Leadership Interview

Regulating Efficiency

“The Energy Commission contends that it is appropriate to phase out the subsidy regime to extract efficiency and eliminate distortions in the way energy has been supplied and consumed” – Abdul Razak Abdul Majid, Chairman, Energy Commission.

What is the game changer that will drive energy efficiency to the next level in Malaysia?

The Malaysian Government has published a number of policy documents outlining its commitment to energy efficiency, green technology and a low-carbon economy in recent years and there is a conscious effort to reduce greenhouse gases (GHG) in line with best international practices. Key among the national targets is the Nationally Determined Contribution (NDC) that was signed following the COP 21 climate conference. Via the NDC, Malaysia has pledged to reduce GHG emissions intensity of GDP by up to 45 per cent by 2030, relative to 2005 levels, and subject to certain collaborative initiatives with developed economies.

At present, numerous ministries and government agencies work across the national energy spectrum and all are guided by their functional responsibilities. The Ministry of Energy, Green Technology and Water (KeTTHA); PETRONAS; the Economic Planning Unit (EPU); and the Ministry of Trade oversee the supply side, while certain other government agencies formulate policy directives and monitor the consumption side. Several action plans have been forwarded to the government and remain under consideration, including a proposed central coordinating agency tasked with the formulation of overall strategic direction for all matters related to energy. Among its proposed responsibilities are all efficiency initiatives, setting GHG reduction targets on a sector-by-sector basis, and instituting accountability with clear and tangible objectives. This proposed central coordinating agency may be seen as the game changer.

 

One of the ways the country is set to meet its GHG reduction target is to increase the share of renewables in the energy mix. How do you see this playing out?

The proportion of renewables in the energy mix is approximately 23 per cent. If this is to successfully reach a level of around 40 per cent, the issue of the availability of firm system capacity must be addressed as a priority, alongside the subject of intermittency.

Malaysia is a relatively small geographical area that is exposed to only about four or five hours of direct sunlight each day, with only sporadic distribution of high-level irradiation for continuous solar energy production. There are only low levels of wind in the country, in the tropical belt, and total generation from biomass and biogas is small. Therefore, the combined total of all installed renewable energy capacities may not meet total instantaneous demand.

The often-cited enabler of synergistic interconnection of energy systems with neighbouring countries, similar to the European scenario, is still at a low level in the ASEAN region. Therefore, a firm baseload capacity is required to provide the necessary power to support increasing sectoral demand growth and overcome the effects of external variabilities. As such, there is little choice but to continue to build new conventional baseload power plants for the foreseeable future. Of course, certain technological breakthroughs regarding energy storage and its commercial application are expected and these will complement any issues stemming from unpredictable supply.

Clearly, such baseload plants must be powered by a secured energy source and the mainstream options include coal, gas and large hydro. Looking beyond that, we cannot unconditionally ignore the other technology option and possibility: nuclear power. Although its public perception is often negative, nuclear power represents a viable alternative with a very low carbon footprint. While efforts remain preliminary, the government is conducting pre-feasibility studies regarding legislative and regulatory steps concerning potential nuclear power plant site requirements, licencing, sizes and costs. There is still much to be done in terms of assessing the advantages and disadvantages of the nuclear option prior to the government taking a definitive policy decision.

Moving forward, debate remains on the use of natural gas as a bridging fuel to serve Malaysia’s energy needs while challenges related to renewables are addressed. Gas is indeed less carbon intensive than coal and oil, but the challenge here is price. In early 2018, gas prices were about 40 per cent higher than those of coal, based on one million British Thermal Units (MMBTU). Moreover, if the Malaysian market is fully exposed to market prices following subsidy rationalisation, gas tariffs will increase even further, resulting in higher generation costs.

 

What is the Energy Commission’s position regarding the prevailing energy tariff model? Is it necessary to raise prices to encourage energy efficiency?

The aim of the government is to ensure affordable tariffs in conjunction with security of supply. For the present regulatory period, there must be a balance between supply adequacy, quality of service and affordability, albeit under a managed subsidy mechanism. There are, of course, advantages and disadvantages to energy subsidies, but the Energy Commission contends that it is appropriate to phase out the subsidy regime to extract efficiency and eliminate distortions in the way energy has been supplied and consumed. Clearly, socio-economic considerations may still necessitate selected sectors to remain under a safety net subsidy mechanism.

The national economy has, for many years, been based on this tariff structure and so changes to energy tariffs will shape the way the economy functions. However, the rationalisation of energy prices to bring them in line with market prices will more accurately reflect the true cost of energy. It will also enable real business values to emerge in all economic sectors and, inevitably, encourage all stakeholders to be more conscientious about the drive towards efficiency.

The point about the need for financial motivation to encourage energy efficiency is important and needs to feature in any related initiative. Accordingly, the government has endorsed the net energy metering (NEM) programme to enable households and companies to install solar panels on their roofs for self-generation. The NEM enables users to benefit from lower monthly bills and the programme also has the potential to create a more competitive business environment. However, there is still a need to dispel the common perception that investing in solar power, including the NEM, will result in direct returns on the investment.

 

What is your position on decentralised electricity generation and local distribution? What would be the implications of this move for existing utilities and tariffs?

The key point is the reliability and cost of supply, which varies across different sectors and social groups due to energy subsidies. First, if an energy-intensive company in a highly industrial economic sector decides to pursue self-generation, Tenaga Nasional Berhad (TNB), the country’s largest utility company, may need to supply less electricity to that area. A likely consequence will be that TNB is unable to recover the costs of its investment in that region. If such self-generation is repeated on a larger scale, it will create a disparity in terms of what TNB spends on capital expenditure and its projected revenue streams. Therefore, prior to formally encouraging market restructuring and widespread decentralised generation and local distribution, it is essential to ensure that tariffs reflect the true cost of supply. Steps are being taken to move in that direction although the process will take a few years to reach full implementation.

Certain entities are already operating in line with the model of self-generation and local distribution, although they are confined to particular franchise areas. One example is NUR Power Sdn Bhd, a power utility mandated to generate, distribute and sell electricity exclusively to tenants of Kulim Hi-Tech Park in Kedah. The RAPID integrated petrochemical development project is another example which can act as a best practice model in this regard. Generally, the Energy Commission is supportive of decentralised generation, subject to certain qualifications.

 

How is the Energy Commission embracing digital technology to boost energy efficiency on the demand side?

One area that the Energy Commission is keen to promote is new technology to encourage customers to use electricity outside peak hours in order to better manage demand spikes. In conjunction with TNB, we are incorporating time of use (TOU) tariffs, whereby off-peak consumption would be at a lower tariff. Technology is set to play an important role in TOU tariffs via advanced metering interfaces and smart metering connectivity. These devices enable two-way communication between the supply centre and the user and therefore facilitate information exchange on how a customer can optimise their TOU tariffs and improve energy efficiency behaviour.

Similarly, the Energy Commission is working on a software application that will enable consumers to access specific energy information, ranging from the macro level, including aspects on national energy planning and the Malaysian energy mix, to the micro, such as how individuals can reduce their personal consumption. There is scope to subsequently evolve this application to incorporate increasingly interactive and informative functions over time, and efforts towards that end will be pursued.

The overall approach of the Energy Commission is to enhance the use of technology to foster awareness, particularly among the younger generation. We have, for example, been working with approximately 70 secondary schools that participated in one of our energy programmes to encourage pupils to engage in energy efficiency behaviour in their schools. A secondary objective of the programme was that pupils would subsequently replicate this behaviour in their homes and local communities. This kind of grassroots-level education is the key factor in successfully preparing the country to take on its distinct energy efficiency challenges of the future through the application of digital technology.

ABDUL RAZAK ABDUL MAJID
CHAIRMAN
ENERGY COMMISSION
No. 12, Jalan Tun Hussein
Precinct 2, 62100
Putrajaya, Malaysia
(603) 8870 8500
www.st.gov.my

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