Gas-rich, and having enjoyed cheap power for decades, Malaysia is on the cusp of a radical shift in its energy profile. Recent electricity price hikes and a concerted move to cut carbon emissions are set to release a surge in renewables. As Kuala Lumpur prepares to host POWER-GEN Asia, PEi reports on Malaysia’s bid to restructure its power industry.
Chris Webb, UK
For six years Kuala Lumpur’s Petronas Towers were the tallest buildings in the world, boldly underlining Malaysia’s rightful place at the top table of Southeast Asia’s economic elite. Partly occupied by the country’s biggest contributor to GDP, it was only when Taipei 101 was completed in 2004, that the huge 88-floor building lost its crown. Yet Petronas, Malaysia’s state-owned oil and gas company, remains one of the world’s leading exploration and development organizations.
Malaysia was the world’s tenth-largest holder of natural gas reserves in 2010 and the second largest exporter of liquefied natural gas after Qatar in 2009. Petronas is ranked among Fortune Global 500’s largest corporations in the world and the most profitable in Asia. Unsurprisingly, then, the country’s 13 states and three federal territories, divided between two regions of Peninsular Malaysia and those of Sarawak and Sabah in East Malaysia, enjoy easy access to natural gas.
For many years, plentiful natural gas has been at the heart of Malaysia’s power industry, in which grid-connected capacity totals almost 20 GW, with a maximum demand of 14 GW. The generation mix is 62 per cent gas, 21 per cent coal and 9.5 per cent hydro, with the rest from fuels such as biomass.
|Sultan Salahuddin Abdul Aziz power station, Malaysia’s largest power plant with a capacity of 2420 MW
Source: Kapar Energy Ventures
Yet things could be about to change, as the country continues to bank on solar and biomass to cut greenhouse gas emission, and some industry insiders eye energy efficiency as offering low hanging fruits.
Rajat Gupta, a consultant for Frost and Sullivan’s Energy and Power System Practice based in Kuala Lumpur, says the country looks on course to have 65 MW of solar installed by 2015, 190 MW by 2020, and 1300 MW by 2030. In biomass, meanwhile, Malaysia is aiming for 330 MW installed by 2020, as the government targets a 40 per cent drop in carbon dioxide emissions from 2005 levels by 2020.
Malaysia’s power sector comes under the control of the Ministry of Energy, Green Technology and Water, whose role is to facilitate and regulate the electricity sector and to ensure that affordable energy is available to consumers. This includes formulation of energy policy in coordination with the Economic Planning Unit. The Energy Commission is responsible for regulation of the electrical power sector, as well as the piped gas supply industry.
In its power policy Malaysia is extending a diversification strategy first implemented in 1999 that features five main sources – natural gas, coal, oil, hydro and renewable energy. Soaring global coal prices amid a rise in commodity prices are now pressuring the profitability of Tenaga Nasional Berhad (TNB), which generates half of the Southeast Asian nation’s power. Consumption of coal in Malaysia had been climbing by almost 10 per cent per year since 2002. The country’s total coal consumption for electricity generation is projected to increase from 11.25 million tonnes in 2005 to 33 million tonnes in 2020.
Diversification also means that, despite events earlier this year in Japan, Malaysia is looking to a future that includes nuclear power – which some see as a proven baseload power generation option to combat runaway gas and coal prices.
Analysts and other industry observers also warn of an impending robust shake-up of the market as independent power producers (IPPs) respond to a reduction or withdrawal of subsidies in natural gas. The Research for Social Advancement (Refsa) think tank says bloated and inefficient cost structures will force IPPs to charge much more than their Singapore counterparts if natural gas were sold to them at market rates.
The think tank estimated that local IPPs would need to raise their average prices from 25 sen (8.4 US cent)/kWh to 74 sen/kWh if subsidies were removed and gas prices were allowed to rise from 10.70 ringgit/mmBTU (293 kWh) to the present market price of 47.42 ringgit/mmBTU. In comparison, Singapore power producers charge the equivalent of 41 sen/kWh.
“Put simply, if the gas subsidy in Malaysia is completely removed, the IPPs’ generation cost would be 80 per cent higher than that of power generators in Singapore,” said Refsa executive director Teh Chi Chang. Singapore fuel prices are market based. Refsa’s estimates follow statements from the Association of Independent Power Producers that savings in gas costs — effectively the difference between international gas prices and fixed price set by the government — are passed on directly to consumers through lower tariffs.
|Electricity generation forecast, 2012–26
Source: Malaysian Nuclear Agency
THE POWER INDUSTRY’S PRIORITIES
Malaysia’s electricity supply industry is mostly vertically integrated and monopolistic, where utilities handle all generation, transmission and distribution activities for electricity in any particular region. The main utility companies are TNB, the Sarawak Electricity Supply Company (SESCO) and Sabah Electricity Limited (SESB), which cover Peninsula Malaysia, Sarawak and Sabah, respectively. Each company was established under British rule before the nation’s independence. Independent power producers also supply some portion of utilities’ electricity supply in each region. Their perceived lopsided purchasing power agreements with TNB have also come under renewed scrutiny following the government’s recent decision to raise electricity prices.
Almost all of Malaysia now has access to electricity, so the crucial challenges facing the country’s power sector are the issues of sustainability, ensuring the security and reliability of the energy supply, and diversifying various energy resources.
As one of ASEAN’s most prosperous economies, an expected growth in electricity demand is foremost in the minds of policymakers. For many years the country has depended on gas fired power, much in the relatively expensive form of single-cycle gas turbines. But coal fired power has emerged as an important provider of power in a country desperate to improve its energy security, which is driving a desire to make fast progress towards cleaner coal technologies.
Malaysia is also gradually moving towards a Western-style energy policy with a concerted effort to increase the role of renewable electricity and energy efficiency. Malaysia was present at the World Climate Change summit in Copenhagen in 2009 and is also a signatory to the Kyoto Protocol, which expires next year. But Malaysia has no legally binding targets for CO2 emissions, even if it has pledged internally to strive towards a 40 per cent reduction by 2020.
|Generation mix, 2010–30 in percentage
Source: Malaysian Nuclear Agency
The forecast depletion of oil and gas reserves within three decades is also driving support for renewables, with the government providing robust incentives through the Green Technology Financing Scheme (GTFS). This is bringing an investment of 1.5 billion ringgit into enhancing the application of green technology. The Small Renewable Energy Programme (SREP) also promotes small power plants that utilize renewable energy to sell electricity to the state-owned electricity utility. This programme applies to all types of renewable energy, including biomass, biogas, municipal waste, solar, mini-hydro and wind.
Last year, Ahmad Hadri Haris, chief technical adviser to Malaysia’s Minister of Energy, announced proposed feed-in tariffs for solar photovoltaics (PV), biomass, biogas and mini-hydro. Since then, progress on implementing feed-in tariffs has continued at a steady pace. In April, Malaysia’s cabinet approved the introduction of the Renewable Energy Act, which has just come into effect. It follows last June’s National Renewable Energy Policy and Action Plan, which has a goal of increasing renewable energy from its current one per cent to 5.5 per cent of electricity supply by 2015.
The current proposal limits the programme to 219 MW in 2011, increasing to nearly 1000 MW in 2015, with the bulk of the new generating capacity to be installed under the programme set aside for mini-hydro and biomass. Malaysia, like Indonesia, is a big producer of palm oil for the world vegetable oil market, leading to ample waste product available for biomass.
Yet the Copenhagen Summit called for a halting of the expansion of palm oil production under a deforestation programme to which Malaysia and Indonesia were opposed. The situation for sustainable electricity production from palm oil waste is therefore far from straightforward and even highly controversial.
In large-scale hydropower Malaysia also faces a policy dilemma. The focus of new hydro capacity is Eastern Malaysia’s hydro corridor, where new plants being developed around river basins in the state of Sarawak could greatly increase electricity supply to the country’s demand centres on the mainland Peninsula, while being way in excess of the demand in the regions where they are to be built, at a considerable cost to the environment.
The role of hydropower in the generation fuel mix will be more prominent after 2010. Though most of the potential sites in Peninsular Malaysia have already been developed, there is still some untapped potential in the states of Pahang, Kelantan and Perak. However, the Bakun Hydroelectric Project, which is currently under development, has the greatest potential. The Bakun project is intended to add 2400 MW to hydroelectric generation capacity.
At full operation, Bakun Dam would most probably generate 10,512 GWh (50 per cent of its potential capacity, the world average for hydroelectric dams), which means that Bakun Dam could contribute nearly 8.5 per cent of the country’s expected electricity demand by 2020.
The government has also approved for the addition of the Peninsular Malaysia–Sarawak inter-connection link via submarine cable to channel the power generated from the Bakun project, although this project is currently postponed.
The government is also studying the possibility of developing more hydropower at the Rejang Basin in Sarawak.
The potential for harvesting wind energy in the country has traditionally been recognized as low. However, recent studies have found that offshore sites exhibit exploitable conditions for power generation, with average annual wind speeds of 4.1 metres/second being recorded in the eastern Peninsular region of the country. Utilization in the country is currently at the pilot project stage, with an estimated installed capacity of only 0.15 MW.
|The Bakun Hydroelectric Project is intended to add 2400 MW to Malaysia’s generation capacity
Source: Mohamad Shoox
SHIFTS IN FOSSIL FUELS
Malaysia currently has about 8 GW of coal fired power capacity, most of which is owned and operated by independent power producers. The 1200 MW Jimah IPP power plant – one of the last major power station to be built – was commissioned in 2009 and could be the last big coal fired station to be completed for some years. Along with the drawback of its escalating costs, coal fired generation also faces considerable public opposition in some regions of Malaysia, especially if projects encourage opencast mining in environmentally sensitive areas.
In crude oil, Malaysia is a net exporter, with markets in Singapore, Thailand, Japan and South Korea. Yet production is expected to tail off, mainly due to the natural depletion of its reserves. It is also one of the world’s leading exporters of liquefied natural gas (LNG), being second only to Qatar in 2009.
In gas, the next two to three years are expected to bring huge growth for the distribution company Gas Malaysia, especially with more supply coming online as an LNG plant in Malacca is brought into operation. With a second LNG terminal expected to be ready by year-end, the firm is likely to overcome the previous constraints on its gas supplies and be able to provide gas to more customers.
Yet ordinary Malaysians are likely to be more concerned by the recent price hikes the government has seen as necessary to reduce subsidies and provide funds for its renewable energy programme. Malaysia raised electricity tariffs and the price of natural gas for the power sector as rising oil and gas prices have made its subsidy burden “unsustainable”. The government said in a statement that it also plans to continue raising the price of gas charged to the power sector by 3 ringgit/mmBTU (293 kWh) every six months, and it expects the gas to be sold at market prices by 2016.
“The increase in natural gas prices is unavoidable due to the increase in global energy prices,” the government said. “As this situation is not sustainable, the government had no choice but to restructure the gas subsidy.” The electricity tariff increases come on the heels of the recently passed Renewable Energy Act, which provides a mechanism for the government to impose FiTs for the Renewable Energy Fund (REF) from 1 September this year.
According to the Institute of South East Asian Studies, the FiT and REF are designed to provide an incentive for Petronas to invest in new sources of oil and gas. Malaysia’s Prime Minister, Najib Razak, had to explain that the existing electricity tariffs prevented the government and Petronas from developing alternative energy resources that required high initial investments. This raises the question as to whether Petronas should fund the development of alternative energy resources from its internal resources or should it depend on increases in electricity tariffs.
The electricity tariff increase, averaging a little over 7 per cent, has been justified on the basis that more than 5 percentage points reflect an increase in basic fuel prices, especially gas prices, which must be absorbed by the power sector. The remaining 2 percentage points is for the TNB to recover the high cost of gas that it has incurred since 2006. TNB also has tried recently to balance its books by charging an additional 100 ringgit as deposit from customers. The government has also set in place a Fuel Cost Pass Through (FCPT) mechanism that will enable it to pass through fuel costs directly to consumers of electricity.
While there was much opposition to Malaysia’s earlier plans to build nuclear power plant in the country, to widen diversity of supply and bring it in line with other Southeast Asian nations, the technology remains an option. Shortly before the Fukushima Daichi incident in Japan, Malaysia was celebrating the establishment of the Malaysia Nuclear Power Corporation.
Public opposition to nuclear power has been muted and many Malaysian remain in agreement with the Ministry of Energy, Green Technology and Water that nuclear would be the best option for cheap, reliable and low carbon power.
Overall, Malaysia is showing exciting signs of growth and development and its challenge to meet the reduction in carbon intensity targets provides a significant challenge for the renewable energy industry and, many observers believe, nuclear also. But, as the fallout from Fukushima continues, it is, possibly, a case of ‘watch this space’.