THE Natural Resources, Environment and Climate Change (NRECC) Minister Nik Nazmi Nik Ahmad reiterated that the implementation of renewable energy (RE) will be further expanded based on the concept of self-contained systems (SCS) to spur increased investment along the RE value chain and to diversify RE programmes based on a willing buyer, willing seller approach.
This will help accelerate greater corporate sector involvement.
The NRECC stated in the United Nations Framework Convention on Climate Change Malaysia Report that the grid emission factor for Peninsular Malaysia stood at 0.78 total carbon dioxide content per megawatt hour.
Let me take this opportunity to share some of the key initiatives that can help make this change and assist in decarbonising the grid through distributed generation (DG).
Regulatory framework
Decarbonising the power sector through distributed generation poses a few challenges and ample opportunities in the context of Malaysia’s existing regulatory framework and the utility’s role.
Let’s take a comprehensive look at the various challenges and opportunities with respect to mainly, the Electricity Act 1990, and the Renewable Energy Act 2011.
Challenges
> Regulatory Barriers: The Electricity Act of 1990 was written at a time when the power system was primarily composed of large, centralised power plants. The act allowed for the formation of Tenaga Nasional Bhd (TNB) on Sept 1, 1990 and with it came the Licensee Supply Regulations 1990.
As a result, there were numerous regulatory barriers to distributed generation, such as limitations on who can generate power and how it can be sold. Rules associated with co generation such as top-up and standby charges were structured to ensure financial viability of the then clawback mechanism for tariff adjustment to protect the utility and ensure sustainable growth in a nation dependent on foreign direct investment (FDI).
> Limited Financial Incentives: While the Renewable Energy Act of 2011 established the feed-in tariff (FiT) system to promote renewable energy, the incentives may not be attractive enough for widespread adoption of distributed generation. The act assisted the solar technology players more than the participants partaking in developing indigenous resources like hydro, biogas and biomass with low FiT support prices, support mechanism and a tedious process.
> Grid Integration: Existing regulations may not sufficiently address the technical and economic issues related to the integration of distributed generation into the existing power grid.
There are limited interconnection points as seen during the initial rollout of the corporate green power purchase (CGPP) programme with southern states having practically none.
Grid connectivity is solely under the purview of the developer thus making projects using our indigenous fuel – hydro, biogas and biomass – economically unviable as compared with solar.
Opportunities
Policy Reform: The Electricity Act and Renewable Energy Act needs to better accommodate distribution generation and some of the immediate steps that can be taken include:
> Co-Generation: This should be viewed as a decarbonisation effort of the grid and an energy intensity reduction exercise; and as such utility rules requiring full cost recovery of interconnecting infrastructure should be reviewed immediately. The incentive based regulation (IBR) in calculating returns and tariff provides ample financial protection for the utility towards cost recovery of its transmission and distribution infrastructure.
> Lowering FiT Subsidy: By ensuring that the new indigenous renewable energy plants (hydro, biomass, biogas) only need to recover capital expenditure costs from RE plant operations.
> Utility to provide interconnectivity till RE plant and this would reduce project costs by over 25% as well as their FiT subsidy, thus increasing available FiT funds and indirectly increasing the number of RE plants connecting to the grid yearly.
> Grid Connectivity: Utility to provide connectivity till the RE plants and infrastructure costs to be recovered via approved IBR clawback mechanism which has been in place since 2016.
Utility, especially TNB, with its extensive experience in rural electrification since the early 1970’s, is best suited to construct and manage the electricity infrastructure to the plant. The RE Act needs to be amended accordingly.
The argument that this additional cost incurred by the utility would need to be passed to consumers via tariff does not hold water anymore as there are similar mechanisms in place seeking cost recovery including:
> 1.6 % for FiT fund charged to commercial and non-commercial customers above 600 kWh.
> Imbalance Cost Pass-Through (ICPT) mechanism under the IBR framework which allows for TNB, as the utility, to reflect changes in fuel especially imported coal. The ICPT for January 2023 to June 2023 is 20 sen.
By adopting the above mechanisms, these funds would be more efficiently utilised.
Expanding the use of FiT, Green Energy Tariff (GET) and Akaun Amanah Industri Bekalan Elektrik (AAIBEE) Funds: FiT funds, which are typically used to support the renewable energy plants, can be redirected or used for various other purposes as part of Malaysia’s decarbonisation effort together with the exisiting AAIBEE with a new revenue source from GET.
Here are some alternative uses for the funds, where some activities are already undertaken by NRECC and the Sustainable Energy Development Authority (Seda) Malaysia, albeit more effectively and efficiently:
> Energy Efficiency Programmes: FiT funds can be allocated to initiatives that promote energy efficiency measures in buildings, industries, and transportation. This could include subsidies or incentives for energy-efficient appliances, retrofitting programmes, and educational campaigns to raise awareness on energy conservation.
> Research and Development: Allocating FiT funds towards research and development in clean energy technologies can help accelerate innovation and the deployment of emerging solutions.
> Grid Modernisation: Utilities spending on grid connectivity could cross utilise FiT funds for upgrading and modernising the electricity grid infrastructure which is crucial for accommodating higher shares of renewable energy.
> Community-Based Renewable Energy Projects: Instead of large-scale renewable energy plants, FiT funds can be channelled into supporting community-led projects. This approach encourages local participation and ownership, fostering a sense of empowerment and promoting decentralised renewable energy generation.> Green Job Creation and Workforce Training: FiT funds can be utilised to develop training programmes and support job creation in the renewable energy sector. This could involve establishing vocational training centres, providing scholarships or grants for renewable energy education, and supporting skills development for employee transition.
> Renewable Energy Certificates (RECs): Malaysia is a voluntary carbon market where corporates freely trade in carbon related products. As a country dependent on FDI there are a number of ramifications due to the Carbon Border Adjustment Mechanism (CBAM) which will soon be introduced in western countries.
The main objective of a CBAM is to prevent “carbon leakages,” which refer to the risk of high-carbon industries relocating to countries with less stringent climate regulations, resulting in a shift of emissions rather than actual emission reduction globally.
The CBAM aims to address this by placing a carbon price on imported goods based on their embedded carbon content, thus creating an economic incentive for both domestic and foreign producers to reduce their emissions.
Currently, there are some 380 companies globally committed to the use of 100% of RE, and of these, 140 are located in Malaysia. These companies are part of Scope 3 in the Green House Gas (GHG) supply chain.
The above provides ample opportunities for the development of the local RE industry by virtue of owning environmental attributes and programmes listed below which will help Malaysia to remain as a preferred FDI destination.
> Large-Scale Solar (LSS) Programmes: This is generally deemed as LSS1.0 and carried under four packages. Under LSS 1.0 the contract for difference (CfD) price against system marginal price (SMP) or wholesale price is borne through the applicable tariff and paid by the consumers.
The environmental attributes have been contracted to TNB as the off taker but the revenue from the sales of the RECs under the green electricity tariff (GET) scheme is returned to Kumpulan Wang Industry Elektrik. This accounted to about RM150mil in 2022 and should be used to support the activities as listed above.
Companies purchasing RECs do it to support RE-related activities, especially related to green awareness and education including the planting of trees.
> Corporate Green Power Programme (CGPP): This programme marks what I deem as LSS 2.0 and has been oversubscribed by more than 100% since the acceptance of bids from May 9, 2023. I feel that all participants who qualify should be accorded the new enhanced dispatch arrangement programme instead of as a tariff paying customer.
A corporate customer has volunteered to subscribe and pay for the CfD price against SMP or wholesale price and receive the associated environmental attributes which belong to the RE generator. These are generally transferred through RECs. The programme could be further enhanced to benefit local communities by ensuring that the corporate customer contracting the solar power producer is within a 50 km radius as this provides ample opportunities for jobs and run-off economic activities.
> Peer-to-Peer (P2P) RE Energy Programme: The P2P energy trading is the buying and selling of energy between a RE generator and a consumer seeking green energy under third party excess rules (TPA). Under this programme, the consumer enjoys price arbitrage.
I term this as LSS 3.0 providing the associated environmental attributes which belong to the RE generator and are generally transferred through RECs.
TPA rules are the corner stone for this to take place and have been part of the Malaysia Electricity Supply Industry 2.0 Roadmap originally scheduled for launch in 2019 but took a sidestep due to a lack of political will. Let us hope that our ambitious NRECC Minister, Nik Nazmi Nik Ahmad, ensures this launch happens during the fourth quarter of 2023.
> Export of Renewable Energy : Within the context of addressing corporate GHG emissions, RECs can be used to reduce their Scope 2 emissions whereas carbon credits can be used for offsetting their Scope 1, 2 and 3 emissions.
Like carbon credits, RECs can be bought from domestic and international markets although there is preference for some corporates to purchase RECs and carbon credits generated from within the same jurisdiction of operation. Not all corporate customers in Malaysia have similar environmental, social and governance policies, especially non-RE100 registered companies and thus many are seen buying from unconnected grids, namely from Sarawak and Sabah.
If local corporates have preference for the purchase of domestic environmental attributes, then Malaysia should work towards generating sufficient RECs to meet local corporate demand.
RECs, as a market instrument tool for companies to reduce its indirect emissions, will not affect Malaysia’s GHG emissions. Therefore, the export of RE bundled or unbundled with RECs, will not result in increasing Malaysia’s national GHG emissions.
Malaysia should then strike a balance between selling unbundled RECs locally or across borders to ensure that the sales helps in the development of the local RE market.
Bundled RE electricity with RECs to Singapore can be a challenge under Singapore’s Electricity Market Authority rules presently and thus trade via unbundling the RECs is recommended here.
It is imperative that a top-down approach must be used in calculating national GHG emissions. This means that the nation’s GHG emissions from the electricity sector is based on the total consumption of fossil fuel used. It should not be based on the reporting of indirect emissions associated with electricity by all companies that operate in the country.
> Develop a Distributed Generation Integration Plan: This plan should address the technical and economic challenges associated with integrating distributed generation into the power grid and not limited to RE but also the other co-generation technologies . This could include upgrades to grid infrastructure, new grid management technologies, and changes to the economic regulation of the power sector which is overseen by the Energy Commission as part of their role in the decarbonisation of the grid.
> Strengthen Regulatory Capacity: Finally, it will be necessary to strengthen the capacity of regulatory bodies to oversee the expanded use of distributed generation. This could involve additional training for regulators, as well as the establishment of new regulatory bodies or departments dedicated to distributed generation. The distributed generation model from Thailand is something we can look forward to and learn from. Additionally, the distributed generation direction should go beyond RE, encompassing distributed generation technologies.
Ir Nirinder Singh Johl is the founder and CEO of Asia Carbonx Change Plt. He was formerly the managing director of TNBX, a subsidiary of Tenaga Nasional Bhd. The views expressed here are the writer’s own.
