Challenges faced by policymakers in the renewable energy space

1. In the latest policy update, the Government lifted the renewable energy (RE) export ban lift and also raised its 2050 RE generation capacity target to 70% of the nation’s total (from the previous target of 40%).

a. Will Malaysia be able to reach its ambitious RE targets of having 70% of total energy generation by 2050?

b. What are the challenges faced by RE players in the country?

c. Is technical and financial barriers one of the main reasons for the realization of this?

It is indeed an ambitious target as it would require an eleven-fold increase in RE capacity for a country with a historic reliance on the traditional fossil fuel industry. Though extremely encouraging and much needed, the viability of this target will become clearer once the government clarifies overarching policy
frameworks in consultation with stakeholders including the corporates, traditional energy players as well as the small-to-medium enterprises (“SMEs”).

Players trying to ride the country’s RE wave in many ways, face first-mover disadvantages. The biggest barrier we are noticing is the financial burden of the clean energy transition. The challenge of phasing out coal, which is our cheapest source of energy, and its associated costs may not be a pill that a lot of organisations and their investors are willing to swallow. This is where market awareness programmes come in to ensure the business case for the transition is front and center.

Operating in Malaysia also means dealing with the environmental terrain which is not the most conducive for various RE mixes – we do not have the environment to harness the power of wind turbines, for instance. Moreover, the RE sources that are viable in Malaysia such as hydro and solar power face land availability constraints. This would again require a sizeable initial capital outlay, which is restrictive especially for cash-strapped smaller players.

Finally, the maturity and agility of the energy market is highly dependent on regulatory pushes as energy is a strictly regulated sector. It is encouraging to note that the Government has made headway with moves such as the lifting of the RE export ban which we expect will spur green energy investment but the challenge remains in implementing energy transition incentives, regulation and frameworks.

We are definitely seeing technical capacity building and financial cost barriers being the main roadblocks corporates face in transitioning to cleaner energy sources. For instance, the ASEAN Centre for Energy stated that a key technical challenge lies in the deployment of a submersible high-voltage line which is very costly.

Overall, costs, availability of a conducive RE environment, market maturity and policy uncertainty remain the major headwinds. At the public policy level, it is not easy to detach from the country’s fossil-fueled economic model.

2. Does Malaysia need to have stricter regulations to push industry towards RE such as:

a. Liberalize the energy sector more, for example, let third-party access to the Grid? Is this the answer to accelerating RE in Malaysia?

b. Impose a carbon tax - why is imposing this a challenge for Malaysia, and what are the factors that come into play?

c. Is the ASEAN Power Grid a part solution to this?

There is no one answer to accelerate RE transition in Malaysia. However, liberalising the energy sector would play an important role. Allowing third-party access to the Grid would better enable the nation to face the challenges in RE transition journey. Collaboration with third parties would assist in the development of required technology and infrastructure, enable fair access to the RE market, as well as promote healthy competition in the supply chain and industries. On the consumers’ end, this would mean that they would benefit from competitive prices. As for the nation, it simply means sustainability and securitization of energy supply in the long run.

Though a critical part in speeding up the RE transition, Malaysia does not have existing carbon tax or carbon trading mechanisms in place as the Government conducts a feasibility study on the impacts of such mechanisms on market players including SMEs. It is encouraging to note that the Ministry of Finance has signaled that the carbon tax mechanism is a government priority although it will likely not be implemented in the near future.

The challenge of implementing this scheme is that it requires a delicate balance between economic development and market equity. Moreover, the efficacy of the mechanism is highly dependent on the quality of carbon emission data by corporates. Most companies in Malaysia have just embarked on their climate accounting journey with only a few players tracking their Scope 3 emissions i.e., indirect carbon emissions emitted through their upstream and downstream supply chain. The foundation of good data is an important prerequisite to ensure that players pay their fair share and thereby preventing inequity in taxation.

As a short answer, yes. Moving from the initial cross-border bilaterals to sub-regional and later to an integrated Southeast Asia power grid would make the ASEAN Power Grid (“APG”) an enabler for the region’s decarbonization efforts. Such region-wide transmission of electricity generated through RE would not only maximize the use of RE, but also help to meet the rising demand and improve energy access at a lower cost over the long-run. A report by the International Energy Agency have exhibited how the line was able to transmit cheaper electricity generated from hydropower resources in Sarawak to Indonesia, replacing fuel-oil based generators in Indonesia.

Given the magnitude of this initiative, the APG must be reliable and capable of dealing with significant amounts of energy with minimum interruptions. As much as APG can be part of the solution, it is challenging as it highly depends on the varying contributions of the member states. Therefore, there should be strategies to strengthen the grid via investment to expand the grid infrastructure and capacity to accommodate renewable resource-rich locations. Development of policies and financial mechanisms to promote smart grid technologies and interconnectedness amongst the member states via the grid would greatly accelerate the process. All of these would be better enabled with the policies to develop and implement standardized, measurable, and stricter emission targets and action plans, which is followed by a monitoring mechanism. Hence, the political and regulatory landscape of member states is key here.

3. What is the experience in markets like the UK, Australia or the United States etc that Malaysia can learn? How is Malaysia progressing on this transition as compared to Asean peers?

At a global macro-industry level, there is optimism that the energy and industrial sectors will meet their net zero commitments by 2050 although there is lingering uncertainty whether decarbonization pathways are viable, particularly for corporates who have just begun their transition journey. Advanced markets like the United Kingdom, Australia and the United States are in many ways, leading the way towards energy transition. In the United States, the Government has been projected to triple federal spending on clean energy manufacturing over the next decade. The Government has pledged investments in domestic RE manufacturing amounting to almost USD$400 billion through the Inflation Reduction Act of 2022.

The Australian Government has made some significant headway as well with the passing of the Climate Change Act 2022, doubling their emissions reduction target and pledging net zero by 2050. Australia has also become a signatory of the Global Methane Pledge and is ranked first globally for installed solar capacity per capita. To support this, the Government has pledged nearly AUD$25 billion over the decade to accelerate the tilt towards renewables.

The United Kingdom has also enjoyed an unprecedented year in RE generation in 2022 with 40% of power being generated from solar, wind, biomass and hydro sources – a 5% increase year-on-year. The Southeast Asia region meanwhile is still dominated by fossil fuels with almost 85% of primary energy being sourced from fossil fuels. With a growing consumer class, energy demand is expected to increase in the coming years. The transport and industrial sectors remain major carbon emitters and these are the very industries which policymakers need to prioritize to accelerate the meeting of net zero commitments. Some regional highlights include Vietnam’s gains in the global solar power market, Indonesia and the Philippines producing a quarter of geothermal energy and Laos’ standing as a hub for regional hydropower generation.

In terms Malaysia’s aspirations, we can definitely draw lessons from these trends. We are making encouraging progress compared to regional peers. However, there still needs to be concerted Government-led follow through towards the dismantling of fossil fuel reliance through the scaling back of subsidies in this sector and shifting the focus towards creating a conducive green investment environment with clear policies in place, which includes continued collaboration on RE trading in the APG.