Renewable Energy: The Rising Sun

Anita Natalia discusses the framework for renewable energy in Malaysia, with a specific focus on solar energy.
Malaysia introduced renewable energy as the fifth fuel, in addition to oil, gas, coal and hydro, in the energy supply mix under the “Five-Fuel Diversification Policy” as part of the 8th Malaysia Plan. It was the first time that renewable energy has been earmarked to be a major contributor to electricity generation in our country.
One of the aims of the “Five-Fuel Diversification Policy” was to generate 5% of the country’s electricity from renewable resources by 2005. However, only 3% of the target was achieved at the end of that period. While the Government continued with the “Five-Fuel Diversification Policy” under the 9th Malaysia Plan, the ideal electricity generation mix remained unmet. Thus the National Renewable Energy Policy and Action Plan (“NREP”) was launched in 2010 as part of the 10th Malaysia Plan to overcome the main barriers to renewable energy deployment in Malaysia and to provide a secure and sustainable national electricity supply.
The objectives of the NREP are to:
  • increase renewable energy contribution in the national power generation mix;
  • facilitate the growth of the renewable energy industry;
  • ensure reasonable renewable energy generation costs;
  • conserve the environment for future generations; and
  • enhance awareness on the role and importance of renewable energy.
It is envisioned under the NREP that renewable resources will contribute 20% of electricity generated in Malaysia by 2025.  
The most significant feature of the NREP was that it laid the foundation for the introduction of the Renewable Energy Act 2011 (“REA”).
The REA is Malaysia's main regulatory instrument in prioritising renewable energy over fossil fuels.  It came into operation in Peninsular Malaysia and Sabah on 1 December 2011 (except for sections 17 and 18 which came into operation on 31 December 2012). Key features of the REA are the establishment of the feed-in tariff (“FiT”) system and the renewable energy fund (“RE Fund”).
In tandem with the REA, the Sustainable Energy Development Authority Act 2011 (“SEDA Act”) came into operation in Peninsular Malaysia and Sabah on 1 September 2011. The SEDA Act, inter alia, establishes the Sustainable Energy Development Authority (“SEDA”) whose responsibilities include advising the Government on sustainable energy and promoting and implementing the national policy objectives for renewable energy. In addition, the REA charges SEDA with the responsibility to implement and administer the FiT system and administer and control the RE Fund.
The REA and the SEDA Act have yet to be enforced in Sarawak.
Renewable Energy
Presently, five types of “renewable resources” qualify to participate in the FiT system under the REA, namely biogas, biomass, small hydropower, solar photovoltaic and geothermal. A notable omission is wind energy notwithstanding that two wind turbine units are operating in Pulau Perhentian, Terengganu and Pulau Layang, Sabah. 
The FiT System
To encourage the generation of electricity from renewable resources, the Government makes it mandatory for distribution licensees (namely Tenaga Nasional Berhad, NUR Distribution Sdn Bhd and Sabah Electricity Sdn Bhd) to purchase electricity generated from these resources for a duration that ranges from 10 to 21 years and at the FiT rates set out in the Schedule to the REA. The FiT rates generally exceed the cost of generating an equivalent amount of electricity from non-renewable resources.
It should be noted that a cap is imposed on the total amount of electricity that is to be generated under the FiT system. The additional capacity allocated to each type of renewable resource is determined by SEDA for every six month period on a three year rolling basis. 
By guaranteeing access to the grid and setting favourable FiT rates, the FiT system encourages renewable energy to become a viable long-term investment for companies, industries and also for individuals.
A person must obtain approval from SEDA in order to participate in the FiT system. The REA requires the electricity to be generated from one of the renewable resources mentioned earlier. In addition, the installed capacity of the renewable energy installation must not exceed 30MW (or such higher installed capacity as may be approved by the Minister). The applicant is also required to meet other criteria prescribed by SEDA.
Subject to the limited exceptions set out in section 12(2) of the REA, a distribution licensee is required to enter into a renewable energy power purchase agreement with a person who has received approval to participate in the FiT system (“FiAH”) upon receipt of a written notice from SEDA.   
Unless exempted by SEDA, a distribution licensee is required under the REA to purchase and distribute the entire available quantity of renewable energy generated by an FiAH in priority to electricity generated from non-renewable resources.  
Renewable Energy Fund
The RE Fund is established pursuant to section 23 of the REA. The RE Fund is raised primarily through sums allocated for such purpose by Parliament and such portion, as determined by the Minister, of the tariffs collected by a distribution licensee from its customers pursuant to section 26(1) of the Electricity Supply Act 1990.
An initial funding of RM300 million was provided by the Government at the inception of the RE Fund.
A distribution licensee is required under the Renewable Energy (Allocation from Electricity Tariffs) Order 2013 to pay into the RE Fund a sum equivalent to 1.6% of the tariffs (after deducting applicable discounts) collected by such licensee from its consumers other than domestic customers with electricity consumption of 300kWh and below per month. Thus, the more electricity one uses, the more he will contribute towards the RE Fund.
The annual contributions to the RE Fund increased from RM219,241,907 in 2012 to RM753,972,002 in 2016 and the balance in the RE Fund in 2016 stood at RM2,236,153,690.
Application of the RE Fund
As the FiT rates paid by a distribution licensee to its FiAHs exceed the cost that it would incur to generate an equivalent amount of electricity, the distribution licensee is entitled to recover from the RE Fund, a sum equivalent to the difference between (a) the FiT paid by the distribution licensee to its FiAHs; and (b) the cost which it would have otherwise incurred to generate the same amount of electricity generated by its FiAHs. A distribution licensee is also entitled to recover administrative fees which it incurs in administering FiT payments to its FiAHs.
When SEDA determines that a particular renewable energy installation (“Relevant Installation”) has achieved grid parity, that is the time at which the FiT rate applicable to the Relevant Installation is equal to or less than the displaced cost (i.e. the average cost of generating and supplying 1kWh of electricity from non-renewable resources): (a) the FiAH concerned will cease to be entitled to be paid the FiT but will be paid based on the prevailing displaced cost for the remaining duration of the effective period; and (b) the distribution licensee will not be entitled to recover from the RE Fund the amount paid by it to the FiAH for the purchase of electricity generated by the Relevant Installation or be paid administrative fees pertaining thereto.
As Malaysia is located where sunshine is in abundance throughout the year, it is not surprising that photovoltaic or solar energy accounts for about 63% of the total installed capacity of the electricity generated from renewable resources as of 2018.
To create a more balanced output of renewable energy under the FiT system, the Government ceased to allocate additional capacity for solar energy after 2017. At the same time, other measures were introduced to encourage the development of solar energy.
Large-Scale Solar Programme
The Large-Scale Solar Programme (“LSSP”) was introduced in 2016 to accelerate the development of solar energy. The Energy Commission is mandated under the LSSP to conduct tenders to invite private sector companies to build, own and operate large-scale solar photovoltaic plants to generate and sell energy to distribution licensees under long term power purchase agreements.
The first tender under the LSSP was held in 2016 with capacity packages ranging from 1MW up to a maximum of 50MW, while the second LSSP tender was held in 2017 with capacity packages ranging from 1MW up to a reduced maximum of 30MW. The third tender under the LSSP opened in February 2019 with capacity packages from 1MW up to an increased maximum of 100MW.
Net Energy Metering
Net Energy Metering (“NEM”) is a mechanism that allows electricity consumers in Peninsular Malaysia and Sabah to sell excess electricity generated from their solar photovoltaic systems back to the grid. This scheme is available to all consumers (other than delinquent consumers) whom are customers of Tenaga Nasional Berhad or Sabah Electricity Sdn Bhd.
The original NEM scheme saw a low take-up rate partly due to the fact that the selling price (based on a displaced cost basis) for electricity supplied to the grid was lower than the price to be paid (at regulated tariff rates) by the consumer for electricity consumed by it. The NEM scheme was revised from 1 January 2019 to a “true net energy metering” basis. The consumer will be given credit for every 1kWh of energy exported to the grid. The credit, which can be rolled over for 24 months, will be offset against the electricity consumed by the consumer on a “one-on-one” offset basis. The revised NEM scheme is presently available only to consumers in Peninsular Malaysia.
According to the Minister of Energy, Science, Technology, Environment and Climate Change, the response to the revised NEM scheme has been encouraging. As at 10 May 2019, 16.6MW of electricity generation has been approved for 2019 as compared to the total approved capacity of 18.24MW in 2018.
Solar Photovoltaic Investors
To encourage generation of energy from renewable resources, the Guidelines for Solar Photovoltaic Installation on Net Metering Scheme (approved by the Energy Commission on 20 December 2018) were revised to allow third party financing of solar photovoltaic installations through solar lease, solar power purchase agreement or hybrid of solar lease/power purchase agreement. This initiative has been well received by investors seeking to finance such installations. The SEDA website discloses that 30 companies have been registered as Registered Photovoltaic Investors (“RPVI”) as at 4 June 2019.   
Supply Agreement for Renewable Energy Programme
Another improvement made to the NEM scheme is the introduction of the Supply Agreement for Renewable Energy (“SARE”) programme. The SARE programme is a tripartite arrangement that involves a consumer, an RPVI (who must be licensed under section 9 of the Electricity Supply Act 1990 and registered with SEDA) and Tenaga Nasional Berhad as a distribution licensee. The consumer leases a solar photovoltaic installation from an RPVI who installs and owns the said photovoltaic installation for an agreed duration. The consumer pays the distribution licensee for electricity consumed and sells the excess electricity generated from the solar photovoltaic installation to the distribution licensee. The leasing fee may be paid to the RPVI through electricity bills.
Renewable Energy Transition Roadmap
On 18 March 2019, the Minister of Energy, Science, Technology, Environment and Climate Change announced that a new roadmap, the Renewable Energy Transition Roadmap 2035 (“RETR 2035”), is currently being developed to explore the possible strategies and action plans to attain the Government’s aspirational renewable energy target of 20% in the national power mix by 2025. Some of the potential strategies that will be explored under RETR 2035 are as follows:
  1. Peer-to-peer energy trading whereby solar prosumers can sell their excess electricity to consumers who have rooftop constraints to enable the latter to enjoy the NEM scheme;

  2. Providing an option for a consumer to purchase 100% renewable energy electricity from a distribution licensee; and

  3. Mobilising the renewable energy certificate (“REC”) market by establishing a mandatory REC market in place of the existing voluntary market.
In light of the initiatives taken by the Government to leverage on solar energy as one of the main driving forces to achieve the renewable energy generation target of 20% by 2025, the coming years may be the time for solar photovoltaics to shine!
You may view the full issue of Skrine’s Legal Insights Issue 2/2019 here.