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Page 1: Greener energy solutions for a sustainable future: issues and challenges for Malaysia

Energy Policy 31 (2003) 1061–1072

.

Greener energy solutions for a sustainable future: issues andchallenges for Malaysia

Mohd. Zamzam Jaafar, Wong Hwee Kheng*, Norhayati Kamaruddin

Pusat Tenaga Malaysia (Malaysia Energy Centre), Block C3, Kompleks PETRONAS Research & Scientific Services (PRSS), Lot 3288 & 3289,

Off Jalan Ayer Itam, Kawasan Institusi Bangi, 43000 Kajang, Selangor Darul Ehsan, Malaysia

Abstract

This paper examines the intricacy of energy policies, issues and challenges woven into the development of the energy sector in

Malaysia. As highlighted in the Third Outline Perspective Plan (OPP3) and the Eighth Malaysia Plan (8MP) unveiled in April 2001,

efforts will be intensified to moderate the growth of energy demand and to develop renewable energy as the fifth fuel in electricity

generation. Whilst the general energy policy thrust for the next ten years remains unchanged, concerted efforts will be made to usher

the energy sector development on a greener path. With a projected average economic growth rate of 7.5% per year in the 2001–2005

period, resource rich Malaysia would have to cater for the 7.8% yearly increase in final energy demand. Total primary energy supply

is projected to grow at an average of 7.2% per year in the same period. Against the backdrop of a growing need for coal and piped

natural gas imports and Malaysia becoming a net crude oil importer in 2008, greater challenges lie ahead for the energy sector. This

implies that Peninsular Malaysia may become a net importer of fossil fuels (oil, gas and coal) sooner than expected. Higher

utilization rate of natural gas as the ‘green’ fuel will be encouraged in electricity and non-electricity sectors. Furthermore, fiscal

incentives in Budget 2001 to promote renewable energy and energy efficiency provide a timely boost for implementation of the new

fifth fuel strategy. Although the overall approach in addressing energy issues and challenges hinges on the precautionary principle,

the main thrust of energy sector development in Malaysia will continue to focus on adequacy, quality and security of energy supply

and the promotion of its efficient utilization with minimum negative impacts on the environment.

r 2003 Elsevier Science Ltd. All rights reserved.

Keywords: Renewable energy; Fuel mix; Pricing

1. Introduction

Malaysia is made up of Peninsular Malaysia and thestates of Sabah and Sarawak on the island of Borneo.Today about 80% of the total 23.3 million people live inPeninsular Malaysia, the hub of the country’s economicactivities. Like many other developing countries, energyhas been the prime contributor towards the rapidgrowth of Malaysia’s economy. Rural–urban migration,higher living standards and increased income per capitahave also spurred an ever-increasing demand for energy.Stable and abundant supply of energy resources in

Malaysia epitomizes how blessed Malaysia is with thesenatural assets. In terms of energy equivalent, Malaysiahas gas reserves, which are four times the size of itscrude oil reserves. Natural gas reserves off the east coast

of Peninsular Malaysia are dedicated for domesticconsumption while those in Sarawak are allocated asrevenue earner in the form of liquefied natural gas(LNG) exports. The locked-in demand created throughthe construction of gas-fired power plants and theconversion of oil-fired thermal power stations to gasfiring also created the necessary scale to justify theincrease of natural gas production and development ofthe Trans-Peninsular gas pipeline.Based on past energy patterns, growth in energy

demand concentrated in Peninsular Malaysia, implyinguneven demand trends between Peninsular Malaysia onone hand and Sabah and Sarawak on the other. Sales ofelectricity in Peninsular Malaysia recorded a double-digit average annual growth rate for the past ten years,in tandem with the rapid rate of industrialization.Over the last two decades, pragmatic energy policies

have facilitated a more environment-friendly energydevelopment path. For instance, the four-fuel strategyadopted has accelerated the transition of oil substitution.

*Corresponding author.

E-mail address: [email protected] (W.H. Kheng).

URL: http://www.ptm.org.my.

0301-4215/03/$ - see front matter r 2003 Elsevier Science Ltd. All rights reserved.

PII: S 0 3 0 1 - 4 2 1 5 ( 0 2 ) 0 0 2 1 6 - 1

Page 2: Greener energy solutions for a sustainable future: issues and challenges for Malaysia

As a result natural gas has made dramatic inroads as thepreferred fuel in the electricity industry, rising from1.2% of the total fuel mix in 1980 to 71.1% in 1999.While the general energy policy thrust for the next tenyears remains unchanged, concerted efforts will be madeto usher the energy sector development on a greenerpath. The Government has set a target that 5% ofelectricity generated should be from renewable energyby 2005. The challenge here would be to give renewableenergy the necessary lift to greater heights in the nextfive years. Efforts to promote energy efficiency, which isconsidered a unique domestic energy resource, will alsobe intensified. Although opportunities for the applica-tion of sustainable energy options abound, the energysector must also rise to the challenge of ensuringadequate, reliable and cost-effective supply of energywhilst contributing towards socio-economic welfare,industrialization and export earnings.

2. An overview of the Malaysia energy sector

2.1. Supply

With a projected average economic growth rate of7.5% per year in the 2001–2005 period, resource-richMalaysia would have to cater for the 7.8% yearlyincrease in final energy demand. Total primary energysupply is projected to grow at an average of 7.2% peryear in the same period (Economic Planning Unit,2001a). The main sources of commercial energy supplyin 1999 amounting to 37.2 million tonnes oil equivalent(Mtoe) were derived from crude oil and petroleumproducts (48.5%) followed by natural gas (41.8%), coaland coke (5.2%) and hydro (4.5%). In the 1990–1999period, the share of crude oil and petroleum products in

the total primary energy supply declined while that ofnatural gas increased indicating a successful reductionfrom the overall dependence on crude oil and petroleumproducts (Ministry of Energy, Communications andMultimedia, Malaysia, 1999, 2000) (see Fig. 1).Total oil reserves stood at 3.42 billion barrels in 1999.

With sustained domestic production of oil and maturityof existing fields, domestic crude oil reserves areexpected to last at least another ten years. Malaysia isexpected to be a net crude oil importer by 2008(Economic Planning Unit, 2001b) unless efforts indomestic oil exploration result in discoveries of sub-stantial new oil reserves.Natural gas can be classified into two types viz.

associated and non-associated gas. As at 1999, totalnatural reserves amounted to 84.4 trillion standard cubicfeet of which 16% was associated gas and the remaining84% was non-associated gas (Ministry of Energy,Communications and Multimedia, Malaysia, 2000). Toensure adequate gas supply, the country will supplementdomestic gas supply with gas from the Malaysia–ThaiJoint Development Area (MTJDA), West Natuna andSouth Sumatra. The gas pipeline interconnections willform part of the Trans-ASEAN gas pipeline network.The country’s known coal reserves in 2000, mainly in

Sarawak and Sabah, were estimated at 1050 milliontonnes. Although coal quality ranges from lignite toanthracite, bituminous and sub-bituminous coal formthe main share of the total coal reserves. Based on theforecast coal production at 0.75 million tonnes per year,a recent report highlighted that 95% of the total coalrequirement by the year 2005 still needs to be imported(Ambun, 2000). The lack of economies of scale andcompetition from bigger coal producing countries arereasons why development of domestic coal resources hasnot been aggressively pursued.

Fig. 1. Share of energy input in commercial energy supply (1990–1999). Source: National Energy Balance 1998 and 1999.

M. Zamzam Jaafar et al. / Energy Policy 31 (2003) 1061–10721062

Page 3: Greener energy solutions for a sustainable future: issues and challenges for Malaysia

2.2. Demand

The expansion of industrial and transport sectorswere main contributors to the increase of final demandfor commercial energy, which collectively grew at anaverage annual growth rate of 7.5%, from 11.3 Mtoe in1990 to 21.7 Mtoe in 1999. Fig. 2 shows that theindustrial and transport sectors were the largest energyconsumers in the 1990–1999 period. In 1999, share oftransport and industrial sectors in the total final energyuse were 42% and 38%, respectively.The decrease in the share of oil and petroleum

products in energy mix reflects the success of the FourFuel Diversification Strategy and the National Deple-tion Policy introduced in the early 1980s. The share ofpetroleum products in final commercial energy con-sumption declined from 75% in 1990 to 69% in 1999(see Fig. 3). Although the electricity sector has success-fully decoupled from oil dependency, the transportsector still relies heavily on petroleum products. Theincrease in private and commercial vehicles and the

expansion of road networks have contributed to thehigh energy demand growth in the transport sector. Thetrend toward greater urbanization accelerated thetransition to electricity where higher income per capitamade desirable electrical goods more affordable. Successof the rural electrification programme introduced by theGovernment also contributed to an increase in electri-city demand. As of 2000, 93% of rural households inMalaysia were served with electricity. As shown inFig. 3, share of electricity in final energy consumptionincreased from 13% to 18% in 1990 and 1999respectively.

3. Energy prospects in Malaysia

Malaysia in the 21st century faces many challenges asit sails through the uncharted path of globalization.Although the 1997–1998 economic downturn wascushioned by the adoption of strategic measures,another bout of economic slowdown is expected to

Fig. 2. Final energy use by sectors (1990–1999). Note: Non-energy use refers to the transformation process for non-energy purpose (e.g. bitumen/

lubricant) and use of energy products (e.g. natural gas) as industrial feedstock. Source: National Energy Balance 1999.

PetroleumProducts

75%

Electricity13%

Natural Gas8%

Coal4%

1990

Total: 13.2 Mtoe

PetroleumProducts

69%

Electricity18%

Coal2%

NaturalGas11%

1999

Total: 27.2 Mtoe

Final Use of Commercial Energy by Fuel Type

Fig. 3. Final use of commercial energy by fuel type. Source: National Energy Balance 1998 and 1999. Note: Natural gas share does not include

natural gas that is utilized by the electricity generation sector.

M. Zamzam Jaafar et al. / Energy Policy 31 (2003) 1061–1072 1063

Page 4: Greener energy solutions for a sustainable future: issues and challenges for Malaysia

bring about a certain degree of uncertainty to the energysector. In the quest to achieve ‘Developed Nation’ statusas embodied in its Vision 2020 goal, sustainabledevelopment of the energy sector will become thepivotal factor for economic competitiveness and pro-gress.

3.1. Natural gas

The energy industry is a multi-billion dollar industrywhere huge capital investments are required to supportthe rapid growth of energy demand. In the next fiveyears, a total of RM 53 billion (1US$=RM 3.80) hasbeen allocated by the Government on the developmentof this industry (Economic Planning Unit, 2001a). Alarge share of the total investment will be set aside forexploration and production of crude oil and natural gas.This includes the development of resources domesticallyand overseas, through joint venture projects. Utilizationof environment-friendly natural gas will continue to beencouraged by sourcing additional supply of natural gasfrom the MTJDA, West Natuna and South Sumatra.The availability of domestic gas resources has alsospurred socio-economic development from foreign ex-change earnings of piped natural gas to Singapore andLNG exports. Furthermore, domestic gas used asfeedstock in petrochemical plants adds value to thedevelopment of petrochemical industries in Malaysia,which serve as a catalyst for further downstreaminvestments.

3.2. Renewable energy potential

The energy mix will continue to be predominantlybased on domestic resources in the next five years. Sincedomestic fossil fuel resources (oil, gas and coal) aredepletable, efforts to promote renewable energy as afifth fuel, especially for electricity generation will beintensified during the Eighth Malaysia Plan period(2001–2005). The Government has identified oil palmresidues as the biggest resource that can be easilydeveloped, thus having the greatest potential for bringingrenewable energy into the mainstream energy supply. Arecent study undertaken by the Government revealed thatbesides biomass and its residues, there are other renew-able energy options in Malaysia such as biogas,municipal wastes, solar and mini hydro (see Table 1).

3.3. Energy efficiency

Electricity peak demand in Peninsular Malaysia alonehas grown from 3447MW in 1990 to 9948MW in July2001. Peak demand is projected to increase by almost55% to 15,380MW by 2005 (Economic Planning Unit,2001a). Based on recent reports, a huge capitalinvestment of approximately RM 30 billion will be

allocated for new power plants in the next ten years.Savings accrued from energy efficiency are viewed as aunique domestic energy resource. It is hoped that energyefficiency programs will also reduce the need to allocatehuge power plant capital investments. Energy efficiencyefforts facilitated by the Government not only reducethe overall requirements for energy but are also expectedto improve the profit margins of organizations, generatenew businesses and decrease foreign exchange loss byreducing the need to build new power plants andrecurring fuel imports.

4. The challenge

The Government fully subscribes to the concept ofsustainable development. As energy is the lifeblood foreconomic growth, overall national sustainable develop-ment efforts in this context can never decouple fromsustainable development of the energy sector. TheNational Energy Policy introduced in 1979 covers thefollowing three objectives:

(i) Supply: To ensure adequate, secure and cost-effective energy supply through developing andutilizing competing energy resources, both renew-able and non-renewable.

(ii) Utilization: To promote efficient utilization ofenergy and to discourage wasteful and non-productive patterns of energy consumption.

(iii) Environment: To minimize the negative environ-mental impacts of the energy supply chain (energyproduction, transportation, conversion and utiliza-tion).

The challenges and issues for the energy sector will bediscussed in the framework of the prevailing energypolicy objectives.

4.1. Meeting the supply objective

In order to meet the supply objective, the Governmentadvocates the promotion of renewable energy and

Table 1

Renewable energy resource potential in Malaysia

Renewable energy Energy value (RM million per annum)

Forest residues 11,984

Oil palm biomass 6,379

Solar thermal 3,023

Mill residues 836

Hydro 506

Solar PV 378

Municipal waste 190

Rice Husk 77

Landfill gas 4

Source: Ministry of Energy, Communications and Multimedia, 2001.

M. Zamzam Jaafar et al. / Energy Policy 31 (2003) 1061–10721064

Page 5: Greener energy solutions for a sustainable future: issues and challenges for Malaysia

increased utilization of natural gas and hydropower.Planning for adequate electricity generation capacity isalso given priority.

4.1.1. Fuel diversification—what is the optimum fuel mix?

The optimum and reasonable fuel mix for theelectricity generation sector has been the subject of anon-going debate. The central issue is how to ensurereliable, adequate and cost-effective electricity supplywhile attempting to meet the economic objectives andsocial obligations with minimum negative impact on theenvironment. The following are a few main factorsinfluencing the choice of fuel in the electricity generationsector:

(i) Desired plant mix—basically depends on the mostcost-effective plant to run on a merit order basis.

(ii) Fuel price—the ‘right’ price will signal the elec-tricity generation players to choose a particularfuel. Currently the electricity generation sector inPeninsular Malaysia pays a fixed gas price of RM6.40 per million British Thermal Unit (mmBTU).

(iii) Government policy, fiscal and non-fiscal incentivesand institutional support for a particular powerproject.

In 1981 the Four-fuel Diversification Strategy wasintroduced as an extension of the National EnergyPolicy. The rationale for this policy initiative was toreduce the country’s over reliance on oil, particularly inthe electricity generation sector. This policy aimed for asupply mix of natural gas, hydropower, oil and coal. Inthe Eighth Malaysia Plan report, this policy is expandedto include renewable energy as the fifth fuel tosupplement energy supply from conventional energyresources.Fig. 4 illustrates the success of the four-fuel diversi-

fication strategy where the share of fuel oil and diesel inelectricity generation fuel mix decreased while the share

of natural gas increased. Prior to 1985, most oil-alternative efforts centered on hydroelectric projects.However, with the proliferation of gas pipelines throughthe Peninsular Gas Utilization (PGU) Project, readilyavailable domestic gas was a good reason to justify itsincreased utilization in electricity generation. Efficientand relatively cheap gas-based technologies proved to bevery popular among Independent Power Producers(IPPs) entering the electricity generation business inthe 1990s. In 1999, natural gas represented 71.1% of thetotal energy input in power stations (see Fig. 5). Naturalgas is expected to continue dominating the share of fuelmix in electricity generation for the next five years as40.6% of the reported total 12,320 MW new generationcapacity in the next ten years will be gas-based (seeTable 2). The revival of the 2400MW Bakun Hydro-electric Project in Sarawak marks a renewed interest toincrease the share of hydropower in the country’s fuel mix.

4.1.2. Making connections—renewable energy in the 21st

century

Among the key barriers to the entry of renewableenergy into the mainstream energy supply chain are:

(i) Lack of economies of scale in renewable energyprojects making it very expensive to embark onsuch projects. With the economy of mass manu-facturing, the future cost of technologies related torenewable energy will be brought down, encoura-ging more players to enter this industry.

(ii) Poor perception about the potential and commer-cial viability of renewable energy technologies.Although a number of feasibility studies anddemonstration projects on renewable energy havebeen carried out, greater government–private part-nership is needed to promote investors’ confidencein renewable energy.

(iii) Lack of financial support for renewable energyprojects. Pure economic efficiency paradigm may

0

10000

20000

30000

40000

50000

60000

1991 1992 1993 1994 1995 1996 1997 1998 1999

Year

GW

h

Diesel

Hydro

Coal

Fuel Oil

Gas

Electricity Generation Fuel Mix in Malaysia (1991-1999)

Fig. 4. Electricity generation fuel mix in Malaysia (1991–1999). Source: Pusat Tenaga Malaysia, 2000.

M. Zamzam Jaafar et al. / Energy Policy 31 (2003) 1061–1072 1065

Page 6: Greener energy solutions for a sustainable future: issues and challenges for Malaysia

not encourage the promotion of renewable energy.Therefore, financial support may be necessary forsuch projects to be cost-effective especially in theinitial stage.

(iv) Reliability of renewable energy supply is an issue asrenewable energy supply mostly depends on seaso-nal fluctuations and weather, which is beyond thecontrol of man.

Palm oil is an important contributor to Malaysia’sGross Domestic Product. In 2000, palm oil exports wereworth RM 10.2 billion (Malaysian Palm Oil Board,2001). The production of palm oil from the 350 palm oilmills generates a substantial amount of readily availablepalm oil residues that may have not been optimallyutilized. In this regard, biomass, particularly oil palmresidues have been identified as the most promisingrenewable energy among other renewable energy re-sources in Malaysia. Several enabling factors were

introduced in Malaysia to provide inroads for renewableenergy into the mainstream energy supply, particularlyfor electricity generation. These include:(i) Fiscal incentivesThe 2001 Budget contained the following fiscal

incentives to promote greater use of renewable energyas an alternative fuel:

* Income tax exemption of 70% on statutory incomefor five years or Investment Tax Allowance of 60% ofcapital expenditure incurred within a period of fiveyears. These are to be utilized against 70% of thestatutory income.

* Import duty and sales tax exemption on machineryand equipment that are not produced locally.Machinery and equipment that are produced locallywill be exempted from sales tax.

The incentives are valid for applications received from28 October 2000 until 31 December 2005, on conditionthat the company implements the project within oneyear from the date of approval.(ii) Institutional supportOn 11 May 2001, the Ministry of Energy, Commu-

nications and Multimedia launched the Small Renew-able Energy Power (SREP) Programme to encourageand intensify the utilization of renewable energy (oilpalm wastes, wood residues and rice husks) for grid-connected electricity. Under this programme, simplifica-tion of the renewable energy purchase agreement(REPA) and connection to the grid between renewableenergy developers and the incumbent utility will beencouraged. This programme is part of the Govern-ment’s effort to promote distributed energy resourcesincluding energy efficiency.(iii) Legal framework

1.2%

74.5%

0.0%

10.4%

71.1%

9.3%11.7%

13.9%

6.7%

1.2%0%

20%

40%

60%

80%

Natural Gas Fuel Oil Coal Diesel Hydropower

1980

1999(Total: 2. 76 Mtoe)

(Total : 14.26 Mtoe)

Share of Energy Input in Power Stations in Malaysia

Fig. 5. Share of energy input in power stations in Malaysia. Source: National Energy Balance 1998 and 1999.

Table 2

Planned new generation capacities (2001–2010)

Commercial operation date Total installed capacity (MW) Fuel

2001 1,000 Coal

2002 1,650 Gas

2003 2,600 Gas

700 Coal

2004 750 Gas

1,400 Coal

2005 700 Coal

2006–2010 3,520 Hydro

Total 12,320

Source: Economic Planning Unit, 2001 and Pusat Tenaga Malaysia,

2000.

M. Zamzam Jaafar et al. / Energy Policy 31 (2003) 1061–10721066

Page 7: Greener energy solutions for a sustainable future: issues and challenges for Malaysia

The setting up of an Energy Commission as aregulatory body for both gas and electricity supply inMay 2001 will see an even more effective monitoringand assessment of the energy sector. The functions ofthe Department of Electricity and Gas Supply will betransferred to the Energy Commission after theamended Electricity Supply Act 1990 and the GasSupply Act 1993 have been passed by the Parliamentand gazetted by end 2001. Among others, the commis-sion will enforce energy regulations pertaining to thedevelopment of the energy sector and address importantissues such as energy pricing and sufficient infrastructureto meet future energy demand. The Energy Commissionwill also be responsible for promoting renewable energyas part of the national strategy on fuel diversification.Transparent terms and conditions would also beprovided to ensure equal access for renewable energyelectricity producers to the grid.(iv) Demonstration projectsThe Government through the Malaysia Electricity

Supply Industry Trust Account (MESITA) has beenproviding financial assistance to rural electrification,energy efficiency and renewable energy projects. Underthis fund, IPPs and TNB Generation voluntarilycontribute 1% of their annual audited revenue to thefund. The studies funded by MESITA include grid-connected electricity generation from landfill gas,photovoltaic systems and palm oil residues. Besideslocal initiatives, the ASEAN-EC COGEN programmebased in AIT (Asian Institute of Technology) Bangkokhas also implemented eight full-scale demonstrationprojects in Malaysia using rice husks, wood wastes,palm oil residues and biogas.As part of the Government’s effort to reduce the

national stock of crude palm oil (CPO), the combustionof medium fuel oil blended with CPO commenced atPrai power station in March 2001 marking a new epochin the history of power generation in Malaysia. Inaddition, a more ambitious plan to develop a 500,000tonne per year palm oil diesel plant to providealternative fuel for diesel engines will certainly makeinroads in the oil-intensive transport sector. A detailedfeasibility study is already under way and palm diesel isexpected to enter the market by 2006 (Rohani et al.,2001).

4.1.3. Deregulation—what is the right model?

Developments in the electricity supply industryindicate that the industry is moving towards usingmarket instruments and competition. The objectives ofderegulation of this industry are obvious: to promotegreater competition and to improve economic efficiency,thus lowering the cost of supply. However, the dilemmaof having to balance the objective of achieving greatercost efficiency whilst ensuring reliable and adequatesupply of electricity is the central issue. Plans by the

Government to emulate the Californian deregulationpath were abandoned when the weaknesses of thismechanism were revealed by the recent power crisis thathit the American state. Persistent electricity blackoutsand brownouts coupled with electricity price hikes inCalifornia badly affected small enterprises and theeconomy as a whole. The challenge now is to developthe right model for Malaysia, but what is the rightmodel? Some concerns raised are that:

(i) industry players would be driven by the cheapestoption in electricity generation due to marketcompetition. Therefore, the issue is how to ensurethat the right mix of fuel and plant type areavailable in the market at any point in time?

(ii) difficulty in assessing ‘changing’ government poli-cies would affect the value of potential investmentsin the electricity generation sector.

(iii) unless incentives or mechanisms are established,conflict may arise between desirable environmentalbenefits of utilizing environment- friendly fuel (i.e.renewable energy and natural gas) and the risk ofover dependence on one fuel.

The electricity supply industry in Malaysia evolvedfrom decentralized systems supplying electricity for tinmining operations in the 1890s into huge Government-owned centralized systems with attractive economies ofscale. Today electricity supply in Malaysia is dominatedby three vertically integrated utilities with responsibil-ities for the three distinct geographical regions viz.Peninsular Malaysia, Sarawak and Sabah. TenagaNasional Berhad (TNB) (the majority Government-owned national electric utility) is the largest utility inMalaysia, with about 54% share of the total 15725MWinstalled capacity in Malaysia (Department of Electri-city and Gas Supply Malaysia, 2000).The original structure of the electricity supply

industry in Peninsular Malaysia consisted of TNB asthe sole generator, transmitter and distributor ofelectricity. Restructuring of the electricity supply in-dustry took place almost a decade ago with privatizationof TNB in 1992 followed by the entry of IPPs in 1994.Today, Malaysia’s electricity supply industry depicts themonopsony model whereby one or more verticallyintegrated entity (ies) control the industry with severalplayers in the generation sector. Historically, verticalintegration in the electricity industry was thought toserve the country’s economic needs and social obliga-tions with efficient state-owned enterprises controllingthe whole electricity supply chain. However, as demandfor electricity soared, huge upfront capital investmentneeded for new power plants proved to be a strain onthe Government’s coffer. Subsequently, policy makersbegan to search for a suitable model to restructure andderegulate the electricity supply industry. The objectivewas to create competition that will lead to greater

M. Zamzam Jaafar et al. / Energy Policy 31 (2003) 1061–1072 1067

Page 8: Greener energy solutions for a sustainable future: issues and challenges for Malaysia

transparency in terms of costs incurred to supplyelectricity and to provide more choices to customers.The Seventh Malaysia Plan (1996–2000) report had

anticipated transition of the electricity supply industryfrom a monopsony model to wholesale competition. Itwas envisaged that Malaysia’s electricity supply industryrestructuring would take place in three stages viz. from asingle buyer, multiple sellers market to multiple buyers,multiple sellers market, ultimately leading to intercon-nection within the ASEAN region. It was believed thatthrough competitive bidding in the electricity pool,electricity rates would be kept low—an ideal way tomanage the electricity supply industry.Recent unpleasant events in economies that have

adopted the electricity pool mechanism have caused theGovernment to shelve its earlier plans to adopt thepower pool mechanism. However, the existing model(see Fig. 6) will be improved and customized to suit localconditions. Recently TNB announced that it wouldimplement the ‘managed market model’ (3M) approachwhereby the national utility will retain 60% share of thetotal generation capacity while the IPPs hold theremaining 40%. Under this model, IPPs will have tobid for new power plants as opposed to the currentpractice where the Government negotiates and awardscontracts for new power plants directly to the projectdevelopers. This way, it is believed that a more levelplaying field will be created for all industry players,promoting greater transparency and encouraging elec-tricity generators to produce at the lowest cost. Thistransparency is needed to encourage the IPPs to practicean ‘open book’ system. This allows TNB and otherutilities to verify the true development cost of powerprojects, as such, there has been no proper documenta-tion to verify the IPPs’ claims over the cost of theirpower projects. As a result TNB is unable to negotiate

for more favourable terms in the Power PurchaseAgreements (PPAs).PPAs in Peninsular Malaysia are separately nego-

tiated with TNB. The IPPs established in the 1990senjoyed ‘pioneer returns’ in terms of favourable PPAswith a ‘take or pay’ clause where TNB pays IPPs a fixedmonthly rate for a period of 21 years regardless ofwhether TNB takes the electricity or not. These so-called‘first generation’ IPPs enjoyed higher tariff rates rangingfrom 13–15 cent Malaysia per kWh. As a result, it wasreported that about 60% of TNB’s operational costwent to payment for electricity purchases from IPPs.The ‘second generation’ PPAs introduced a new conceptof ‘take and pay’ whereby TNB pays the IPPs only forthe electricity acquired based on a lower rate than hadbeen agreed in the previous PPAs. As it is, PPAs signedfor the two fast-track IPP projects in July 2001 were ‘lesslucrative’ with tariff rates of 12.14 cent per kWh and11.73 cent per kWh. These projects are expected to comeon stream from 2002 onwards.

4.1.4. Oil and gas sector development

One of the goals of the National Depletion Policy

introduced in 1980 was to safeguard the exploitation ofdomestic oil and gas reserves by applying a cap onproduction of these resources. A cap of 650,000 barrelsper day on oil production (excluding natural gas liquidsor condensates) was imposed through this policy.During the Seventh Malaysia Plan (1996–2000) period,this policy was extended to include natural gas reserveswhereby a cap of 2 billion standard cubic feet per daywas imposed for natural gas processed in PeninsularMalaysia. Today the challenges for the oil sector arethat of addressing declining production from existing oilfields and discovery of limited new oil fields but withsmaller capacities. This will eventually lead to an

Co-generators Independent Power Producers

TNB Generation

Tenaga Nasiaonal

Berhad (TNB)

Mini Utilities

Localized Distributors

Customers Customers Customers

Generation

Transmission

Supply

Distribution

Fig. 6. Existing electricity supply industry structure in Peninsular Malaysia. Source: Department of Electricity and Gas Supply Malaysia, 2000.

M. Zamzam Jaafar et al. / Energy Policy 31 (2003) 1061–10721068

Page 9: Greener energy solutions for a sustainable future: issues and challenges for Malaysia

increase in the average cost of producing one barrel ofcrude oil and one mmBTU of natural gas. To overcomethis problem, Petroliam Nasional Berhad (PETRO-NAS), the national oil and gas company, has beenpromoting deep-water exploration activities in domesticoffshore areas and joint ventures.The power sector is the main consumer of natural gas

accounting for 80.7% of total domestic natural gasutilization in the year 2000 (Economic Planning Unit,2001a). Therefore, future demand for natural gas isprimarily driven by the extent to which the power sectoris able to utilize gas. The remaining 19.3% of totalnatural gas consumed can be traced to the non-powersector such as petrochemical and small industries,residential and commercial consumers. Apart from theincrease in gas-based technologies for power generation,four major developments that have contributed to theincrease of domestic natural gas consumption in the lastdecade are:

(i) Establishment of the PGU network in stages since1981 channelling natural gas via pipeline to majorconsuming areas including centralized powerstations. One of the objectives of the PGU projectwas to provide the alternative fuel for electricitygeneration and displace fuel oil as the primarysource of energy. Phase I–III and Loop 1 ofthe PGU project has been completed. The finalphase (Loop 2), which is expected to be completedin end 2001, will further enhance transmissioncapacity and ensure security of gas supply (seeFig. 7).

(ii) Implementation of natural gas vehicle (NGV)programme encouraging the utilization of gas as acleaner transport fuel.

(iii) Promotion of synergy between gas and petrochem-ical industries leading to the establishment of threemajor petrochemical complexes (in Gebeng, Kertehand Tanjung Langsat, in Peninsular Malaysia),which would further strengthen downstream in-vestments.

(iv) Introduction of co-generation gas district coolingsystems utilizing gas to produce mainly chilledwater and electricity.

Related to gas supply security is the issue of domesticgas pricing. The power sector, which is the largestconsumer for natural gas pays a fixed price of RM 6.40per mmBTU until December 2001. Electricity tariff toconsumers is regulated and TNB is not able to pass onany increase in production cost without Governmentapproval. Consequently, gas price, which is also subjectto Government intervention, has remained unchanged.

4.2. Meeting the utilization objective

The second challenge in the energy sector is topromote efficient utilization of energy by discouragingwasteful and non-productive patterns of energy con-sumption. From the national perspective, implementa-tion of energy efficiency measures will not onlydiscourage wasteful energy consumption but will alsobring economic benefits such as possible export ofenergy on the portion saved and reduction of negativeenvironmental impact from decrease in fuel combustion.‘Development of Energy Efficiency Strategy in Malay-sia’ study done by the Government in 2000 revealed thatif the industrial and commercial sectors were to improvetheir energy use efficiency by 10%, there would be aneconomic benefit of more than RM 5.8 billion in the

KangarPauh

Changlun

Alor Star

GurunGeorgetown

IpohLumutSitiawan

Meru KUALA LUMPUR

Seremban

Melaka

Johore Bahru

Segamat

Gas TransmissionOperations Centre

Kuantan

Kemaman

KERTIH

KualaTerengganu

MAINLINE STATUSPGU I

32 KMKertih - Tanjung Sulong

Gas - in1984

PGU II 714 KM

Tanjung Sulong - SegamatSector 1 (265 Km) :

Segamat - Pasir GudangSector 3 (208 Km) :Segamat - MeruSector 2 (241 Km) : Gas - in

1991

PGU III 450 KM

Meru - LumutSector 1 (184 Km) :

Gurun - PauhSector 3 (90 Km) :Lumut - GurunSector 2 (176 Km) :

Gas - in1996

Gas - in1997

Sept.1999

2001

Loop 1

Kertih - Segamat

Segamat - MeruLoop 2

265 Km

227 Km

Fig. 7. Peninsular Gas Utilization Project. Source: PETRONAS, 2000.

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next five years. In addition, the benefits will continue toaccrue over the life of the equipment.Since the energy industry will continue to experience

robust growth, greater efficiency in energy use will notonly discourage wasteful energy use and improvecompetitiveness of industrial production but will alsofacilitate sustainable energy sector development throughoptimization of resource utilization. As with renewableenergy, energy efficiency will be elevated to greaterheights with sufficient legal, financial, fiscal and institu-tional support. In this respect, the ‘carrot and stick’approach has been adopted in Malaysia. The ‘stick’ inthis case is Energy Efficiency Regulation (within theamended Electricity Supply Act 2001) and amendmentsto the Uniform Building By-law to incorporate energyefficiency designs and features in buildings. The ‘carrot’would include demand-side management activities suchas changing energy use pattern, appliance labelling,retrofitting, district cooling programmes and intensifiedpublic awareness campaigns. The recent 2001Budget also announced incentives such as income taxexemptions, import duty and sales tax exemptions andaccelerated capital allowance for energy conservationand efficiency initiatives. In addition, a Centre forEducation and Training in Renewable Energy andEnergy Efficiency (CETREE) was recently establishedat Universiti Sains Malaysia to educate the public on theimportance of renewable energy and energy efficiency.Among others, CETREE’s mandate is to disseminateinformation on renewable energy and energy efficiencythrough new school curriculum, revised textbooks,websites, competitions and trainings for secondaryschools, universities and energy professionals.

4.3. Meeting the environmental objective

It has always been a challenge to balance theseemingly conflicting interest between concerns for theenvironment on one hand and economic and financialviability of a project on the other. Combustion of fossilfuels is known to be one of the major sources ofgreen house gas (GHG) emission, a significant con-tributor to global warming. Therefore, the primaryenvironmental consideration affecting the energy sectoris fuel-related. Issues with respect to each fuel arediscussed below:

(i) Renewable energy—although known to have a netGHG emission value of zero, presently renewableenergy industry is like a drop in the oceancompared to the matured oil and gas industry.They occur as small distributed systems andtherefore lack the economies of scale. Support inthe form of fiscal and financial incentives is criticalparticularly in the initial stage of project imple-mentation.

(ii) Natural gas—combustion of natural gas emitslower quantities of GHG per unit of energyproduced than do oil or coal. The increased useof natural gas, particularly in power stations hasturned the electricity generation sector into one ofthe cleanest and most environment-friendly energysectors. However, issues of domestic gas pricingand fuel mix ‘threatens’ to decrease the future shareof natural gas in the electricity generation sector.

(iii) Hydropower—existing hydropower plants arenoted to be a clean and green source of electricity.However, plans to develop new hydropower plantsoften encounter environmental debate over theintangible cost associated with loss of biodiversity.

(iv) Oil—contains sulphur but cleaner and highergrades of oil products are more expensive. Thechallenge in the energy sector development is tofurther reduce its reliance on oil, especially in thetransport sector.

(v) Coal—the use of coal will increase in the next tenyears, in line with the Government’s objective tofurther diversify the fuel mix in the electricitygeneration sector. To mitigate the emission ofsulphur dioxide, new coal plants will be fitted withflue gas desulpharization (FGD) equipment. How-ever, other issues on coal utilization such asmonitoring and control of relevant pollutingsubstances and efficient use of space for storagestill need to be addressed.

The convergence of energy security strategies withforeseeable GHG reduction commitments has sparkedinterest in new and advanced technologies in theproduction and consumption of energy in Malaysia.Although Malaysia is one of the signatories of theKyoto Protocol, it is not bound by any limit of GHGemission. Nonetheless, the country has had a good headstart even before making any commitments to the KyotoProtocol. As the Government continues to advocate thepromotion of renewable energy and energy efficiency,these initiatives will provide a greener solution to thechallenge of meeting the environmental objective in theenergy sector. No doubt as a developing country,demand for energy will continue to increase but theimmediate solution is not so much to suppress theenergy demand but pursue a strategy that will meet theenergy demand in a sustainable manner.

5. Malaysia as a regional energy trade hub

The OPP3 (2001–2010) marks the second phase of thecountry’s quest to achieve the status of a developednation. Here the greatest challenge for the country is tobe able to thrive in the forces of globalization.Transformation from the traditional production-based

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economy to a knowledge-based economy becomes avital ingredient for the country to stay competitive.Ironically, although Malaysia is rich with natural energyresources, it has been the general practice to ‘sell-high’and ‘buy-low’, which is a rule governing profitmaximization, resulting in higher net income for thecountry. Pursuing this prudent formula, Malaysia sellsits sweet crude at a premium and buy sour crude fromthe Middle East. By extension, Malaysia will buy low-cost coal and sell its high value gas so that the energysector remains a net forex earner. A well-plannedinfrastructure development especially in transmissionnetwork is a pre-requisite for the country to expand itstrade in energy. The development of the Trans-ASEANGas Pipeline (TAGP) and the Trans-ASEAN PowerGrid (TAPG) networks will be the enabling factors inapplying the strategy for Malaysia to become an ‘energytrade hub’ in the ASEAN region.It is envisaged that continuing privatization, dereg-

ulation and restructuring in the energy sector will createnew window of opportunities associated with liberalizedenergy industries with many buyers and sellers conduct-ing transactions electronically. The focus on earningsand efficiencies will be intensified and will in turnprompt further quickening of e-procurement practices.To stay competitive globally Malaysia would have toseize the opportunity of becoming the central hub ofenergy exchange in this region. Apart from the increasein trading volume, the commission earned from energyexchange would be an additional source of revenue forthe country.

5.1. Trans-ASEAN Gas Pipeline (TAGP)

Countries in ASEAN region have started buildingtheir network of gas pipelines to cater for their domesticconsumption. These networks of pipelines wouldprovide the foundation for possible regional pipelinelinkage, the TAGP project. There are currently approxi-mately 5000 km of offshore pipelines and 2300 km ofonshore pipelines under construction and in operationin the ASEAN region. Geographically, Malaysia’s PGUnetwork could serve as the hub for future TAGP linkagebetween Indonesia’s inter-regional pipelines in the southand countries in the north such as Thailand, Vietnamand Myanmar. Malaysia is well placed to play a majorrole in the project due to its domestic gas reserves andequity gas reserves in the West Natuna, Myanmar andMTJDA gas fields. Moreover, this is believed to bebeneficial for the country as securing gas from overseasjoint ventures will provide the impetus for the conver-gence of gas supply with the electricity sector i.e. agreener solution to the energy supply issue as comparedto utilizing coal or oil. Furthermore, the development ofTAGP with cross-border interconnections coupled withhighly reliable information and communications tech-

nology (ICT) will definitely give gas industries the edgeto pursue gas trading in the ASEAN region. When theTAGP infrastructure is laid out, players in the gasindustry would be able to source for cheaper gas(foreign) for domestic consumption while selling highpremium gas to foreign counterparts.

5.2. Trans-ASEAN Power Grid (TAPG)

In the long term, TNB is keen on export and importof power via the TAPG. The utility believes that sharingof reserve margins with neighbouring countries wouldbe a prudent way to manage the country’s own reservemargin. As it is the Government has decided that a 30%reserve margin should be maintained to ensure relia-bility of electricity supply. However, since a typicalproject needs long lead-time before commissioning,planting-up programs and investments are carried outthree to five years prior to actual commissioning.Projection of energy demand growth is a tricky business.On one hand if the growth in electricity demand isslower than projected, these power plants would lie‘idle’, presenting huge capital investments that thecountry could do without. On the other hand, thecountry may encounter the California-like problem ifinsufficient power plants are built. With interconnec-tions through the TAPG network, TNB hopes to reducethe country’s reserve margin by half, from 30% to 15%.The Government’s decision to carry on with the

2,400MW Bakun Hydroelectric Project will certainlychange the scenario of future fuel mix and generationplant-ups on the island of Borneo. The so-called pan-Borneo power grid project anchored by Bakun willsupport the realization of the TAPG network, servingSabah, Sarawak, Brunei and Indonesion (West Kali-mantan). Not only will the development of Bakun andother hydroelectric projects in Borneo satisfy thegrowing need for energy demand but these projectswould also provide one of the cheapest sources of themuch-needed electricity to industrialize and develop thatpart of Asia. The non-polluting aspect of hydroelectricity will also provide a greener solution byreducing the need for planting-up additional pollutingthermal power plants.

6. Conclusion

As a developing country, Malaysia would have to beconstantly on its toes in trying to meet the ever-increasing demand for energy in the most cost-effectivemanner whilst ensuring sustainability of the energysector. To enhance the country’s competitiveness andresilience in the 21st century, the energy sector must alsobe able to deliver adequate, reliable and quality powersupply. The quest for an ultra reliable power quality to

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ensure the smooth-running of ICT applications is yetanother challenge for the electricity supply industry.Power quality issues and requirements to meet theincreasing demand from customers in the high-techindustries will be of paramount importance in order tominimize the risk of loss of revenue from poor powerquality.In conclusion, strategies to meet the supply, utiliza-

tion and environmental objectives of the NationalEnergy Policy were formulated by promoting greenersolutions in the energy sector. These include:

(i) Development of renewable energy as the fifth fuelin electricity generation supported by fiscal incen-tives, institutional and legal framework. Theburning of crude palm oil blended with fuel oil inpower stations as well as palm oil with diesel indiesel gensets indicate TNB’s interest to incorpo-rate renewable energy in the fuel mix.

(ii) Feasibility study to introduce palm oil diesel as analternative fuel for diesel engines undertakenjointly by PETRONAS and the Malaysian PalmOil Board (MPOB). The Government is at presentsubsidizing diesel price in the transport sector. Ifpalm oil diesel proves to be economically viable,subsidies may be shifted to palm oil diesel thusreducing the dependence on petroleum products inthe transport sector while promoting utilization ofrenewable energy (biodiesel).

(iii) Promotion of energy efficiency as a form ofdomestic energy resource through fiscal incentives,demand-side management activities, regulatoryframework and public awareness programmes.

(iv) Greater utilization of environment-friendly naturalgas through strong support of natural gas infra-structure i.e. the PGU project and natural gasdistribution network.

(v) Development of the Bakun Hydroelectric Projectand other projects (Kenyir Phase II, Ulu Terengga-nu and Ulu Jelai in Peninsular Malaysia), which willreduce the need to build new thermal power plants.

While the country must make certain that economicobjectives are achieved, it must also ensure that socialobligations to provide reasonably priced and adequatesupply of electricity are met. Sound energy policiescombined with significant measures to increase theutilization of natural gas and to promote renewableenergy and energy efficiency in Malaysia would defi-nitely prepare the country in its transition to become adeveloped nation on a sustainable basis. Greenersolutions to the energy challenges will go a long wayin enabling and powering Malaysia’s dynamic growth.

Acknowledgements

The authors acknowledge the support and assistanceof Dr. Pola Singh, DANCED Consultant at PusatTenaga Malaysia in preparing this Paper.

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