of 5 USD/ton CER and the calculated potential sale of 17.8 million ton CERs per year the annual income will be in the order of RM300 million per

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year or a total of RM1.5 billion before 2012. The indirect benefits of participating in the CDM contribute to the implementation of environmentally friendly technologies in Malaysia and reducing the dependence on fossil fuels. 6.3

RE Policy

Furthermore, the newly restructured Ministry of Energy, Green Technology and Water, is at its final stage in developing a comprehensive RE Policy that complements the National Green Technology policy. The RE policy provides the direction and funds to make RE an important component of the country’s energy mix, overcome technological barriers, address existing market failures, and drive down costs. As high cost of RE is the key stumbling block that prohibit the RE implementation, the new RE policy will introduce feedin tariff as a pricing mechanism. Presently, there is still massive support for conventional energy sources in the forms of subsidies. If RE were to be competent economically, it is important that RE receives the same treatment as fossil fuels. Otherwise, such subsidies should be removed or made transparent in order to create a level playing field. This can be partly overcome through a mandatory feed-in tariff, which has shown positive results in some countries such as in Germany, Spain and Portugal. Under the scheme, which might be part of the RE policy, electricity utilities must buy renewable electricity at above-market rates set by the government. The higher price helps overcome the cost disadvantages of RE sources. Like successful policies elsewhere, the proposed feed–in tariff will includes all renewable energy, differentiates tariff by technology and derives the tariff based on the cost of generation. Under the feed-in tariff, PTM has proposed that consumers who use electricity beyond a certain minimum point are required to contribute 2% of their bill towards a RE fund, which will then be used to equalize the price between non-renewable and renewable sources of energy. The scheme could change the mindset of consumers as it is based on the ‘‘polluter-pays’’ principle [5]. The role for government in this principle is to discourage environmental harms and to ensure that polluters pay for the damage they cause and are enjoined from causing harm in the future. From this principle, if individuals or companies paid a price for polluting, it is believe that they would be less likely to do it. 6.4

Social Responsibilities

There are numerous issues of RE development at present but reliable and implementable RE solutions is appropriate for Malaysia in moving towards sustainable development. While RE Roadmap Action Plan is a welcome move, the successful policies require buy-in from all agencies and the general public, of which it will require some time for it to be implemented. The government agencies are not the only ones who should make the efforts but the private sector should also be more corporate social responsible and make compromises for instance by accepting longer payback periods in RE projects. If Malaysia is to introduce feed-

in tariff, user acceptance to pay for higher cost of RE would be a major challenge. Nevertheless, a breakthrough is needed to overcome the high cost by means of creating a market and forcing the renewable industry to grow that will ultimately lower the cost of technology. Obviously, if Malaysia is to make headway in building a low-carbon society, renewable law and legal instruments need to be instituted that allow all players to invest. 7.

CONCLUSION

In order to ensure the sustainability of energy supply and subsequently of the country’s sustainable economic development, the government has to intensify further the implementation of renewable energy and energy efficiency programs. As seen in quite a number of successful countries in promoting RE such as Germany, Denmark, and Japan, strong and long-term commitment from the Government is crucial in implementing any kind of policies which will lead to RE development. Over the past 10 years, Malaysia has instituted various efforts and initiatives to promote renewable energy. The progress on RE generation has been slow but over time the growth rate of RE in Malaysia has shown an upward trend as more energy users took advantage of the incentives provided by the government. In line with any radical change, the way Malaysia perceives its energy development must be on a gradual basis. The foundations have to be firmly set so that while external environment may change, our direction remains the same. Malaysia has taken a step forward towards a more proactive approach and the soon to be introduced national RE policy will hopefully create a level playing field for RE technologies providers or investors and provide conducive regulatory framework that would allow more participation from the government agencies, non-government organizations as well as the general public. It is our hope that the soon-to-be RE Policy will introduce effective pricing-law and enabling environment that will lead towards a sustainable market and encourage production of RE for the country. REFERENCES [1] APEC Energy Demand and Supply Outlook Economy Review 4th edition by Asia Pacific Energy Research, 2009. [2] Extracted from World Wide Web: http://www.mbipv.net.my [3] Extracted from Energy Information Bureau, Malaysia Energy Centre from the World Wide Web: http://eib.ptm.org.my/index.php?page=article&ite m=100,136,143 [4] Hitam, S. 2000. Sustainable Energy Policy and Strategies: A Pre-Requisite for the Concerted Development and Promotion of the Renewable Energy in Malaysia. [5] T.H. Oh et al, Renewable and Sustainable Energy Reviews, 14 (2010), 1241–1252.

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