The Future of Cross-Border Electricity Trade in Malaysia

Key Contacts:
 
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Richard Khoo Rachel Chiah

Malaysia is no stranger to cross-border electricity transmission, having made its first such connection back in 2016. The country’s pilot project, which was funded by the Asian Development Bank, saw the transmission of 70MW of electricity from Mambong, Sarawak in Malaysia to Bengkayang, Kalimantan in Indonesia by way of a 47km long double-circuit grid line.1 The announcement of the Laos-Thailand-Malaysia-Singapore Power Integration Project (‘LTMS Project’) in late October 2020 marked a huge step forward for Malaysia’s venture into cross-border electricity transmission, as this involves a commitment to initiate cross-border electricity sales of up to 100MW of electricity from Laos to Singapore, via Thailand and Malaysia.
 
Following the announcement of the LTMS Project, the Energy Commission Malaysia (‘Commission’) has published a Guide for Cross-Border Electricity Power Sales (‘Cross-Border Guide’)2 which sets out the framework for cross-border electricity sales between Peninsular Malaysia and a neighbouring country, the latter being  specified as either Singapore or Thailand.
 
In this article, we examine the main aspects of the framework for cross-border electricity sales in Malaysia as well as the challenges ahead and future of cross-border electricity trade in general.
 
WHAT A POWER PLANT DEVELOPER NEEDS TO KNOW
 
Any person intending to participate in cross-border electricity sales, i.e. a power plant developer (‘PPD’) is required to:
 
  • Own a power plant that is connected to the grid system; and
  • Have a supply agreement in relation to the sale and purchase of electricity with a person in a neighbouring country (‘Supply Agreement’).
Contractual Arrangements
 
The Cross-Border Guide envisages the PPD entering into two contracts, namely:
 
  1. Supply Agreement, as described above; and
  1. System Access Agreement, which is an agreement between PPD and Tenaga Nasional Berhad (‘TNB’), the owner and operator of the grid system in Peninsular Malaysia. This agreement should set out the technical and commercial arrangement for the connection and access to and operation of the grid system, as well as the cross-border interconnection and wheeling of electricity generated.
It should be noted that a System Access Arrangement will be required if the PPD utilises an existing interconnection that is owned or operated by TNB (‘Existing Interconnection’). At present, the only existing interconnection identified in the Cross-Border Guide is between Malaysia and Singapore.
 
A System Access Agreement would not apply if the PPD owns or operates a new dedicated interconnection between the PPD’s power plant and the receiving point of the purchaser in the neighbouring country for the sale and transfer of electricity to the neighbouring country (‘Dedicated Interconnection’). The interconnection element of cross-border electricity sales is discussed in further detail below.
 
Interconnection Options and Technical Requirements
 
The PPD has the option to utilise either the Existing Interconnection or a Dedicated Interconnection for the transfer and sale of electricity to a neighbouring country. In the event the PPD intends to utilise a Dedicated Interconnection, the development and construction thereof is the PPD’s responsibility and will be subject to the approval of the Commission, relevant local authorities and the neighbouring country. It is pertinent to note that the Cross-Border Guide in its present form does not envisage or address the possibility of a Dedicated Interconnection being constructed and owned by a third party, that is a party other than a PPD or TNB.
 
The technical requirements for the project are dependent on whether the PPD utilises the Existing Interconnection or a Dedicated Interconnection, as seen below.
 
Requirements
Technical Aspect Existing Interconnection Dedicated Interconnection
Energy Sources
  • If the PPD is using natural gas or coal, procurement of fuel supply shall be from the open market and will not be subject to price regulation or government subsidies applicable to generating facilities for domestic consumers.
  • If the PPD is using intermittent energy sources such as solar energy, the PPD shall install energy storage systems or other means to ensure firm energy supply.
Metering All metering equipment shall comply with specifications of the Grid Code3 and terms of the System Access Arrangement. All metering equipment shall comply with specifications of the Grid Code.
 
Dispatch Generation and delivery to grid system and export capacity shall be in accordance with dispatch schedule approved by the Single Buyer4. In accordance with the Supply Agreement.
 
Accounting and Settlement TNB shall be responsible for reading the meters and maintaining the records of electricity generated and delivered to the grid system and to the neighbouring country. In accordance with the Supply Agreement.
 
Wheeling Charges5 Payable by PPD to Single Buyer in accordance with the terms of the System Access Arrangement. N/A.
 
Licensing
 
In order to operate the power plant, the PPD will need to apply for and obtain a licence under Section 9 of the Electricity Supply Act 1990. It is a condition precedent to obtaining the aforesaid licence for the PPD to execute the Supply Agreement and System Access Agreement (if applicable) and submitting the same to the Commission.
 
THE CHALLENGES AHEAD
 
Cross-border electricity trade in Malaysia will not be without its challenges given that it is in its infancy. First and foremost, it will be necessary for the existing legislative and regulatory framework for electricity to take into consideration cross-border electricity trade. While the Cross-Border Guide provides a framework, greater clarity on the regulation of such projects is required. Further, the Cross-Border Guide addresses the ­export of electricity, but not the import thereof. In recognition of this gap, the Commission had in March 2021 issued a request for proposal in relation to the review and amendment of the Energy Commission Act 2001 and the Electricity Supply Act 1990 for purposes of regulating power import-export activities. However, these amendments and the implementation of the same will take time, and in fact may even be delayed due to the ongoing COVID-19 pandemic. It therefore remains to be seen how cross-border electricity trade in Malaysia will be regulated and the uncertainty thereof may deter domestic industry players from venturing into cross-border projects.
 
The economics of cross-border electricity trade are also another key consideration. In developing the project, a PPD would have to take into account, among others, the following issues:
 
  • The cost of procurement and ensuring reliability of energy sources;
  • Financial returns on the project, particularly as energy generated from the power plant can only be used for sale to a purchaser in a neighbouring country; and
  • The time and cost needed for implementation of cross-border projects, which would include obtaining approvals and compliance requirements in multiple jurisdictions and involve various stakeholders.
These challenges will have to be addressed in order to create an enabling environment in Malaysia for investments into cross-border electricity trade.
 
FUTURE OF CROSS-BORDER ELECTRICITY TRADE IN MALAYSIA
 
Across the strait, Singapore’s Energy Market Authority has plans to initiate a pilot project for the import and sale of up to 100MW of electricity by a PPD to a buyer in Singapore by utilising the Existing Interconnection, for a period of two years.6 This is in line with Singapore’s plan to tap into regional power grids to gain access to energy that is cost-competitive and the express restriction on the use of coal-fired generation is a clear nod to Singapore’s commitment to transitioning to clean energy. Singapore’s pilot project could very well be the trial for the export of electricity for Malaysian players and possibly spur the further growth of renewable energy power plants in the country.
 
From a big picture perspective, cross-border electricity trade is a step forward in the liberalisation of the domestic electricity market as it will offer diversity of supply as well as introduce a competitive element to the pricing of electricity consumption. With Malaysia’s commitment to the LTMS Project and the steps being taken to address regulation, the role of cross-border trade in this liberalisation is a promising one. Ultimately, however the Government will have to play its part in encouraging the development of these projects, such as providing incentives and increased jurisdictional cooperation and coordination – this will be key in ensuring cross-border electricity projects become an attractive and feasible investment opportunity.
 
For enquiries, please contact Mr. Richard Khoo (Partner) or Ms. Rachel Chiah (Senior Associate) of our Projects and Infrastructure Practice.
 

1 “Malaysia exports electricity to Indonesia” at https://asia.nikkei.com/Economy/Malaysia-exports-electricity-to-Indonesia.
2 The Guide for Cross-Border Electricity Power Sales can be accessed here.
3 The Grid Code is the regulatory instrument coordinating electricity supply activities in Malaysia, and can be accessed here.
4 The expression “Single Buyer” refers to any person or a unit, department or division forming part of a licensee who is authorised by the Minister of Energy and Natural Resources under section 22B of the Electricity Supply Act 1990. Presently the only Single Buyer is a department within TNB that is authorised to conduct electricity planning and manage electricity procurement for Peninsular Malaysia.
5 Wheeling charges refer to the charges imposed by the grid owner / operator for the use of their system to transport energy.
6 “Request for Proposal for Electricity Imports Trial” at https://www.ema.gov.sg/rfp-electricity-importer-2021.