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Policy Analysis of Malaysia's Bioenergy Programme: A Study on Social and Economic Impact

Hoi Why Kong^[1]

ABSTRACT

This paper outlines the development of bioenergy in Malaysia and the institutional framework to support it. The incentives provided for renewable energy are grouped into two categories. Under the Promotion of Investment Act, the incentives granted are Pioneer Status, Investment Tax Allowance and Reinvestment Allowance. Depending on the modality of the investment, an investor can opt for any of these incentives. Incentives are also given under the Approved Service Projects, such as transportation, communications and utility projects, whereby proponents under this category can enjoy tax exemption under Section 127 and investment allowance under Schedule 7B of the Income Tax Act 1967. The social and economic impact and barriers to the promotion of bioenergy technologies and the measures to overcome them are also discussed. The paper finally discusses the source-specific concerns and recommended measures to develop renewable energy.

1.0 INTRODUCTION

Malaysia is in the midst of an era of vigorous industrial growth brought about by strong domestic demand, in addition to its significant science and technological development. The government's vision in turning Malaysia into a humane industrialized country by the year 2020 will have a great impact on the usage of energy in this country. In the next three decades Malaysia plans to establish itself in a manner so that it not only a consumer of technology but also a contributor to the scientific and technological needs of the future. Universities and Institutions are consolidating their effort to undertake research on energy and its conservation to attain increased efficiency and better productivity through reduction of waste.

1.1 National Energy Policy

Malaysia's energy sources comprise of oil, natural gas, hydropower and coal, although other renewable energy sources such as solar power and biomass are currently being exploited. The government is emphasizing the usage of natural gas and also planning to develop hydropower projects in East Malaysia in the foreseeable future. In conformity 'with the government's four fuel strategy, additional coal fired plants will be introduced to the system during the next decade to complement the non-oil thermal generation from natural gas. Studies have also been undertaken to assess coal utilisation for power generation in the long term.

2.0 BARRIERS TO THE PROMOTION OF BIOENERGY IN MALAYSIA

2.1 Technical Support Services

There are no local manufacturers or agents of equipment for the efficient conversion of the various types of biomass to energy. In general, the renewable energy support services are inadequate in Malaysia to cater the needs of the three major users of the technology, namely domestic, industrial/commercial and developers/investors. The most glaring barrier is in the area of technical consultancy where potential end-users can confidently seek advice on the types of equipment to be used to achieve maximum benefits. Thus for renewable energy to be successful, the technical support services must be adequate to render their capabilities and competencies from the beginning of the project development right throughout the life cycle implementation process including operation and maintenance. Right now, consultancy companies which provide services in renewable are not evident. Most consultants are viewed as an additional cost that need not be spent on any particular undertaking. Generally, consultants are considered expensive and they are only affordable when the project is of a sufficient size to be able to accommodate their cost. There has been very little or no emphasis made on the cost benefits of using consultants for projects to be undertaken. Furthermore, the quantification of cost benefits arising out of consultants is difficult to ascertain.

A number of public institution such as National University of Malaysia, Forest Research Institute Malaysia, Malaysian Palm Oil Board, SIRIM have demonstrated their competencies in undertaking academic, research-based renewable projects. Within the private sector, a number of energy service companies or ESCOs. Generally, ESCOs are those companies that develops energy projects as a third party, who is prepared to assume risk of project development on 'payment for service ' concept.

2.2 Policy & Institutional

There is no national strategy or priority given to biomass for energy ends. The main trust of the country's energy policies works within the framework of three broad policy objectives. These policies objectives are instrumental in guiding energy planning and particularly, the formulation of the country's five year development plans. The main core of the supply policy is to ensure the provision of adequate, secure and cost-effective energy supply through both renewables and non renewable energy using the least cost option and the diversification of supply sources both within and outside the country. In the utilisation policy is to promote the efficient utilisation of energy and to discourage wasteful and non-productive patterns of energy consumption. From the environmental perspective, the policy is to minimise the negative impacts of energy production, transportation, conversion, utilisation and consumption on the environment. Until recently, there have been limited initiatives to pursue the utilisation objectives, relying highly on the energy industry.

These policies fact that there are no local expertise for renewable energy project feasibility study and design does not help in the dissemination of information nor in creating an awareness in terms of knowledge and technology characteristics of renewable energy production. The result is a lack of coordination among the different national agencies and the lack of a designated agency specifically for renewable energy and consumers to exercise efficiency in energy production, transportation, conversion and consumption. Demand side management initiatives, particularly through tariff incentives have had very little impart to encourage the wider utilisation of renewables. The energy efficiency regulation is currently being formulated on designation of large consumers, appointment of energy managers and equipment labeling.

The environment objectives too have seen limited policy initiatives. All major energy development projects are subjected to the mandatory environmental impact assessment requirements. This environmental objective has strong pressures from the rapid energy demand growth in Malaysia. Renewable energy has strong environmental impacts at every level, namely exploitation of energy resources, energy supply and energy demand levels. Environmental consequences such as emissions, discharges and noise are subjected to the environmental quality standards like air quality and emission standards, However, the emission of pollutants to the atmosphere constitute the biggest impact on the environment. Cogeneration initiatives and the promotion of gas utilisation in the industrial and commercial sectors through the Peninsular Gas Utilisation project, can be seen as having far lesser impacts on the environment as compared to the more conventional fuels.

2.3 Financial

The financing for renewable energy still faces numerous difficulties. Whether a renewable energy project is small or big, the initial cost of the project arising from the engagement of consultants can be quite substantial. This cost is added to the project. As such the viability of the project tends to be affected particularly if the project is small. If experience of IPP is to go by, the ability to obtain financing is usually based on the viability of projects with preference being given to big projects. As renewable energy projects are capital intensive, financing is often considered the main barrier to the development and implementation. Generally, banks are not eager to finance energy projects as there are no records of renewable energy experience to rely upon, unlike IPP development where loan syndication for power projects are all to familiar now. Furthermore, bank loan officers typically lack the experience necessary to evaluate loans for renewable energy backed by performance guarantees. Also there are also inadequate ability by the financing institutions to evaluate risks associated with renewable energy projects through the mechanism of implementation of non recourse project finance. This is further compounded by weak or non-existent credit histories for some prospective customers rendering credit analysis is close to impossible.

2.4 Negative Perception on renewable energy

There seems to have a negative perception that renewable energy is associated with biomass that is considered backward and connotes of being underdeveloped and tends to be looked down upon as a primitive and dirty fuel. Therefore, any attempts to promote biomass as technology of choice is frowned upon through lack of information. There is a preferential bias for conventional energy. This is worsened when most of the renewable energy studies seem to overestimate the easy entry of renewable energy into the electricity market through oversimplification of existing problems.

3.0 POLICY MEASURES TO OVERCOME THE BARRIERS

Renewable energy has been implemented to varying degree in Malaysia. Whilst some efforts in these areas have reached an advanced level, knowledge and efforts in renewable energy are insufficient and fragmented. The most extensive study in the use of biomass renewable energy is in the form of palm oil wastes which is used to meet the energy requirements of the palm oil mills and the electricity needs of the workers The potential energy from biomass is estimated to be about 10 Mtoe/year.

The total contribution of biomass to the primary energy supply of Malaysia has been estimated to be at least 2 Mtoe. At present, the main contribution is from palm oil mills (about 80%) while the use of other wastes are rather inefficient. However, the total technical potential from biomass energy in Malaysia is around 3Mtoe - about 5% of the national energy requirements.

There are however, many barriers or constraints to the adoption of biomass technologies, which included lack of a technical, operational and market data at all levels, lack of financial mechanism, limited support from research and development and the general misconception that renewable energy technologies are expensive. To overcome these barriers, the government has taken a number of steps to try to overcome these barriers.

3.1 Increased employment

There are various other benefits of utilising Bioenergy instead of imported conventional fuels. In addition to the foreign exchange savings, the increased use of biomass creates additional employment for Malaysian workers and hence profits Malaysians businessmen instead of employment and profits in foreign countries, which export the coal/oil to Malaysia. In terms of employment, there will be greater employment opportunities in two distinct areas namely in new activities such as the collection, treatment and handling of local biomass and the erection, operation and maintaining the biomass power plants.

3.2 Establishment of a Bioenergy Revolving Green Fund

To overcome a major constraint in terms of undertaking investment in Bioenergy projects, Bioenergy investors will be able to avail themselves to Bioenergy Revolving Fund at attractive terms and conditions. The operation and management of this Fund is on the same principle as the SMI Fund for small and medium scale industries. To start the Fund, an initial amount of RM500 million is allocated. Soft loans at 5.0 % interest rates will be extended over a 10-20 year period. Officials to handle loan applications will undergo training to familiarise themselves with the peculiarities of Bioenergy including evaluating the financial aspects of Bioenergy power projects.

3.3 Credit Guarantee Scheme for Bioenergy-related loans

Due to the higher investment costs of Bioenergy related projects with its additional risks, a credit guarantee scheme is established to cover loans extended by commercial banks and financial institutions. It is suggested that no new institution be set up for this purpose. One option is for the Credit Guarantee Corporation Malaysia Berhad (CGC) to widen its coverage by introducing a new scheme - Bioenergy Guarantee Scheme. CGC has to agree in principle to this new scheme first. The lead agency is the Ministry of Energy, which will have to solicit the co-operation of Bank Negara to provide this guarantee.

3.4 Legislative Government Actions

For biomass to be a major contributor to the fuel mix for power production, the biomass plant should be able to connect to the grid with given terms and conditions. The provisions for this grid connection - with terms that are easy-to-understand and use - should be an integral part of considerations regarding the new IGSO-system. The legal actions will have to be based on the following premises:

a. It cannot be based on a " willing buyer/willing seller" approach.

b. Bioenergy plants have the right to sell to the grid on transparent terms

c. Fixed price setting mechanisms for Bioenergy grid-connection plants

d. Bioenergy electricity sales to be regulated by Energy Commission and implemented through the IGSO-framework (IMO)

The Ministry of Energy, Communications and Multimedia has indicated that the minimum share of Bioenergy will be 5.0 per cent by the year 2005. An estimate of the market share for Bioenergy in the planning period of the 8^th Malaysian will establish the possible impact on average electricity prices assuming the launch of the national Bioenergy programme. In addition to the above legislative measures, a number of administrative actions will have to be taken in the immediate future to expedite the speedy implementation of the Bioenergy programme. Although these government actions may not require legislation, they do require budgetary allocations.

3.5 Awareness Government Actions

Another component of the "Kick-start" package will be the establishment of an Awareness Programme on Bioenergy such as developing a WEB-site with information on Bioenergy from biomass in Malaysia. Some of the likely information that will be made available on the web-site include:

a. Technical, legal and financial issues pertaining to the development of Bioenergy projects

b. Examples of successful projects

c. Updates and Monitoring of developments in Bioenergy

d. Establishment of contacts and links with various parties e.g. ESCOs

e. Information on Support Services available e.g. list of banks and financial institutions offering loans to Bioenergy projects

4.0 COGENERATION AT SAWMILLS

It has been examined that co-generation for sawmills is economically feasible compared to a diesel alternative. The following table shows the relative economic attractiveness of the sawmill co-generation.

Comparison between diesel generation and biomass fired cogeneration at sawmill

· Repayment period

As seen from the above table, the generation cost for electricity from a new biomass plant is less than electricity from a diesel genset. The 20-year repayment period is based on the expected lifetime of the equipment. The electricity generation cost does not take into consideration a 30% contingency, should a private sector wish to undertake the project. With that additional cost, the electricity price will be higher than 12.3 or 9.6 sen/kWh shown in the table above.

Also, once a demand exist for the sawmill residues as the input fuel, then fuel cost can no longer be considered to be zero. If forest residue is to be utilised as fuel, the cost for handling has to be added to the total annual cost for operation of the plant. Whilst biomass cogeneration project is quite feasible using sawmill residue, which is readily available within the facility, the feasibility using forest residues requires a more detailed study as it involves retrieving the residues from logging concession areas which may be relatively more expensive.

5.0 CONCLUSION

It is said that the business approach and the establishment of a commercial market should form the main drivers for the implementation of the Malaysian renewable energy policy leading to big environmental benefits. The abundant supply of renewable energy resources in Malaysia provides good justification for a very ambitious and progressive renewable energy policy. Consequently, the approach of this project should be based on a framework that will have a legal and financial entity that will not only pave the way to wider use of renewable energy in Malaysia but to ensure that Malaysia plays a leading role in the use of renewable energy in Asian and Pacific region.

There are five factors that contribute significantly to the cost of renewable energy. Most of these factors are related to financing the project in a different manner from what has been done in the past. As such, new thinking is required to promote the use of renewable energy to compete with the conventional energy projects. The five factors that will ensure the success of the implementation of renewable energy projects vis-a-vis conventional energy generation projects are as follows:

a. Loan period to be extended to the life of the project of about 20 years

b. Interest rate to be reduced to a fair and competitive level

c. No penalties on Bioenergy in form of import duties on equipment/machinery - to be on the same basis as equipment meant for conventional power plants which do not pay these duties

d. Lifting of the approximate RM2.0 subsidy on natural gas to prevent market distortion on fuel prices. It is estimated that the price of gas should be at a minimum level of RM 8.40 per mm BTU to reflect real market cost of gas.

e. A grant or subsidy to be provided to Bioenergy in the transition period to reflect the advantages of Bioenergy to the country - e.g. the benefits of saved foreign exchange and increased employment (externalities) associated with using domestic fuels instead of imported coal.

REFERENCES

1. EPU 1999. Support to the development of a strategy for renewable energy as a fifth fuel in Malaysia. Economic Planning Unit, Prime Minister's Department, Malaysia

2. SIRIM 1999. Feasibility Study on grid connected power generation using biomass cogeneration technology. Standards and Industrial Research Institute of Malaysia.

3. EPU 1996. Study on energy policy analysis and planning to the year 2020. Economic Planning Unit, Prime Minister's Department, Malaysia

4. CETDEM 1996. Blowing in the wind: Malaysia's renewable energy scene. Centre for Environmental, Technology & Development Malaysia.