Renewable energy in Malaysia: a policy analysis

Transcription

1 Renewable energy in Malaysia: a policy analysis Koh Mok Poh and Hoi Why Kong Forest Research Institute Malaysia, Kepong, 52100, Kuala Lumpur, Malaysia This paper outlines the development of renewable energy in Malaysia and the institutional framework to support it. The incentives provided for renewable energy are grouped into two categories. Under the Promotion of Investment Act, the incentives granted are pioneer status, investment tax allowance and reinvestment allowance. Depending on the modality of the investment an investor can opt for any of these incentives. Incentives are also given under the approved service projects such as transportation, communications and utility projects, whereby promoters under this category can enjoy tax exemption under Section 127 and investment allowance under Schedule 7B of the Income Tax Act The barriers to the promotion of renewable energy technologies and the measures to overcome them are also discussed. The paper finally discusses the source-specific concerns and recommended measures to develop renewable energy. 1. Introduction Malaysia is in the midst of an era of vigorous industrial growth brought about by strong domestic demand together with its significant science and technology development. The government s vision of turning Malaysia into a humane industrialised country by the year 2020 will have a great impact on the usage of energy in the country. In the next three decades, Malaysia plans to develop itself in such a manner that it will not only be a consumer of technology but also contribute to the fulfilment of the scientific and technological needs of the future. Accordingly, universities and institutions are consolidating their efforts to undertake research on energy and its conservation to attain increased efficiency and better productivity through waste reduction. Malaysia has also committed itself under Articles 4 and 12 of the United Nations Framework Convention on Climate Change to prepare a national greenhouse gas (GHG) inventory. Accordingly, it has planned to review and update the assessment of vulnerability to climate change, and assess adaptation needs and prepare its initial National Communications to the Conference of Parties (COP). Malaysia is also a signatory to the Kyoto Protocol. The vision for Malaysia stipulates the overall target of becoming an industrialised country by Similarly, the Ministry of Energy, Communications and Multimedia (MECM) has elaborated the vision for the energy sector for 2020, which lays down that by the year 2020, every member of Malaysian society should have access to highquality, secure electrical power and other convenient forms of energy supplied in a sustainable, efficient and cost-effective manner, and to use them efficiently and responsibly to propel economic activities and maintain a high quality of life, having regard to the need to minimise the negative impacts of their supply and use on the environment. 2. Renewable energy in Malaysia Malaysia s energy sources primarily comprise oil, natural gas, hydro power and coal, although renewable energy (RE) sources such as solar power and biomass are currently being exploited. The government is emphasising the use of natural gas and also planning to develop hydro power in East Malaysia in the foreseeable future. Initiatives have been taken towards careful usage of energy resources and developing renewable energy (RE) sources. RE has been developed to varying degrees. While some knowledge and efforts in RE development have already reached advanced level, they are insufficient and fragmented in general. The most extensive study on the use of biomass has been on palm-oil wastes, which are used to meet the energy requirement of the palm-oil mills and the electricity needs of the workers. The energy potential of biomass is estimated to be about 440 PJ/year in 1996 [EPU, 1999]. The total contribution of biomass to the primary energy supply of Malaysia has been estimated to be at least 90 PJ. At present, the main contribution is from palm-oil wastes (about 80 %), while the use of other wastes is rather inefficient. However, the total technical potential of biomass in Malaysia is around 130 PJ -- about 5 % of the national energy requirement [EPU, 1999]. It is a widely accepted Malaysian policy to save foreign currency by producing and using local products wherever possible. By using domestic fuels such as biomass instead of imported coal or oil, the country benefits significantly in terms of foreign exchange savings. Since biomass power plants are relatively smaller than conventional fossil fuel power plants, it is reasonable to assume that a larger part of the investment in biomass plants can be undertaken by local companies [EPU, 1996]. This means a lower import ratio for biomass power plants compared with conventional power plants, because a number of kinds of equipment such as boilers and fuel-handling 31

2 equipment can be produced locally. But because of the small size of biomass power plants, the investment per MW is assumed to be higher than that for conventional power plants. However, since no precise data are available on the import component in biomass and conventional power plants, it is assumed that the lower import component for the former combined with its higher investment cost will result in approximately the same level of net imports per MW as for conventional power plants. In addition to the foreign exchange savings, the increased use of biomass creates additional employment for Malaysian workers, and hence profits Malaysian businesses, instead of creating employment in foreign countries that export the coal/oil to Malaysia. There will be greater employment opportunities in two new distinct areas: collection, treatment and handling of local biomass; and the erection, operation and maintenance of biomass power plants. It is often argued that additional costs will be incurred to connect smaller power plants to the grid. However, there are cases where decentralised generation results in cost reduction, especially in the transmission system, and in almost every case, decentralised generation leads to reduction in transmission losses to the network. Contrary to conventional thinking that decentralised generation systems are expensive to the network, they have more advantages and benefits than centralised systems. Market operators in some countries have been asked to buy electricity at lower prices from these decentralised producers (such as RE-cogen producers) due to network cost reduction as a result of lower network losses and lower investment in transmission capacity. The approximate value of the reduced losses from a decentralised power plant will in some cases be higher than the actual investment needed for physical connection of the plant to the grid (transformer and a low-voltage power line). 3. Institutional framework for the development of renewable energy A number of agencies are involved in RE development in the country. They are described in the sub-sections below Economic Planning Unit (EPU) The EPU is the central body involved in formulating policies for the development of RE in the country. It acts as a secretariat to the National Planning Council (NPC), the National Petroleum Advisory Council (NPAC), Foreign Investment Committee (FIC), National Development Planning Committee (NDPC) and various inter-departmental economic development planning committees. The EPU plans both at macro and sectoral levels. Organisationally, planning responsibility at sectoral level is divided among various sections. For example, the energy section assists in overall planning, and formulating policies and programmes related to the development of the energy sector as a whole. The EPU is also involved in implementation and evaluation of the plan. The coordination of external assistance also rests with the EPU. The EPU has an important function particularly related to the development of the electricity sector. With the entry of independent power producers (IPPs) in the electricity industry, the EPU has acquired a bigger direct planning and implementation role. It reviews and considers each IPP proposal in consultation with other relevant parties and issues letters of intent of the government. It thus plays a key role in determining how IPPs operate in the electricity market and their subsequent impact on the rest of the economy Ministry of Energy, Communications and Multimedia Malaysia (MECM) The MECM s role in energy policy and planning focuses mainly on the power sector. The MECM chairs the National Committee for Electricity Supply Planning and Tariff, an inter-agency committee. This committee sets the framework and policy guidelines for tariff review. It meets quarterly to review electricity demand growth and plan electricity supply. The ministry is also responsible for the promotion and development of programmes on energy efficiency and RE. It compiles the annual national energy balances. The MECM is also the focal point for regional and international cooperation in the energy sector, particularly at the Association of South-East Asian Nations (ASEAN), Asia Pacific Economic Cooperation (APEC) and World Solar Programme (WSP) levels. The Department of Electricity within the MECM has statutory responsibility with regard to electricity and gas supply. The overall objective of the ministry for the energy sector is to ensure that the sector is able to develop and expand to meet the growing demand of the country. To attain this objective, it initiates, implements and evaluates policies and strategies regarding privatisation of the energy sector. It also ensures the economic usage of energy resources by reducing the dependence on oil and by varying the usage of other resources such as hydro and coal. Also, the department establishes, upgrades and regulates the quality of services provided by the agencies in the energy sector National Energy Centre (PTM) The PTM has been established as a non-governmental organisation (NGO) to assist the government in carrying out energy studies and performing energy analysis, including developing and maintaining a comprehensive national energy database. The PTM functions as the main implementing agency of the government s energy efficiency and RE projects. It is also the monitoring agency for all energy efficiency and RE projects funded by the government. The PTM was involved in conducting a study on the long-term national strategy for the Malaysian energy sector, , as part of the policy preparatory activities related to the 8th Malaysian Plan [PMD, 1999] The Ministry of Education (MoE) The MoE is responsible for the curriculum and course content of schools, colleges and universities in the country. It is also the focal point for many United Nations Educational, Scientific and Cultural Organisation (UNESCO) activities, of which the WSP is one. Through the ministry, most universities have introduced some courses on energy in their curricula, especially in science and engineering. Most of the universities have some form of activities in RE. However, most of these are carried out on an ad-hoc basis and have different objectives. 32

3 3.5. The Ministry of Science, Technology and Environment (MoSTE) The role of the MoSTE within the energy industry is to provide research and development (R&D) support through the Intensification of Research in Priority Areas (IRPA) programme The Ministry of Information (MoI) The MoI plays a key role in publicising RE, especially through the mass media. For RE to attract wide publicity, its involvement is essential Ministry of Rural Development (MoRD) The MoRD is responsible for the planning, formulation, implementation and evaluation of programmes and strategies for rural development that will expedite the attainment of the national development policy objective. This includes the provision of basic amenities such as electricity. As such, the ministry oversees planning, co-ordination and implementation of the rural electrification programme Department of Environment (DoE) The DoE has the responsibility of controlling, monitoring, conserving and maintaining the environment through legislative power vested in it. The Environmental Quality Act, 1974, was the first legislation put in place to develop an environmental conservation programme. This was followed by a number of other legislations, regulations and guidelines. In addition, the DoE issued the Environmental Impact Assessment (EIA) Order in 1987, which listed a set of guidelines for environmental impact assessment. This has facilitated better understanding of the government s requirements in relation to the environment for all affected projects, including power projects Universities and research institutions Malaysia has followed the success stories of countries such as Taiwan and South Korea and has tried to develop a strong link between the public and private sectors for successful R&D in the country. The universities and research institutes play an exceedingly important role in conducting fundamental and applied research on energy. Universiti Sains Malaysia (USM), for example, has made intensive research efforts on solar energy, photovoltaics and rural energy planning. Similarly, Universiti Kebangsaan Malaysia (UKM) has conducted research on solar energy and fluidized bed combustion, Universiti Pertanian Malaysia (UPM) on solar energy and biomass, Universiti Malaya (UM) on energy conservation in industries and alternative fuels, and Universiti Teknologi Malaysia (UTM) on energy conservation in buildings and industries, cogeneration and alternative fuels Petronas Petronas is the key state-owned enterprise engaged in oil and gas exploration, production and distribution, and other segments of the petroleum industry. Petronas was established under the Petroleum Act, It is vested with the exclusive rights of ownership, exploration and production of the country s petroleum resources. The Act also bestows regulatory responsibilities on Petronas. It supervises oil and gas exploration, and negotiates production-sharing contracts. Through its own subsidiary, Petronas also undertakes investments in the country and overseas. Petronas was constituted to meet the need for a vehicle to control and manage important depletable oil and gas resources to meet the national energy requirement, and to finance national development Tenaga National Berhad (TNB), Sabah Electricity Supply Board (SESB) and Sarawak Electricity Supply Cooperation (SESCO) The power market is still mostly monopolised, although restructuring of the sector is in progress. While a number of IPPs have entered the power market, the TNB still holds a monopoly on power transmission and distribution in Peninsular Malaysia, while SESB and SESCO hold monopolies in Sabah and Sarawak, respectively. All these three agencies conduct demand forecast and supply planning Energy services companies (ESCOs) The ESCOs provide a wide range of energy services to the client ranging from preliminary assessment to detailed feasibility studies, designing alternative options, providing engineering assistance, participating in the construction and commissioning of the project, arranging finance, handling operation and maintenance as well as monitoring the performance of equipment and the process. They also implement retrofit projects to increase energy efficiency. There are a few engineering companies, contracting for either energy efficiency projects or servicing for industrial plants (for example, air-conditioning, ventilation, compressed air, waste reprocessing, electricity load management), that can play an effective role in carrying out energy efficiency projects Consumer associations A number of consumer associations such as Consumer Association of Penang (CAP) have been promoting RE in the country. However, the lack of policy and funds has limited the activities of these associations. Still, they play an important role in organising activities targeting the consumers to publicise RE effectively Federation of Malaysian Manufacturers (FMM) Being the major industrial trade association, the FMM is an important intermediary between the government and industrial enterprises. It conducts training programmes, including programmes in energy efficiency, for industry personnel. As such, it plays a key role in human resource development for the development of the energy sector in the country. 4. Incentives for renewable energy technologies Currently, palm-oil mills, wood-based industries (with the exception of higher-end wood industries), etc., which also generate electricity for their own use, do not qualify for any incentives offered by the Malaysia Industrial Development Authority (MIDA), as these are not considered manufacturing activities that qualify for incentives Incentives as promoted activities Apart from manufacturing activities, the MIDA also grants incentives for selected promoted activities. It has drawn up a list of the promoted activities which are eligible for consideration under pioneer status (PS) or investment tax allowance (ITA) schemes under the Promotion of Investments Act, 1986 [MIDA, 1986]. It is the Ministry of Trade and Industry that determines the 33

4 activities that come under the list of promoted activities. The major criteria for consideration include the level of value-addition, local material content, technology and industrial linkages, and the level of priority accorded to the activity by the government. Curently, electricity generation at palm-oil mills does not appear in the list. The TNB and IPPs also do not currently enjoy any incentives such as those provided under the PS or ITA schemes. If the activity is eligible for consideration as a promoted activity, the following are the incentives that will be granted under the Promotion of Investment Act, 1986: Pioneer status (PS) Project proponents wishing to establish new RE generation capacities have the option to request for PS or ITA. A company receiving PS will have to pay only tax on 30 % of its statutory or taxable income for five years. Companies located in the states of Sabah, Sarawak, and the Eastern Corridor states of Peninsular Malaysia (Pahang, Terangganu and Kelantan) have to pay tax on only 15 % of their statutory income for five years Investment tax allowance (ITA) Instead of opting for PS, a company has the option of asking for ITA. The ITA is more beneficial if the project involves heavy up-front capital costs and profits are not expected in the initial years of the project. Under the ITA, a company is given an allowance of 60 % of qualifying capital expenditure, which can be utilised to offset against 70 % of the taxable income. Any unutilised allowance can be carried forward to subsequent years until the whole amount has been used up. The company pays the prevailing corporate tax rate on the balance (30 %) of its statutory income. For the states of Sabah and Sarawak, and Eastern Corridor states in Peninsular Malaysia, the allowance is higher at 80 %, which can be utilised to offset 85 % of the statutory income. The allowance given under the ITA is over and above the normal depreciation allowances permitted in the preparation of financial statements Reinvestment Allowance Existing palm-oil mills wishing to inject fresh capital into their plants can be granted RA. Qualifying capital expenditure includes expansion, modernisation, automation and upgrading of production facilities, and product diversification. The RA is 60 % of capital expenditure, which can be utilised to offset against 70 % of the statutory income. Any unutilised allowance can be carried forward to the subsequent years until the whole amount has been used up. For the states of Sabah and Sarawak, and the Eastern Corridor states in Peninsular Malaysia, the allowance is 100 %, which can be utilised to offset 100 % of the statutory income. It is the Treasury, under the Ministry of Finance Malaysia, that approves applications for RA. These considerations for RA are applicable only until the year of assessment After this period, the reinvestment must also result in productivity increase based on the process efficiency ratio Incentives for approved service projects (ASPs) Project proposers undertaking investment in approved service projects (ASPs) such as transportation, communications and utility projects (approval given by the Ministry of Finance) can enjoy tax exemption under Section 127 and IA under Schedule 7B of the Income Tax Act Tax exemption under Section 127 The following are incentives for ASPs under Section 127 of the Income Tax Act Exemption of 70 % of taxable income for five years is offered to the ASPs. If the projects are located in Sabah, Sarawak, Kelantan, Terengganu or Pahang, the exemption is higher at 85 % of taxable income. Companies undertaking ASPs of national and strategic importance are eligible for 100 % exemption of taxable income for ten years. Strategic projects are defined as projects involving products/activities of national importance Investment tax allowance under Schedule 7B The incentives for ASPs under Schedule 7B of the Income Tax Act 1967, which are similar to those given to manufacturing firms under the ITA, are as follows. Offer of ITA of 60 % of qualifying capital expenditure incurred within five years from the date the first capital expenditure incurred is made. This allowance can be used to set off against 70 % of the taxable income. Eligibility is increased to 80 % of qualifying capital expenditure matched gainst 85 % of taxable income for ASPs located in Sabah, Sarawak, Kelantan, Terengganu and Pahang. If the ASP is of national and strategic importance, ITA of 100 % of qualifying capital expenditure incurred within five years from the date the first capital expenditure incurred is provided. The allowance can be set off against 100 % of the statutory income. Any unutilised allowance can be carried to the subsequent years until it is fully utilised. Tax on dividends paid to shareholders out of tax-exempted income is also exempted Incentives for RE-based power plants The following are incentives for power plants utilising RE as their major source of fuel. If it is convincing enough for the government to endorse that the electricity generation from RE is a strategic activity, then the industry will enjoy enhanced benefits such as PS with full tax exemption for ten years or ITA of 100 % matched against 100 % of statutory income. If Ministry of International Trade and Industry Malaysia (MITI) and MIDA do not approve the activity as strategic for whatever reason, the next option will be to get the Ministry of Finance s approval to merely declare RE power projects ASPs, without providing any strategic status. Once this is approved, RE power projects will be eligible for incentives offered to ASPs. These are similar to those manufacturing companies enjoy under PS or ITA. Details of the incentives have been discussed earlier in Section 4.2., Incentives for approved service projects. If the RE power projects fail to be declared ASPs, the next step will be to define a power generation activity using RE as a promoted activity. In this way, RE power plant operators (IPPs and palm-oil mills) can also enjoy 34

5 the current incentives offered to the promoted activities, namely PS, ITA and RA discussed earlier. These incentives are similar to those manufacturing companies enjoy under PS, ITA and RA. The advantage of this three-option approach is that there is no need to develop a new legislation (which usually takes some time) or amend the current Promotion of Investments Act, 1986, or the Income Tax Act, The implementation process will be expedited if the incentives are offered within the existing framework itself. Another alternative is to develop a new fiscal framework that will incorporate all of the fiscal incentives and schemes. The merits of this approach are that the framework can be very comprehensive and can be tailored to meet the specific needs of the RE industry. 5. Barriers to the promotion of renewable energy technologies 5.1. Policy barriers There is no national strategy mapped out for or priority given to RE development in Malaysia. The main thrust of the national energy policy lies within the framework of three broad policy objectives having respectively demand, supply and environmental perspectives. These policy objectives are instrumental in guiding energy planning, particularly formulation of the country s fiveyear development plan Supply perspective The core of the supply policy is to ensure the provision of adequate, secure and cost-effective energy through both RE and non-re sources using the least cost option and the diversification of sources both within and outside the country. The current emphasis of the government is based on fossil fuel, namely oil and gas. This has formed the bulk of the fuel mix of the country. The implementation of the Fifth Fuel Policy with the option of a fourth alternative energy source based on renewable resources was only institutionalised in 1998 and comprehensive programmes to promote the use of renewable resources are very limited. Although renewable energy resources are expected to contribute about 5 % or 600 MW in the national fuel mix by the year 2005, there is no reliable data on the total volume of biomass that is available in the country. Most of the present data is based on projections only Demand perspective Promotion of efficient utilisation of energy and discouragement of wasteful and non-productive patterns of consumption are the foci of the demand-side policy. In this context, although the government has formulated a comprehensive programme to enhance energy efficiency, there are only limited efforts to regulate and enforce the energy efficiency programme. The establishment of ESCOs to label energy equipment is mainly focused on promoting energy efficiency in more energy intensive industries such as pulp and paper, cement, glass, and manufacturing industry. There are very limited efforts to promote renewable energy technologies Environmental perspective From the environmental perspective, the policy focuses on the minimisation of the negative impacts of energy production, transportation, conversion, utilisation and consumption on the environment. However, until recently, there have been limited initiatives to pursue these policy focal points. With reference to RE, demand-side management initiatives, particularly tariffs, have produced very little positive impact on the utilisation of renewables. The energy efficiency regulation is currently being formulated, focusing on large consumers, appointment of energy managers and equipment labelling. The environment-related objective too has seen limited policy initiatives. All major energy development projects are subject to the mandatory EIA. There is a strong pressure on this environment-related objective from the rapid energy demand growth in the country. RE is associated with strong environmental impacts at every level, namely, exploitation of energy resources, energy supply and energy demand. Environmental consequences such as emissions, discharges and noise are subject to the environmental quality standards like air quality and emission standards. The general perception of RE technologies as polluting has been a barrier to their promotion. This is compounded by the fact that the majority of the current biomass-based technologies used in the country are very inefficient and polluting. This negative perception is discussed in the next section Financial barriers As with any new technology, the front-end cost for RE technology is comparatively higher in comparison to conventional energy technology that has already reached maturity. This is understandable, as the cost of initial development has to be recovered. Generally speaking, RE development in Malaysia is still in its infancy and has not realised the economies of scale with short payback periods for developers to be interested in participating. Whether a RE project is small or big, the initial cost of the project arising from the engagement of consultants can be quite substantial and adds to the project s overall cost. As such, the viability of the project tends to be affected, particularly if the project is small. If one goes by the experience of IPPs, the ability of projects to obtain financing is usually based on their viability, with big projects getting preference. As RE projects are capital-intensive, financing is often considered the main barrier to their development and implementation. Generally, banks are not eager to finance RE projects, as there are no records of experience of RE to rely upon, unlike IPP development where all are familiar with loan syndication for power projects [Lonergan and Cocklin, 1985]. Furthermore, bank loan officers typically lack the experience necessary to evaluate loans for RE projects backed by performance guarantees. Also, the ability of financing institutions to evaluate risk associated with RE project implementation through non-recourse financing is inadequate. This is further compounded by weak or non-existent credit histories of some prospective customers. Carrying out credit analysis is close to impossible Institutional barriers There is no co-ordination among the different national 35

6 agencies. Neither is there any designated agency for the development of RE technologies in the country, specifically to encourage efficiency in energy production, transportation, conversion and consumption. There is no information dissemination system to create awareness in terms of knowledge and technological characteristics of RE production and use Others Lack of technical support services In general, RE support services are inadequate to cater for the three major users of the technology: the domestic sector, the industrial/commercial sector, and developers/investors. For the RE industry to grow successfully, the technical support services must be adequate to deploy their capabilities and competencies from the beginning of the project development right through the life-cycle implementation process, including operation and maintenance. The highest barrier lies in the area of technical consultancy, where potential end-users can confidently seek advice on the types of equipment to be used to achieve maximum benefits. Right now, companies which provide consultancy services in the area of RE are not in evidence. With reference to power projects, the experience gained through the induction of IPPs has created a wealth of knowledge to deal with the complexities of project implementation, especially on the basis of non-recourse project financing. However, consultancy companies that can be associated with RE are clearly not in evidence at present. Therefore, even though most of the RE projects are considered power projects, there exists general lack of understanding in their implementation. This will require education to the extent that it will be readily accepted and implemented in a manner similar to the IPP projects in the country. On the other hand, most consultants are viewed as an additional cost that need not be incurred for any particular undertaking. Generally, consultants are considered expensive and they are only affordable when the project is sufficiently large to be able to accommodate their costs. There has been very little or no emphasis on the analysis of costs and benefits of employing consultants for projects to be undertaken. Furthermore, costs and benefits are difficult to quantify Lack of local equipment suppliers Malaysia, in general, still relies on foreign equipment suppliers, especially from Europe. A few existing local manufacturers/equipment suppliers are unable to cater for the needs of the RE industry. Most local companies dealing with power projects have joint venture arrangements with their foreign counterparts. Most RE projects in Malaysia are associated with palm-oil projects, which have generally been implemented using traditional turnkey contracts having direct involvement of the equipment suppliers. This leads to over-specification, which does not do justice to project viability Lack of ESCOs Within the private sector, there exist a number of ESCOs. The terminology used to identify ESCOs is, however, not so precise. Almost any companies involved in energy-related activities in Malaysia can call themselves ESCOs. Generally, ESCOs are those companies which develop energy projects as a third party and are prepared to assume risk of project development on the payment for service concept. While the big IPPs have been quite successful, the smaller ESCOs dealing with small power projects are not so prominent in Malaysia. There may be a number of companies that claim to be called ESCOs, but their participation in the energy sector in relation to RE has not been evident. Because of difficulties in securing jobs, some of them are also involved in consultancy services Inadequate use of research results A number of public institutions such as the National University of Malaysia (NUM), Forest Research Institute Malaysia (FRIM), Malaysian Palm Oil Board (MPOB), and Standards and Industrial Research Institute Malaysia (SIRIM) have demonstrated their competence in undertaking academic research-based RE projects. Even though some of these researches are supported by industries, their work has not been aimed at commercialisation. Nevertheless, in order to make use of the knowledge acquired from such studies, there should be adequate coordination among the RE fraternity Negative perceptions of renewable energy There seems to be a negative perception that RE is associated with biomass, which is considered backward and connotes fuel underdevelopment. Hence, RE tends to be looked down upon as a primitive and dirty fuel. Therefore, any attempt to promote biomass as technology of choice is frowned upon due to lack of information. There is a preferential bias towards conventional energy. The use of conventional energy technology is so advanced that the emphasis is on finding new ways to improve what is currently being practised. It is much easier to improve existing design than to invent new ones, as the infrastructure is already available. As such, the preference for conventional energy remains strong, with prejudice against RE arising from lack of education and awareness of its benefits. The situation is worsened when most of the RE studies seem to overestimate, through oversimplification of existing problems, the ease with which RE can enter the electricity market. Generally, the views expressed are too optimistic, creating the impression that the development of RE is not a difficult task. But in reality, this is not true. Many projects have failed and this has led to negative impressions Unwillingness to change Although Malaysia is a progressive nation in terms of industrialisation, Malaysian organisations are said to be conservative in most business dealings. They are usually governed by concrete past experience, whose lack constitutes a concern to be dealt with at the top level to minimise potential repercussions at the lower level [CETDEM, 1996]. There is a general perception that local companies without support from expatriate organisations are not likely to have much credibility. Therefore, a new practice such as opening the electricity market does not provide 36

7 comfort for decision-makers to commit themselves to until it is proven acceptable. This barrier leads to prolonged delays and lost opportunities, causing frustration and disappointment. Furthermore, the general public in Malaysia is not well aware of energy consumption. People s main concerns are the reliability and stability of supply for the purpose of economic development and personal comfort. Therefore, new technology which cannot guarantee satisfaction of these needs is unacceptable. 6. Measures to overcome the barriers 6.1. Legislative measures For biomass to be a major contributor to the fuel mix for power production, the biomass plant should be able to connect to the grid on defined terms and conditions. The legislative provision for grid connection -- with terms that are easy to understand and use -- should be an integral part of a new independent grid system operator (IGSO) system. The legal action has to be based on the following premises. It cannot be based on a willing buyer/willing seller approach. RE plants have the right to sell power to the grid on transparent terms. Fixed price-setting mechanisms are accorded to RE grid-connected plants. RE electricity sales must be regulated by the Energy Commission and implemented through the IGSO framework Administrative measures In addition to the above legislative measures, a number of administrative actions will have to be taken in the immediate future to expedite the speedy implementation of the RE programme. Although these government actions may not require legislation, they do require budgetary allocations. The MECM has indicated that by the year 2005 the minimum share of RE in the country s energy consumption will be 5.0 % [KTKM, 2001]. Amongst the major administrative measures taken is the inclusion of biomass-based power generation in the list of promoted activities. These measures are discussed in Section Financial and fiscal measures One way to enhance the viability of RE projects is through the provision of financial and fiscal incentives. In order to improve financial conditions, a number of legal measures also have to be proposed. The main requirement in the short term will be to establish a financial market for RE. When this has been established and experience has been gained for over a five-year period, new directions and policies can be decided on the basis of the knowledge acquired and experience gained. To start with, a number of initiatives are recommended which comprise both direct financial measures and incentive-oriented measures. They are as follows Establishment of a RE revolving green fund To overcome a major constraint to investment in RE projects, RE investors should be able to avail themselves of a revolving fund on attractive terms and conditions. The operation and management of this fund should be on the same principle as the fund for small- and medium-scale industries (SMI Fund). To start the fund, an initial amount of 500 million ringgit Malaysia (RM) (1 US$ = 3.8 RM) could be allocated. Soft loans at 5.0 % interest could be extended over a 10- to 20-year period. Officials handling loan applications should undergo training to familiarise themselves with the peculiarities of RE, including evaluating the financial aspects of RE power projects Credit guarantee scheme for RE-related loans Due to the high investment costs of RE projects (in addition to their risk), a credit guarantee scheme should be established to cover loans extended by commercial banks and financial institutions. It is suggested that no new institution be set up for this purpose. One option for this is to widen the coverage of the of the Credit Guarantee Corporation Malaysia Berhad (CGC) by introducing a new RE guarantee scheme. The CGC has to first agree in principle to this new scheme. Then the MoE as lead agency has to solicit the co-operation of Bank Negara (Central Bank of Malaysia) to provide this guarantee Others There are five factors that contribute significantly to the cost of RE. Most of these factors are related to financing the project in a manner different from what had been done in the past. As such, new thinking is required to promote the use of RE to enable it to compete with conventional energy. The five steps that should be taken to ensure the successful implementation of RE projects vis-à-vis conventional energy projects are as follows. Loan period to be extended to the life of the project of about 20 years. Interest rate to be reduced to a fair and competitive level. No penalties on RE in the form of import duties on equipment/machinery -- to be on the same basis as equipment meant for conventional power plants which do not pay these duties. Lifting of the approximate RM 2.0/million BTU subsidy on natural gas to prevent market distortion in fuel prices. It is estimated that the price of gas should be at a minimum level of RM 8.40/million BTU (1 BTU = kj) to reflect the real market cost of gas. A grant or subsidy to be provided to RE in the transition period to reflect the advantages of RE to the country, for example, foreign exchange savings and employment increase (externalities) Other measures Inclusion of biomass-based power generation in the list of promoted activities New activities can be included in the list of promoted activities, if there is enough justification to do so based on the above-mentioned criteria of level of value addition, local material content, etc. Accordingly, there have been new activities added to the list of promoted activities from time to time on a case-by-case basis. Hence, a strong case will have to be made to include the power generation from biomass-fuelled plants as a promoted activity so that it would be eligible for incentives such as PS, ITA and RA. 37

8 For the new activity to take effect, it only has to be gazetted first. There is no need for any new legislation Launching an awareness programme on renewable energy Launching an information dissemination programme on RE, such as developing a website to create awareness among various stakeholders including investors and consumers, is another measure to promote RE technologies. The following are some of the areas on which information could be provided [EPU, 1999]: technical, legal and financial issues pertaining to the development of RE projects; examples of successful projects; latest developments in RE; relevant contacts and links for networking with various parties, for example, ESCOs; and support services available, for example, list of banks and financial institutions offering loans to RE projects Inclusion of externalities The choice of a technology imposes on society and the environment a certain cost, which is usually not computed in the overall cost of implementing the project. These social and environmental costs which are not accounted for are termed externalities. RE technologies in general are more environment-friendly than their conventional alternatives. As such, the cost to society and the environment needs to be taken into consideration to ensure an equitable comparison while making a comparison between technologies using conventional and renewable fuels. However, it is rather difficult to ascertain any definitive cost of externalities to be applied for the use of coal or natural gas as compared to RE such as biomass. A study conducted by the European Commission in 1998 [GTZ, 1998] to evaluate the cost of externalities, using different methods and approaches, showed considerably varying results. It ranged from US 0.01 to US for natural gas and between US 0.08 to US 5.70 for coal. 7. Source-specific concerns and measures to develop renewable energy 7.1. Wood wastes Major concerns The absence of a grid connection to the mill to export excess power to the distribution network discourages the millers from using these residues for power generation beyond their own needs. Excess mill residues are sometimes indiscriminately dumped as landfill or wherever convenient [Hoi, 1989]. Forest residues are left in the jungle to rot, causing environmental problems. The cost of extracting forest residues for use in power generation can be expected to be quite high initially, until the equipment used is fully amortised. The profit from extraction is not lucrative enough even for other purposes such as the making of chipboards and medium-density fibreboard. There are no special incentives or provisions to utilise these residues for power generation. Measures recommended It has been found that wood residues can form an additional source of energy. Although there are competing uses of wood residues, environmentally sensitive disposal issues, especially in sawmills, should be considered, and they can be used for power generation by burning them efficiently. The following recommendations are made regarding wood residue usage. A detailed study should be undertaken to explore the most economic method of extracting wood residues. To enhance further research as well as commercial project development, emphasis should be given to categorising and standardising the available wood residues to create a comprehensive database with detailed information on calorific values and densities of different types of wood. The potential of wood residues, especially sawmill residues, for RE should be duly considered and economically feasible wood-based cogeneration plants should be considered for implementation. Promotion of wood residues as an energy source would be possible through sale of power to the TNB grid and through different financial and fiscal measures. The option of briquetting or converting wood wastes into wood pellets should also be considered in expectation of future power generation. Alternative uses of wood residues should be quantified to ascertain the future potential of wood residues as an energy resource Municipal solid waste Major concerns Proper waste management by incineration is an acceptable practice in dealing with municipal solid waste (MSW) in many countries. Since this approach is expensive, the tendency now is to dispose of these wastes in landfill sites, creating the problem of methane gas emission when the waste biodegrades. From an environmental perspective, methane gas has almost 20 times more damaging effect than CO2 as a GHG. In addition, leachate leakage can cause pollution of ground water. Municipal waste is not sorted out at the source to be useful for burning in incinerator. The possibility of burning chloride derivatives can result in the emission of dioxin, which is considered cancer-causing in human beings. When being incinerated, the combustibles within the waste are being burnt. Some toxic wastes have to be incinerated at a very high temperature to avoid problems with bacteria or poisonous emission. Most municipal waste has high moisture content, and sometimes the energy content in the waste is less than what is needed to evaporate the moisture. To ensure total combustion, and to ensure that toxic waste is completely neutralised, it may be necessary to install gasor oil-fired burners in the incinerator. Utilisation of energy from incineration of urban waste cannot really be considered RE, but the incineration is favourable to the environment, as it reduces the emission of methane 38

9 from the landfills. Utilising the heat from the combustion of waste has the effect of reducing the consumption of energy using fossil fuel. This method is considered an energy-conserving system, and thus reduces the environmental impact of combustion of fossil fuels. Measures recommended The major recommendations include the following. An overall waste management plan that addresses all aspects of municipal waste problems associated with recycling, incineration, composting and landfill should be drawn up. Recycling facilities should be established so that the municipal waste may be sorted out for recycling. Incineration facilities at appropriate sites should be built so that the waste may be disposed of by combustion in efficient boilers to produce electricity. As the composition of urban waste depends very much on the community from where it comes, a thorough analysis of the waste has to be made before deciding on investment in an incinerator. A thorough analysis of the quantity and composition of waste generated from all parts of the country should also be carried out on an ongoing basis. Before a decision is made to put up an incinerator to get rid of municipal waste, sorting out the waste at source should be considered. Sorting of the waste will probably not eliminate the need for incineration, but the size of the incinerator will definitely be reduced if waste sorting is introduced. By sorting the municipal waste, it would be possible to reduce the amount of waste to be disposed of Rice-husk Major concerns The trend of rice production is on the increase. As such, the production of rice-husk at the rice mill will increase correspondingly, which will then create the problem of disposal. The dumping of rice-husk in landfills is an environmental hazard when the husk begins to biodegrade, producing methane gas that escapes into the atmosphere. Sometimes, millers even resort to burning rice-husk in the open. As rice-husk does not burn easily, it tends to smoulder and produce smoke, which contributes to the problem of haze. Rice-husk is a unique biomass in the sense that it contains a high proportion of silica. On burning in the boiler, the hot gas stream containing silica particles tends to corrode the water tubes and superheated tubes, eventually causing the tubes to leak. Measures recommended The amount of rice-husk produced as waste at the mills will continue to grow with increase in rice production. Even though there is a problem with rice-husk as a fuel, biomass cogeneration technology has progressed considerably to make it feasible for power generation projects. Therefore, the most important recommendation for dealing with rice-husk is to set up the legal and financial framework to facilitate the viability of cogeneration to be implemented at rice mills to allow for the disposal of these wastes. Considering that the potential of rice-straw could be just as great, perhaps, as that of palm-oil residue, a detailed assessment of this resource should be made to evaluate its potential and investigate the possibilities of setting up a collection scheme to utilise this straw. A UNDP-GEF project on Removal of Barriers to Biomass Power Generation in Thailand includes cogeneration at rice mills [DEDP, 1999]. Malaysia could organise a bilateral study tour to learn from the Thai experience and apply the lessons learned in the country. 8. Conclusion Although there is no national strategy made for or priority given to RE development in Malaysia at present, its abundant availability provides good justification for a very ambitious and progressive RE policy in the country. The RE development approach should be based on a framework having both legal and financial entities, which will not only pave the way for the wider use of RE in Malaysia, but also ensure that Malaysia plays a leading role in the use of RE in the region. As a move towards developing RE, the adoption of a business approach and the establishment of a commercial market should form the main drivers in the implementation of RE policy. Acknowledgements The authors would like to thank the Swedish International Development Cooperation Agency (Sida) for financial support provided for this work under the framework of the Asian Regional Research Programme in Energy, Environment and Climate (ARRPEEC). The authors also thank the ARRPEEC Coordinator, S.C. Bhattacharya, and his research group at the Asian Institute of Technology, Bangkok, for reviewing the manuscript and providing valuable comments. References Centre for Environment, Technology and Development (CETDEM), Blowing in the Wind: Malaysia s Renewable Energy Scene, Petaling Jaya, Centre for Environment, Technology and Development. Department of Energy Development and Promotion (DEDP), Removal of Barriers to Biomass Power Generation, United Nations Development Programme-Global Environment Fund (UNDP-GEF) Project Brief THA/99/G31, Bangkok, Department of Energy Development and Promotion, Royal Thai Government. Economic Planning Unit (EPU), Study on Energy Policy Analysis and Planning to the Year 2020, Kuala Lumpur, Economic Planning Unit, Prime Minister s Department, Government of Malaysia. Economic Planning Unit (EPU), Support to the Development of a Strategy for Renewable Energy as a Fifth Fuel in Malaysia, Kuala Lumpur, Economic Planning Unit, Prime Minister s Department, Government of Malaysia. 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