Malaysia: Renewable energy in the Asia Pacific: a legal overview (3rd edition) - Malaysia

Carbon Markets and Renewable Energy Update (Australia)
Last Updated: 11 September 2013
Article by Stephen Webb

MALAYSIA

OVERVIEW

JURISDICTION LANGUAGE
Common law, Islamic law and customary law Bahasa Malaysia (official), English, Chinese dialects, Tamil, Telugu, Malayalam, Panjabi and Thai


BUSINESS ENVIRONMENT

  • Ease of Doing Business Report 2013: 12 out of 185 (up 2 rankings)
  • Global Competitiveness Index 2013: 25 out of 144 (down 4 rankings)
  • Index of Economic Freedom 2013: 56 out of 177 (down 3 rankings)
  • Corruption Perceptions Index 2012: 54 out of 176 (up 6 rankings)
POPULATION INCOME GNI PER CAPITA (PPP TERMS)
29.7 million Upper middle $15,650

PROFILE

Malaysia federated in 1963. The early years of the country were marred by a number of internal conflicts, territorial claims from neighbouring countries and Singapore's secession from the federation in 1965. Presently, Malaysia comprises 13 states and three federal territories. Former Prime Minister Tun Dr. Mahathir bin Mohammad (1981-2003) is largely credited with transforming Malaysia's economy. The pro-business policies of successive governments have ensured that manufacturing, services and tourism are Malaysia's dominant industry sectors. The May 2013 federal election captured the region's attention with the incumbent National Front led by Najib Razak narrowly defeating Anwar Ibrahim's People's Alliance. The National Front has ruled Malaysia since the country broke from British rule, yet this election was the strongest challenge the party has faced to retain government.

ELECTRICITY INDUSTRY OVERVIEW

  • In 2009, Malaysia's total installed electricity capacity was 27GW (not including private generation). Of this amount, gas and coal-sourced electricity contributed over 90% of capacity.
  • Malaysia has nearly achieved 100% electrification, which is a significant increase on 1990 levels when only 80% of Malaysia had electricity coverage.

Government

  • Key government bodies in the energy sector are:
    • the Energy Section of the Economic Planning Unit of the Prime Minister's Department;
    • the Ministry of Energy, Green Technology and Water (keTTHA) which facilitates and regulates the energy sector; and
    • the Energy Commission which was established under the Energy Commission Act 2001 to also regulate the energy sector with a particular focus on the electricity supply and piped gas supply
    • industries in Peninsula Malaysia and Sabah.

Electricity laws

  • The Government has jurisdiction over electricity, gas, gas works and other works for the production and distribution of power and energy.
  • The Electricity Supply Act 1990 regulates a number of aspects of the electricity supply industry, including:
    • the supply of electricity at reasonable prices;
    • the licensing, registration and control of any electrical installation, plant and equipment with respect to matters relating to the safety of persons; and
    • the efficient use of electricity.

Generation, distribution and transmission

  • Despite some privatisation, Malaysia's electricity industry is mostly vertically integrated and monopolistic. The three main utility companies that are responsible for generation, transmission and distribution of electricity are:
    • Tenaga National Berhad (TNB) for Peninsula Malaysia;
    • Syarikat SESCO Berhad (SESCO) (formerly known as Sarawak Electricity Supply Corporation) for Sarawak; and
    • Sabah Electricity Sdn Bhd (SESB) (formerly known as Sabah Electricity Board) for Sabah.
  • TNB is a private company that is wholly owned by the Malaysian Government, SESCO was fully privatised in 2005, whilst SESB is owned by both TNB (80%) and the State Government of Sabah (20%).
  • The three main utility companies are now complemented by Independent Power Producers (IPPs)and to a lesser extent, by dedicated power producers and co-generators.
  • In 1993, licences were issued to IPPs to build, operate and own power plants. Currently, there are 27 IPPs, which contribute approximately 43% of the total installed electricity generation capacity in Malaysia.

RENEWABLES INDUSTRY OVERVIEW

  • Malaysia has abundant domestic energy resources including oil, gas, hydropower and coal. However, domestic fossil fuel resources are depleting, which has reinforced the need to source renewable energy
  • alternatives.
  • Malaysia has targeted 985MW, or about 6% of its electricity generation, to be from renewable sources by 2015. The Government is anticipating strong progressive growth in renewables capacity through to 2050.
  • As of September 2012 though, only 74MW of renewables capacity was connected to the utility grid. More than 430MW of renewables sourced electricity is off grid, mostly from private palm oil millers and through solar hybrid systems.
  • The Sustainable Energy Development Authority (SEDA)is the statutory body formed under the Sustainable Energy Development Authority Act 2011. The key role of SEDA is to administer and manage the implementation of the feed-in tariff.
  • The percentage distribution (in total capacity terms) of approved projects entitled to the feed-in tariff was dominated by solar PV (43%), small hydro (26%), biomass (26%) and biogas (5%).

Renewable energy policies

  • The National Renewable Energy Policy was approved by cabinet in April 2010. The policy aims to "enhance the utilisation of indigenous renewable energy resources to contribute towards national electricity supply security and sustainable socio-economic development".
  • The policy includes a five-stage plan to enhance renewable energy capacities, namely to:
    • introduce a legal and regulatory framework;
    • provide a conducive business environment for renewable energy;
    • intensify human capital development;
    • enhance renewable energy research and development; and
    • create public awareness and renewable energy policy advocacy programs.
  • Malaysia is arguably still at stage two following the introduction of renewable energy legislation in 2011 (see below).
  • In 2001, the Government introduced the Five Fuels Policy, which was part of the 8th Malaysia Plan (2001 – 2005). It added renewable energy to the traditional "four fuels policy" (which consisted of coal, hydropower, natural gas and oil).

Hydropower

  • Hydropower is the dominant renewable energy generator in Malaysia.
  • Most suitable hydropower sites in Peninsular Malaysia have been developed. States like Pahang, Kelantan and Perak have been earmarked for potential development.

Wind energy

  • Onshore wind sites are limited, however they have exhibited potential for small and medium scale projects, with average wind speeds of 4.1m/s recorded in the eastern Peninsula region of Malaysia.
  • Overall, the wind industry is underdeveloped with an estimated capacity of 0.15MW at present.

Solar energy

  • It is estimated that just 1.5MW of grid-connected PV systems are installed in Malaysia, however stand-alone PV systems are prevalent, particularly in rural areas.
  • SEDA is encouraging "the massive involvement of the public in solar systems". In 2012, it allocated solar rooftop systems for 2,000 households and in 2013 it plans to allocate a further 10,000 solar systems.
  • Solar energy is far more feasible in Malaysia than wind or geothermal energy for instance, as is evidenced by recent feed-in tariff grants.

Geothermal energy

  • The Tawau geothermal field is estimated to have potential for 67MW, with temperatures between 220 and 236 degrees Celsius. RM1.5 million (approximately US$473,000) has been allocated for research into the site, and plans for its development have been included in the 10th Malaysian Plan (2011 – 2015).

Biomass energy

  • Malaysia is the largest palm oil producer in the world and has abundant sources of palm oil biomass.
  • It has been estimated that technical biomass potential in Malaysia could be 29GW. Along with biogas sources, biomass could generate up to 20% of Malaysia's total electricity needs. Currently, the country produces around 18 million tonnes of palm oil annually.

CURRENT ISSUES IN THE RENEWABLES INDUSTRY

  • Palm oil is a contentious, yet potentially vast renewable energy source for Malaysia. Large and often forested areas need to be cleared for plantations, which impacts on Malaysia's carbon reduction platform and conservation efforts. Palm oil plantations already cover approximately 15% of the country (4.7million ha).
  • Most renewables projects in Malaysia have been on a small scale to meet short or medium term goals. Some commentators suggest there is a need for larger projects to satisfy increasing electricity demands and renewable energy targets, yet approvals for such large projects have not been forthcoming from the Government.
  • In recent months there has been confusion about the 1% charge on electricity bills that contributes to the Renewable Energy Fund (REF). TNB has, by press statement, clarified that the 1% charge is not new and not a scheme to collect money from unwary customers as alleged. The 1% charge is imposed following the launch of the Feed-in-Tariff system. This system is a funding mechanism under the Renewable Energy Act 2011 and Sustainable Energy Development Authority Act 2011 designed to encourage the development of renewable energy via cost-sharing among electricity consumers in Peninsular Malaysia.

RENEWABLES LAWS

Renewable Energy Act 2011

  • This Act is Malaysia's main regulatory instrument in prioritising renewable energy over fossil fuels. It provides for the establishment and implementation of the feed-in tariff to support the generation of renewable energy.
  • Part II of the Act establishes the feed-in tariff. Under section 4 of the Act, generally only persons who produce renewable energy from a renewable energy installation having an installed capacity of not more than 30MW (or such higher installed capacity as may be approved by the Minister), and who meet such other criteria as may be prescribed by SEDA, are eligible for the tariff.
  • Part III of the Act deals with the connection, purchase and distribution framework for renewable energy, including:
    • renewable energy power purchase agreements (PPAs);
    • the procedure for making an application for connection to a supply line when a PPA has been concluded; and
    • the requirement for a distribution licensee to purchase and distribute electricity generated by renewable energy installation connected to a supply line. Licensees who distribute renewable-sourced electricity are given priority over fossil fuel-sourced electricity.
  • Part IV of the Act addresses the feed-in tariff, as well as utlining the amount a distribution licensee may recover from the renewable energy fund.
  • There is significant subsidiary legislation under the Renewable Energy Act, including:
    • Renewable Energy (Criteria for Renewable Resources) Regulations 2011;
    • Renewable Energy (Allocation form Electricity Tariffs) Order 2011;
    • Renewable Energy (Feed-in Approval and Feed-in Tariff Rate) Rules 2011;
    • Renewable Energy (Renewable Energy Power Purchase Agreement) Rules 2011;
    • Renewable Energy (Technical and Operational Requirements) Rules 2011;
    • Renewable Energy (Recovery of Moneys by Distribution Licensee) Rules 2011; and
    • Renewable Energy (Administrative Fees) Order 2011.

Sustainable Energy Development Authority Act 2011

  • The Sustainable Energy Development Authority Act 2011 gives SEDA the power to do all things necessary or expedient for or in connection with the performance of its functions under the sustainable energy laws. SEDA's functions include promoting the national policy objectives for renewable energy, promoting investment in the sector and advising the Government on sustainable energy.

GOVERNMENT INCENTIVE PROGRAMS

  • The feed-in tariff is Malaysia's main mechanism incentivising the generation of renewable energy up to 30MW in size. Special approval from the Minister will need to be obtained for renewable energy installations with the installed capacity of more than 30MW in size. This mechanism allows electricity produced from indigenous renewable resources to be sold to power utilities at a fixed premium price for a specific duration. The feed-in tariff system is not financed by the Government. It is financed by electricity consumers themselves, who contribute 1% of their total electricity bill towards the renewable energy fund. However, domestic customers who consume 300 units of electricity or less each month do not have their tariffs raised to contribute to the fund.
  • Currently, biogas, biomass, solar PV and small hydropower projects are eligible for the tariff.
  • Tax incentives are open to companies providing energy conservation services. Under a 2011 Budget announcement, the following tax incentives will be extended for applications received until 31 December 2015. These include:
    • a pioneer status, which grants an income tax exemption of 100% of statutory income for a period of 10 years;
    • an investment tax allowance of 100% on the qualifying capital expenditure incurred within a period of five years;
    • exemption on import duty and sales tax on imported machinery, equipment, materials, spare parts and consumables used directly in the generation process and that are not produced locally; and
    • full exemption on sales tax for locally purchased machinery, equipment, materials, spare parts and consumables. The exemption is for a period of one year, commencing from the date of application.
  • The Government has also earmarked MR1.5 billion (approximately US$473 million) in a Green Technology Financing Scheme (GTFS). The scheme is intended to benefit producers as well as users of green technology. It is a soft loan supported by the Government and the nature of it is similar to a normal loan, where the borrower is required to pay an instalment to the bank throughout the tenure period.

MAJOR PROJECTS/COMPANIES

  • Yingli Green Energy Holding Company Limited announced in May 2013 that it will supply over 10MW of solar panels for Malaysian PV projects.
  • Kulim Hi-Tech Park is the first high technology industrial park in Malaysia. The park's primary aim is to help Malaysia achieve its "Vision 2020" for the country to be fully industrialised.
  • EQ Solar is investing US$500 million to manufacture solar modules, cells and wafers in Senai Hi-Tech Park.
  • Berjaya Solar Sdn Bhd is investing US$61 million in a 100MW plant at Bukit Tagar, as a precursor to a proposed 50MW solar PV plant.
  • The Hulu Terengganu (250MW) and Ulu Jelai (372MW) hydropower projects are among other notable planned projects.
  • Bosch has invested US$736 million for a new solar energy manufacturing site in Penang.
  • Bakun Hydropower Project will add 2.4GW to Malaysia's hydropower capacity.

FOREIGN INVESTMENT/OWNERSHIP

  • In 2009, Malaysia relaxed its foreign investment laws significantly. Among the changes, the Government has removed the requirement for 30% ethnic ownership of Malaysian companies. As a result of these reforms, Malaysia has become a more attractive foreign investment destination. The ethnic ownership restriction still applies in strategic sectors such as the telecommunications, ports, energy (not including renewable energy) and transport sectors.

RELEVANT INTERNATIONAL TREATIES

  • Malaysia became a signatory to the United Nations Framework Convention on Climate Change in 1993 and it ratified the Kyoto Protocol in 2002. As a developing nation, Malaysia has no binding emission reduction targets under the Kyoto Protocol, however, as at 2009, it had registered 67 clean development mechanism projects.
  • During the Copenhagen talks of 2009, Malaysia's Prime Minister pledged that his country would adopt a voluntary greenhouse gas emissions reduction target of up to 40% of 2005 levels by 2020.

© DLA Piper

This publication is intended as a general overview and discussion of the subjects dealt with. It is not intended to be, and should not used as, a substitute for taking legal advice in any specific situation. DLA Piper Australia will accept no responsibility for any actions taken or not taken on the basis of this publication.


DLA Piper Australia is part of DLA Piper, a global law firm, operating through various separate and distinct legal entities. For further information, please refer to www.dlapiper.com

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