Leadership Interview

Legislating for Change in the National ESCO Market

“A fundamental part of providing impetus to the ESCO market, and promoting energy efficiency in general, is to develop and refine not only physical resources, such as equipment, but also human resources in terms of talent and expertise” – Zulkifli Zahari, President, MAESCO.

What major challenges must be overcome if energy efficiency is to fulfil its potential in Malaysia?

The first major challenge relates to regulation and the need for all government departments to fully implement existing policies. This is especially important in the context of the national objective to secure continued growth while simultaneously promoting the efficient use of energy.

In addition, clearly defined energy efficiency legislation that covers multiple economic sectors is essential. That is why the passage of the proposed Energy Efficiency and Conservation Act (EECA) is so important. This piece of legislation has been under discussion for approximately seven years and once its enactment and implementation is complete, it will have a number of major impacts. First, the Act will help establish concrete standards, wide-ranging codes and mandatory requirements in several sectors with the aim of fostering sustainability. Second, it will enable market players to clearly identify the lead agency driving the segment and put national energy efficiency action plans into practice. Third, it will provide the required impetus and guidance to market players to phase out older equipment in favour of more energy-efficiency alternatives. Finally, and crucially, the Act will encompass not only electrical, but also thermal energy.

This latter point is significant because thermal energy has historically been overlooked, despite it accounting for a major proportion of all energy use in the country. For example, electricity remains the focus of the Ministry of Energy, Green Technology and Water (KeTTHA), it is the subject of all Energy Commission (EC) regulation, and the government definition of ESCOs relates specifically to electrical energy, leaving thermal to one side. Thus, the passage of the EECA will go someway towards rectifying this imbalance by providing a clear regulatory framework that incorporates both electrical and thermal energy alongside one another.

However, the EECA will not resolve all the challenges related to energy efficiency proliferation. For instance, my understanding is that the proposed legislation will not cover the transport industry, which has the highest carbon emissions and greatest energy demand of any national sector. This is partly because a pre-feasibility study conducted by the government’s Economic Planning Unit identified that the lack of accurate and detailed data on energy consumption and performance in the transport industry is hindering its inclusion in the EECA. Until this gap in data that pertains specifically to the different sub-segments of the transport industry is filled, the sector will remain beyond the scope of the Act.

The second major challenge is closely associated with the first and relates to enforcement. Currently, energy efficiency is covered by the Efficient Management of Electrical Energy Regulations (EMEER) 2008. This legislation requires all facilities that consume more than 3 million kilowatt hours over a period of six months to submit detailed information on their energy usage to the Energy Commission (EC), in conjunction with plans on how they intend to improve their energy performance.

EMEER has had a positive impact and energy savings have been achieved across the industrial sector. However, the big challenge it or any new legislation, such as the EECA, faces in the future is enforcement.

At present, industry-wide compliance of energy consumers and generators with EMEER is approximately just 60 per cent, partly due to the shortage of practising energy managers. The regulation establishes that all large energy consumers must appoint an energy manager registered with the EC, although the number of practising energy managers is too small to meet the enforcement needs of the sector. Out of about 900 currently registered energy managers in the country, I estimate only a third are practising. Ideally, the former would be closer to 1,500 in order to be able to serve the approximate 2,000 companies.

One reason for the lack of energy managers is a shortage of available talent. However, the main cause is because many energy-consuming companies fail to see energy efficiency as a priority business area, which leads to fewer work opportunities for energy specialists.

Furthermore, ESCOs have traditionally been seen as outsiders and there is a degree of scepticism among end-user companies in inviting a third party to gain detailed knowledge about their internal operational characteristics. This scepticism is understandable from a business point of view, but it represents an obstacle that must be overcome if energy efficiency is going to achieve the required take-up levels. The only way to sell an ESCO to a large energy consumer is via a top-down approach, starting with the business decision-makers at senior management level, whereby the decision to contract an energy auditor makes clear business sense.

Obtaining support from local financial institutions is another challenge. A full-fledged ESCO would need to combine technology and capital to be able to develop turnkey solutions for companies wishing to reduce their energy consumption and operating costs through an energy performance contracting (EPC) model. While technological advancements are being made in energy efficient equipment available in the market today, steps from commercial financial institutions to assess the viability of EPC models proposed by ESCOs are lacking.

You mentioned the importance of the EECA. What three aspects must the proposed legislation include in order to provide impetus to the ESCO market?

First, there is a need for the EECA to include mandatory building standards to govern minimum energy efficiency criteria for different premises. This includes transforming the current voluntary code of practice, MS1525, which establishes the minimum standard of 150 kilowatt hours per square metre per year, into mandatory regulation. Similarly, existing buildings should be issued with specific time periods in which to retrofit their facilities and bring them in line with the new regulation. This move would increase the efficiency of all buildings and facilitate the associated work undertaken by ESCOs.

Second, regulatory efforts must focus on redefining the ESCO segment as one that works in thermal energy as well as electrical energy.

Third, a fundamental part of providing impetus to the ESCO market, and promoting energy efficiency in general, is to develop and refine not only physical resources, such as equipment, but also human resources in terms of talent and expertise. For example, existing EC regulation states that energy managers must be registered by the Commission in order to provide their services. I contend that the EECA should extend this clause to ensure energy auditors and all other relevant specialists working in data monitoring and verification are fully certified and qualified. As there is no central authority through which contracting companies are able to verify and validate energy specialists, this development would assuage many of the related concerns.

It is also important that the legislation designates a body to accredit these specialists and which disseminates information regarding the certification of their training and skills. This kind of formal certification would greatly increase the recognition and reputation of energy practitioners from the perspective of energy service users and would therefore significantly strengthen the position of the overall ESCO market.

As part of its role as one of the stakeholders actively helping to shape certain parts of the EECA, MAESCO is well positioned to share its expertise on these matters. In particular, we are keen to emphasise how international best practices can help drive energy efficiency in Malaysia and provide valuable impetus to the wider ESCO market.

What two further steps can be taken to ensure the country fulfils its energy efficiency requirements by means of a robust ESCO ecosystem?

From MAESCO’s perspective, our main concern is to ensure the ESCO ecosystem is conducive to the growth of our member organisations. This requires a number of steps, including the provision of new funding opportunities and an awareness raising drive to educate employees of the banking sector about the energy efficiency sector. Accordingly, the implementation of the Energy Performance Contracting Fund from Malaysian Debt Ventures (MDV) has been extremely positive and MAESCO will continue to work closely with MDV on the analysis of project viability and project monitoring, as well as on defining the details of the EPC template, a process which remains ongoing.

A second crucial step is the need to develop more specialist companies in the local market with expert knowledge of one particular area, whether lighting, thermal energy or something else. Given the current lack of a standardised EPC template, contracts can vary significantly from project to project. This results in ESCOs, particularly the smaller ones, having little choice but to apply for projects in which they often lack expertise and experience. Moreover, specialisation is particularly important in the field of energy efficiency because of the huge range of technologies utilised, as compared to other segments such as renewable energy where the options are less varied.

One way of bridging the gap in specialisation is to learn from international best practices and research findings, such as publications from leading entities like the International Energy Agency on how to develop national internal initiatives.

One of the main obstacles for overcoming these challenges is the low energy-price scenario. It is therefore important that stakeholders conceive of this challenge as not only necessary to combat climate change, which is one of the prevailing concerns, but also to ensure the safeguarding of energy security and survival.

The crucial requirement in all of this is not technology or technical knowhow. Rather, it is a combination of political will and close collaboration between all government entities, private sector companies, non-profit organisations and professional associations such as MAESCO. Once this has been assured, all parties can work together to shape the future energy agenda.

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