Enhancing Malaysia’s renewable energy sector

Photo: AP

WITH a growing global commitment towards net-zero emissions of global warming gases and increasing awareness of sustainable finance, Bursa Malaysia recently launched Malaysia’s first voluntary carbon market, the Bursa Carbon Exchange.

While leveraging the private sector’s growing ESG (environment, social, governance) commitments is a great start, more can be done to mobilise private finances in a net-zero transition – particularly in the energy sector, which underpins virtually all economic activities in the country.

The Renewable Energy Certificate (REC) market allows energy users to pay a premium per kWh (kilowatt-hour) of electricity produced through low carbon sources; this is a great mechanism to realise greater private finances in accelerating the deployment of renewables.

Therefore, enhancing the REC market would be a good start in capturing corporates’ growing ESG appetite to accelerate Malaysia’s transition towards a greener future.

Currently, all RECs are owned by Tenaga Nasional Berhad (TNB) and sold through its Green Electricity Tariff scheme at a fixed price of 3.7 sen/kWh. This simple approach is a good starting point for establishing a green electricity market. However, two key issues arise: limited active market participation and the lack of product differentiation.

The current structure where TNB is the sole price-setter in the REC market limits responses to market signals. This can risk the value of green electricity being underestimated, which leads to inefficiency as the market’s willingness to pay for low-carbon electricity is not sufficiently captured.

At the same time, the authorities should also note that the willingness to pay for green electricity varies across end users. The value of green electricity is also not universal across the board. It is distinctive depending on its impact on decarbonisation.

For example, over 380 companies in the RE100 group tend to have a higher willingness to pay a premium on high-value renewable electricity to fulfil their commitments to use 100% renewable electricity. On the other hand, electricity generated from newly built and “deep green” generation assets like solar and wind should have greater value than electricity sourced from older hydro or biomass power plants, given the former two face less controversy on its wider ecological impacts.

[The RE100 group is a global initiative bringing together the world’s most influential businesses committed to 100% renewable electricity.]

The current market design with a fixed REC price across the board does not enable renewable projects that can bring high environmental benefits but marginally lack the financial feasibility to come online even if some corporates might be willing to pay a high premium to acquire their high value REC.

As such, the relevant authorities should consider transitioning towards a more liberalised REC market where buyers and sellers are encouraged to perform free market trading of REC on a central platform regulated by the government. This can ensure Malaysia’s REC market can capture the benefits stemming from corporates’ growing ESG commitments, and ultimately help unlock a notable revenue stream for some marginal renewable projects to be brought online.

However, a more liberalised market could also risk price volatility and lead to market uncertainty. Therefore, the authorities should have clear guidelines on the different tiers of REC based on their environmental impacts – for example, by classifying certificates with generation sources and commission year and, subsequently, have an indicative reference price for each tier of REC.

This can help investors in both the generation and the REC offtaker’s side to have greater visibility of the expected revenue and cost while enabling a more liberalised market structure to spark innovations and improved efficiency.

EVAN NG CHEE YANG

London

The letter writer is an energy market consultant at a consulting firm in London and holds an MSc in Energy Systems from the University of Oxford.