Glynn Cooper, Ong Kok Jin and Wong Jen Ru

Embracing the transition to renewable energy (RE) in order to reduce carbon emissions has been on the agenda for Malaysia. The Ministry of Science, Technology and Innovation (MOSTI) has set an ambitious target for Malaysia to achieve 20% RE capacity in 2025, and Malaysia is also committed to its contribution to the RE target set by ASEAN, i.e. 35% RE capacity by 2025.

Focus on the solar energy market

Acknowledging solar energy as the most promising RE source in Malaysia due to our exposure to equatorial sunshine, the RE target primarily focuses on increasing solar energy generation capacity. Malaysia’s enthusiasm towards promoting solar energy can be seen in various programmes, including:

Large Scale Solar (LSS) Programme

The LSS programme was introduced in 2016, with the Energy Commission (EC) being the regulatory body entrusted with the implementation of the programme.

The EC have since commissioned a number of LSS projects:

• LSS1: The first round of bidding in March 2016 saw a total of 19 projects approved with a combined generation capacity of around 450 MWac.
• LSS2: The second round of bidding in February 2017 had a total of 41 bids with a combined capacity of around 562 MWac later shortlisted.
• LSS3: The third competitive bidding cycle took place in 2019 with the EC awarding a total of 491 MWac additional solar energy capacity in Peninsular Malaysia.
• LSS4: In 2020, the EC opened competitive bidding for 1 GW of solar plants, the largest capacity offered under its LSS scheme, and ended up awarding LSS projects of an aggregate of 823.06 MWac.

Under the EC’s requirements and as reflected in the first three rounds of the LSS bid, foreign participation was allowed up to 49%. However, there was a deviation in the latest round, whereby participation was open only to local companies (i.e. 100% Malaysian equity shareholding if not listed, or 75% if listed), or a consortium of local companies.

Notably, LSS4 was commissioned during the COVID-19 period and its underlying purpose was to stimulate activity in the domestic market given the present COVID-related and general economic circumstance in Malaysia. It remains to be seen whether at the next LSS programme, and in usual economic circumstances, the EC would reopen the bid to allow foreign participation.

Net Energy Metering (NEM)

The NEM scheme has been introduced in November 2016. The scheme is executed by the Ministry of Energy and Natural Resources (KeTSA), regulated by the EC, with Sustainable Energy Development Authority (SEDA) as the implementing agency.

The concept of NEM is to enable consumers to generate clean energy using solar PV systems installed on the rooftops of their premises, and the energy generated can be used for self-consumption. Any excess electricity generated can be sold to the distribution licensees for credit to reduce electricity bills.

The NEM 1.0 scheme (2016-2018) (open to all consumers who are customers of Tenaga Nasional Berhad (TNB) or Sabah Electricity Sdn Bhd) was based on the prevailing displaced costs which were lower than the regulated electricity retail tariff. Due to a low take-up rate at the end of 2019, a review was carried out and as an effort to encourage the NEM uptake, NEM 2.0 was introduced where a true net energy metering concept was adopted, and excess solar PV generated energy was allowed to be exported back to the grid on a “one-on-one” offset basis. The NEM 2.0 scheme was only applicable to Peninsular Malaysia and applicants must be a registered TNB customer.

There was an overwhelming take-up rate and the NEM 2.0 quota was well exhausted ahead of its closing date at the end of 2020. KeTSA has now announced that NEM 3.0 will be in effect from 2021 to 2023 with a total quota allocation up to 500 MW, to be assigned through 3 different sub-schemes.

Peer-to-peer solar power trading (P2P)

SEDA has introduced a P2P programme and has completed the pilot project between November 2019 and June 2020. P2P has the following features:

• prosumers (i.e. users who both sell and consume energy) can trade electricity with consumers on an energy trading platform or sell excess power generated to TNB;
• the sale of the excess energy can be made through a grid operator or retailer (both roles played by TNB), and such operator / retailer will be paid a grid fee or retailer’s fee;
• typically, prosumers will sell their solar electricity at a competitive rate compared to a retailer’s tariff.

Essentially, P2P is the “Uber” or “Airbnb” of energy, whereby the platform allows local distributed energy generators to sell their electricity at a desired price to consumers willing to pay that price.

While findings of the pilot project show that there was important interest from the solar PV industry including local governments to have P2P implemented, there are gaps that require further studies before the P2P can be properly implemented, such as:

• impact of the P2P energy trading on the grid;
• identifying sustainable business models and capital investment; and
• legal provision and conducive regulatory framework for the live implementation.

The venture into green hydrogen

SEDA has acknowledged the importance of green hydrogen as a potential solution to provide a balancing mechanism to solar energy (given the intermittent nature of sunlight), and has included a green hydrogen agenda in the Renewable Energy Transition Roadmap 2035.

To realise the potential of hydrogen energy, clear strategies need to be put in place to accelerate the adoption of hydrogen use. Encouragingly, SEDA has committed to collaborate with other relevant agencies to:

• invest in hydrogen R&D;
• put in place subsidies for hydrogen production facilities and infrastructures;
• abolish or reduce import taxes for imported fuel cell vehicles; and
• formulate laws and regulations on the production, storage and distribution of hydrogen and guidelines on hydrogen standards.

Sarawak will play a pivotal role in the uptake of the hydrogen market, due to its experiences in the demonstration projects carried out by the Sarawak Economic Development Corporation (SEDC) and Sarawak Energy Berhad (SEB) (in collaboration with Linde Fox Sdn Bhd), including the Southeast Asia’s first hydrogen production plant and refuelling station in Bintawa, Kuching, and the hydrogen-powered bus trial in Kuching.

Further, there are other hydrogen projects in the pipeline, including: (i) Sarawak’s autonomous rapid transit (ART) powered by hydrogen fuel cells, targeted to start in 2025; (ii) the joint techno-commercial evaluation of a large-scale hydrogen production facility initiated by SEB and PETRONAS; and (iii) SEDC’s project with Sumitomo Corp and ENEOS to build a hydrogen plant in the Bintulu petrochemical park, expected to be ready by 2023.

Closing remarks

Notwithstanding the various efforts in introducing RE policies in the country, the general consensus appears to be that fossil fuel consumption will continue to dominate the power sector, and the role of RE would be to complement (rather than to replace) fossil fuels as Malaysia’s main energy source, at least for the foreseeable future.

That said, these developments show that Malaysia continues to recognise the importance of RE in the development of a sustainable economy and is taking active steps to increase RE growth in the energy mix. It will be interesting to see further updates on these commitments and policies, as well as the efforts of the Malaysian government leading up to the RE target set for in 2025.

For further information, please contact Glynn Cooper (Partner), Wong Jen Ru (Associate), or your usual Herbert Smith Freehills contact.

Disclaimer

Herbert Smith Freehills LLP is licensed to operate as a Qualified Foreign Law Firm in Malaysia. Where advice on Malaysian law is required, we will refer the matter to and work with licensed Malaysian law practices where necessary.