National renewable energy policy and action plan malaysia

Notes to Table 5.7:

(1) The maximum potential can be realised from palm oil EFB and agrobased industry;

(2) The maximum potential can be realised from POME, agrobased and farming industries;

(3) The maximum potential can be realised from minihydro. The assumptions used in Table 5.7 are:

(1) RE plant lifespan is 2530 years, whereby old plants will be replaced or upgraded.

(2) RE Technical potential:

i. Biomass (EFB, agrobased): 1,340 MW will be reached by 2028.

ii. Biogas (POME, agrobased, farming): 410 MW will be reached by 2028.

iii. Minihydro (not exceeding 30 MW): 490 MW will be reached by 2020.

Solar PV (gridconnected): unlimited.

Solid waste (RDF, incineration, sanitary landfill): 378 MW will be reached by 2024 (at 30,000 tonne/day of solid waste as projected by KPKT, followed by 3% annual growth post 2024).

Figures 5.4 and 5.5 indicate modestly the potential of RE in terms of national installed power capacity and electricity generation under the SMART target. It is critical to recognise this scenario is only possible when the proposed National RE Policy and Action Plan is implemented, in particular the Strategic Thrust 1. The thrust which is on introducing an appropriate regulatory framework (RE Law which facilitates the feedin tariff and funding mechanisms) are instituted and effectively implemented.

Under the umbrella of the RE Law, it is expected that for the first 15 to 20 years, biomass energy would have a significant role to play until it reaches the limitation of the plantations. Solar energy is anticipated to play a very important role in the longterm, as it is the only unlimited source of energy with significant capacity available in the country. The impact of electricity production from solar energy is expected to greatly increase because solar technology is progressing fast whereby its efficiency would leap over the coming years.

5.7.2 GHG Emission Reduction

Malaysia has ratified the Kyoto Protocol in 2002 a move to show the government’s seriousness and commitment to reduce our carbon footprints through escalating green technology applications in all sectors of the economy. Thus effective mitigation measures to reduce GHG need to be taken with special focus given to main sectors emitting GHG which are electricity generation and transport.

It is well known fact that using renewable energy is an effective measure to reduce GHG emission from the electricity sector. Generating electricity using RE is environment friendly because it has minimal or zero emission. Many countries around the globe are embarking on serious RE development as initial measures to the global warming phenomenon which has become the focus of the global society.

Malaysia has made the voluntary commitment at the United Nations Climate Change Conference 2009 (COP 15) to reduce 40% of its emission intensity of GDP by the year 2020 compared to 2005 levels. Based on the SMART targets, by 2020, RE will be 11% or 2,065MW from the electricity peak demand mix. It is projected that 60,584GWh electricity will be generated from RE sources contributing towards the reduction of 42 million tonne CO 2 from the power sector.

The detailed targets for energy (by RE resources) and environmental CO 2 avoidance are shown in Table 5.8.

The applicable assumptions to Table 5.8 are:

(1) No loss of RE plant capacity (old plants are replaced or upgraded).

(2) RE electricity generation:

i. 1 MW of biogas and biomass (consumes 25,000 tonne/year/MW of wastes) generate 6,132 MWh/year (70% capacity factor);

ii. 1 MW of minihydro generates 5,000 MWh/year (57% capacity factor);

iii. 1 MW solar PV generates 1,100 MWh/year (13% capacity factor, but is expected to significantly increase in the future);

iv. 1 MW of solid wastes (consumes 100 tonne/day/MW) generate 6,132 MWh/year (70% capacity factor).

(3) 1 MWh of RE electricity avoids 0.63 tonne of CO 2 .

6. THE RENEWABLE ENERGY POLICY

This Chapter sets out a proposed vision statement and the set of objectives and related strategic thrusts of a forwardlooking RE Policy.

The new RE policy is intended to transform Malaysia to become a leader in renewable energy and also in green technology applications. This will ensure that Malaysia will develop into a nation that is able to satisfy its own energy needs from indigenous RE resources, be independent from fuel imports, a leader in green technology development while able to conserve its natural environment so that it can also be enjoyed by the future generation. A sustainable local RE industry could ensure the green house gas emission due to power generation from fossil fuel be mitigated while creating a new source of economic activity for the country. It is envisaged the new RE Policy would be able to put Malaysia on the forefront amongst ASEAN countries to pursue green technology aggressively towards a more sustainable future for the country.

6.1. Policy Vision

A policy vision for RE development in Malaysia provides for the longterm goal that all stakeholders should strive towards realisation. The policy statement is crafted to be all encompassing addressing the aspects role and the importance of RE in national development as stated below:

Enhancing the utilisation of indigenous renewable energy resources to contribute towards National electricity supply security and sustainable socioeconomic development.

6.2. Policy Objectives

A forwardlooking RE Policy embodies elements of energy, industry and environmental policies making it convergent in nature and is reflected in the five objectives which have been set for RE:

6.3. RE Strategic Thrusts

To achieve these policy objectives, five strategic thrusts have been identified which would enable Malaysia to pursue RE development more aggressively. The strategic thrusts are:

Thrust 1: Introduce Appropriate Regulatory Framework

This requires an appropriate, robust and efficient regulatory framework which would address market failures and provide incentives for firms to enter into the RE generation market be introduced and implemented.

The regulatory framework should provide for the introduction of a feedintariff (FiT), a catalyst for the entry of RE power generation businesses, RE industries and R&D in RE. Furthermore with the reduction of environmental pollution means the society must also play its part by making a contribution to a fund that would be used to pay for the RE power. This is especially important as the retail tariffs contain subsidies and have today been reduced and exclude the external costs. A mechanism could be employed by embedding into the electricity tariff structure a certain cost which must be made to a specific RE Fund.

There are consequently direct spillover effects from a regulatory framework which would act as a catalyst for the emergence of RE industries, undertaking of R&D in RE technology and innovation (e.g. via improved boiler technologies etc.). The measurable outcomes of this thrust include the rate of increase in the use of RE, the gradual decreasing (or constant) rate of fossil fuel consumption for conventional power generation and reduction of the CO 2 emissions.

Advocacy programmes are tailored with specific messages for specific audiences should be implemented. For example an advocacy programme targeted at investors and RE market entrants will need to convey a message that is subtly different from a general public advocacy programme designed to secure buyin to the idea of societal payments for clean environment. The common aim of all advocacy programmes is to increase the awareness of all stakeholders of the benefits and advantages of utilising RE and participation in RE businesses.

Policy mission should be reviewed and (as necessary) embellished over time, once the foundation has been laid. For example when the policy is reviewed in five years time, the original mission of Thrust 1 would have been accomplished with the implementation of an appropriate regulatory framework. Nonetheless, it may need to be improved further or as necessary, replaced by a new thrust as part of the ongoing mission to realise the Policy Vision.

35 Invention is defined as the creation of a new product or process. 36 Innovation is defined as the making of changes in existing products or services by introducing new methods, ideas or products.

The contributory role of the respective thrust in achieving the policy objectives are summarised in the matrix below:

7. RE ACTION PLAN: IMPLEMENTATION APPROACH

To achieve the objectives of the new RE Policy, specific actions to provide the most effective results must be identified. The specific actions need to be taken are of two forms:

(a) Direct actions to create or establish the necessary institutional arrangements; and

(b) Supporting measures to encourage and nurture the growth and development of the RE businesses.

The nature of the direct actions needs to be taken, reflecting three guiding principles, namely:

(a) Focusing on activities rather than a sector (as much as possible);

(b) The actions must be measurable, thus there must be appropriate criteria to evaluate success or failure; and

(c) RE is a technology which needs to be diffused.

7.1. Strategic Thrust 1: Introduce Appropriate Regulatory Framework

For RE to achieve the desired progress, a new Renewable Energy Law is critical to provide the clarity and certainty to the regulatory framework which has the effect of encouraging firms to enter the RE power generation business 37 ; and correct the existing market failures.

To implement Thrust 1 effectively and efficiently, a new RE Law should be enacted to introduce a regulatory framework which addresses the specific market failures caused by information asymmetries and the potential negative impacts of prevalent market power.

The introduction of a new statute is required because analysis of the ESA shows the law is inadequate to address issues relating to RE development, and does not provide for a clear framework for the energy industry specifying obligations and rights of firms undertaking generation, transmission, distribution and retail 38 . The ESA also does not obligate interconnection to the grid nor specifies the access charges that can be charged (if any). It only identifies persons who build and operate “installations”, which can encompass all of the above segments, and requires them to be subject to licensing, safety requirements and provision of employment or business to specifically licensed class of people whose actions are strictly controlled. In such a case a special legal framework is required if RE is to make the necessary and effective head start.

7.1.1. RE Law

Responsive regulation is an approach which values trust, transparency and professionalism. To achieve the aims of Thrust 1, the structure of the proposed RE Law must take cognisance of the design principles set out in Table 7.1. It is also important the proposed RE Law provides for a regulatory framework which is consistent with the aim of business stimulus in Thrust 2.

These design principles are a guide by which the legislation and regulation can be designed and do not provide a means by which legislative provisions can be drawn up.

More importantly, the RE Law will allow the Feedin Tariff (FiT) and RE Fund mechanisms to be introduced and implemented.

Feedin Tariff (FiT)

Feedin Tariff (FiT) is a mechanism that allows electricity produced from RE resources to be sold to power utilities at a fixed premium price and for a specific duration. This will provide a conducive and secured investment environment which will make financial institutions more comfortable in providing loans with longer period (at least 15 years tenure) to finance the renewable energy projects.

As a result, RE projects become bankable and could grow unhindered. It is anticipated the FiT mechanism will:

(a) Provide fixed revenue stream for the installed and operated RE systems;

(b) Only pay the for electricity produced, i.e. promoting RE system owner to install only quality RE systems and maintain the systems properly to generate more revenue;

(c) With a suitable degression rate, the RE manufacturers and installers are motivated to reduce the technology costs while maintaining or improving the quality and efficiency.

The disadvantage of FiT mechanism is that it does not address the first cost barrier of high incremental cost. However, this can be addressed through soft loan support or financial packages. As proven in some countries, this barrier will be removed by itself once the financial institutions get involved in RE projects under the secured environment which FiT mechanism provides.

Independent evaluations undertaken between 2006 and 2008 reveal and confirm that a Feedin Tariff (FiT) mechanism is very effective in introducing and growing the number of RE power plants, spurring innovation and spearheading the growth of the economy through the emergence of new RE Industry compared to the quota system or renewable portfolio standard (RPS). A summary of these reports findings are set out in the table below.

Prior to the year 2004, the quota system (also known as renewable portfolio standard or RPS) was a popular mechanism adopted by various Governments to promote RE deployment. Under the quota systems (RPS), the Government sets a target for renewable electricity production which increases over time. Most quota systems allow the target to be met by producing the renewable energy directly and the RE investments are recovered via tradable ‘Green Certificates’.

Nonetheless, the success of Germany’s RE market and subsequent replications by 20 European countries of the German’s EEG (Renewable Energy Sources Act) proved that FiT mechanism is more effective. This shows FiT is a more effective mechanism deployed to achieve renewable energy targets.

A comparison between feedin tariff and quota system mechanisms are described in Table 7.3 below.

Table 7.3: Comparison between Feed-in Tariff (FiT) and Quota System (RPS)

Proven to be the cheaper option;

Less successful in achieving targets (e.g. UK, Sweden);

Performance based incentive, encourages reliable operation;

Involves tradable green certificates which are unpredictable

Provides long-term investment security and returns;

Creates stable and predictable revenue to pay for cost of

Must have a penalty system;

Requires strong enforcement mechanisms;

Degression and periodic reviews allow and stimulate system

No clear identification of source of funds to meet additional

price reductions due to technological advances (e.g. solar

Unpredictable RE prices and costs because of bidding and

Simple to implement, specific RE developments and FiT costs

can be pre-determined and planned in advance;

Usually only one RE technology would be promoted;

Encourage smaller and distributed power producers and

Usually only bigger company (with resources) would be

new industries – creates greater number of jobs.

interested to become developers.

Feedin tariff needs to be introduced through a legal instrument to guarantee success and effective implementation. Therefore a new law usually a Renewable Energy Law will have to be introduced which contain specific details of the feedin tariff prices, degression, the duration, obligations of various parties, and the review process.

Setting up high feedin tariff rates for the RE technology at the first instance will not guarantee a success without incorporating the other critical success factors which are described below. In almost all cases, the feedin tariff rates are empirical values and need to be reviewed or adjusted (of the degression) to suit the growth of RE market. Most importantly, the growth of the RE market is dependent on the available RE fund to pay for the incremental cost of the higher feedin tariff rates, and this will then limit the achievable RE capacities. Nonetheless, this limitation (if not too small) will provide a realistic opportunity for the local RE industry to grow and mature, and not ‘booming’ out of hand. This relationship is shown Figure 7.1

Figure 7.1: Example of relationship between PV market growth and feedin tariff rates

Outline of RE Law

For an RE Law to be effective it must address the following key points:

(1) RE prices (FiT) – creation of a price (i.e. FiT) setting mechanism anchored on economic principles of efficiency and fullcost recovery. The FiT should be designated a regulated price for which negotiations between parties are neither necessary nor allowed. Different levels of FiT, together with a degression rate should be set for different types of RE technologies. These prices and degression rates should be reviewed at least triannually. A detailed explanation of FeedinTariff (FiT) is set out in Annex B of this Report and a more detail information is available from http://www.onlinepact.org;

(2) Details relating to the setting up and operation of the RE Fund and specifying the contribution obligations of consumers must be made. The simplest approach is to set a contribution rate applied to the quantity of conventional electricity consumed, as the more one consumes the more one should be responsible for the pollution emitted by conventional generators;

(3) Obligation to interconnect – the power utilities (grid operators or distributors) must be obliged to interconnect with priority access for transmission and distribution. The cost of interconnection must be borne fairly and reasonably on the basis of shallow connection charging, i.e.:

• The RE producers will pay for the costs of the equipment needed to connect their plant physically to the nearest point of the electricity distribution grid;
• The power utilities will pay any cost for reinforcement of the network, costs which are passed to the final consumers by including them in the system charges (as rate base) upon the next tariff review.

(4) REPPA – the standardisation of terms and conditions of the REPPA to minimise negotiations between the utility and the RE producer.

Consequential amendments to other statutes may be needed to avoid inconsistencies with this new law.

Critical Success Factors for the RE Law

The critical success factors identified for RE Law are:

(1) Access to the grid must be guaranteed. Utilities must be legally obliged to accept all electricity generated by private RE producers;

(2) Tariffs for RE (FiT) must be high enough to produce a return on investment plus a profit (not excessively) to act as an incentive for firms to enter the market 39 ;

(3) Tariffs for RE (FiT) must be fixed for a long enough period (REPPA is typically 20 years) to give certainty. In addition, it will also provide businesses with the security for market development and project financing 40 ;

(4) There must be a "degression" for the FiT to promote cost reduction to achieve “grid parity”, where an annual stepwise reduction in tariffs by a certain percentage is mandated .

A degression encourages would be RE system purchasers to invest early rather than later (leading to increase in planting of RE power generation systems). It can also add pressure on manufacturers of RE power systems to innovate, so that they continually reduce their production costs, which in turn increases the affordability of the RE power system for subsequent installation of RE systems 41 ;

(5) Adequate fund is created to pay for the feedin tariff (or the incremental cost between higher FiT and the displaced electricity cost) and guarantee the payment for the whole contract period. The size of the fund will significantly determine the amount of RE capacity (limit) that can be generated.

39 Notes: The current German tariff is 49 euro cents per kilowatthour (roughly RM2.50), about two and a half times the retail price of electricity.

40 Notes: In Germany the degression was 5% in 2008, increasing to 8% by 2009.

41 An intending RE power producer will only buy PV if the cost of the system is less than the sale price. This means that PV suppliers need to ensure that their prices are reasonable.

(a) The Malaysian RE Law Must Be Specific and Clear

The law must be clear as to the obligations it imposes, the duties it creates and the rights of the relevant parties. The RE Law must address specific issues and shortcomings such as:

(1) Remove the need to negotiate REPPA by creating a standard agreement to be adopted and for which changes are not permitted;

(2) Mandate interconnection within a stated time frame, thereby removing the potency of strategic refusals or delays by utilities to frustrate RE power generation firms;

(3) Contribution by all consumers and a collection mechanism that works (e.g. the current collection mechanism);

(4) Specifying the feedin tariffs for different RE technologies, the degression rate and the duration of the FiT; and

(5) Requiring an annual periodic review and public reporting of the progress by the appointed Government agency.

(b) Proposed FeedIn Tariff (FiT) Mechanism

The FiT rates were determined through extensive consultative discussions with relevant stakeholders and RE players based on the following factors:

• Capital and investment cost;
• Equity and financing (rates and tenure);
• Costs of O&M, fuel, transport, insurance and depreciation;
• Annual cost increment;
• IRR, simple payback calculation, cashflow;
• RE plant capacity factor and other revenues.

The proposed FiT rates are followed by the degression rates each specific for the renewable source used. Referring to the type of RE sources used it is projected that the degression for solar PV would be the highest. This is because for solar PV the technologies are anticipated to improve tremendously bringing down the prices. Other sources would also have degression however it would not be as substantial as solar PV.

The proposed FiT and degression for the promotion of RE technologies in Malaysia are as in the following table:

Biomass (palm oil, agro-based)

Biogas (palm oil, agro-based, farming)

Solid waste & sewage

*Note: Subject to final confirmation upon enactment of the RE Law.

(c) Contribution Mechanism of the RE Fund

The principle adopted here is all electricity consumers would be required to contribute to the RE Fund and this obligation must be specified, including the mechanism by which the contribution amount is ascertained. There should be no difficulty in ascertaining the amount and a simple mechanism is best, such as a contribution system based on consumption.

Thus, it is recommended that a minimum contribution rate of 2% (equivalent to not more than 0.65 cents/kWh) to be embedded into the tariff pricing upon the next electricity tariff review and it would remain until the year 2030. The collection of the RE Fund could be retained for implementation until 2050 or when the tariff for electricity from RE sources is equal to the tariff from fossil sources a period when it is said to achieve grid parity. When grid parity is achieved, electricity from renewable sources would be the preferred choice because it is environment friendly and competitive compared to fossil sources.

(d) Setting Up of the RE Fund

The Fund needed for FiT implementation must be prescribed by the RE Law in order that contributions can be paid to it legally. If the fund is not specified in the RE Law then any such payments if received by Government must be paid to the Consolidated Fund or if received by the utility risked being mixed with its own funds. This can affect the legitimacy of the fund and jeopardise public’s trust in the system. The availability and size of the fund will directly determine the overall RE capacity that can be installed in each year, as well as guarantee the payment for FiT throughout the contract period.

The fund is to be managed by a professional fund manager appointed by the Government, where the fund’s governance structure, role and responsibilities must be set out in the RE Law with no room for discretion which could be misused. The payment to the power utilities for the cost of FiT (less the value of displaced electricity) shall be efficiently and expeditiously disbursed.

The RE Fund in the first year of collection would amount to RM 580 million. The projected collection is for a 20 year period (until 2030) about RM 20.1 billion. The structure, governance and responsibilities of the Fund Manager would be stipulated in the RE Law to ensure transparency and integrity. The total FiT cost and RE Fund is illustrated in Table

7.5.

Assumptions: Electricity tariff is increased by 6% in 2010 (4% for TNB and 2% for the RE Fund).

(e) Institutional Clarity Provided

It is important that institutional clarity be specified so all the agencies especially government stakeholders are aware of their respective roles. Institutional structure must provide for clarity of functions of the various interacting agencies. Amongst the functions of the relevant stakeholders for RE development are suggested below:

Institutional clarity provides the basis for organisations to act, identify their boundaries and the scope of their responsibilities; without which the risk of institutional failure is high. The introduction of a RE Law which provides for the introduction of FiT is critical to the success of the new forwardlooking RE Policy. Such a law will not only contribute to realisation of Thrust 1, it will also have the effect of stimulating the RE Industry, R&D and human capital development.

7.1.2. Supporting Measures

After the enactment of the RE Law, supporting measures need to be implemented are as follows (additional measures that may be considered are described in Annex C):

(a) Enter A “Delegation Agreement” In Lieu Of Amending Laws That Affect State Rights

To facilitate the growth of RE generation, a onestop centre for approvals of ancillary matters should be set up to address the regulatory concern of the additional compliance costs with respect to planning permission and land use approvals at the state level. This onestop centre is to be the Government appointed FiT Implementing Agency. The agency plays a coordinating role between the State Authorities whereby they should agree to delegate their approving function to the agency if certain specified conditions are met; in return all revenue collected from the processes are to be paid to them and not retained by the agency (“delegation agreement”).

Conceptually therefore the delegation agreement would provide for:

(1) Scope of agreement: Delegate authority to the Government appointed agency grant the planning permissions and land use approvals if specified conditions are met;

(2) Conditions for approval: A common set of conditions must be agreed with the State Authorities against which the agency can exercise the delegated authority to approve an application on behalf of the State Authority. These conditions must be documented in the agreement;

(3) Fees: State Authority is to specify the amount of fees the agency should collect from applicants, and such sums are to be paid over to the relevant State Authority. The agency’s administrative costs in undertaking this is to be provided by the Federal Government;

(4) Duration: The agreement is for a finite period (say 5 years);

(5) Renewal: State Authorities must consent to renewal, not automatic;

(6) Governance: The agreement must provide for proper governance and accountability of the agency to the State Authorities.

The use of an agreement to facilitate the emergence of a new industry is a new and novel concept in Malaysia. It is anticipated to provide a better and more efficient means to undertake the activity without the need to amend the relevant laws.

The agreement requires the appointed agency to “negotiate” with all State Authorities on a common set of conditions for the grant of approvals for RE generation only. For example – the conditions of land use conversion if a planning permission is required for an RE facility within a residential area. For any matters beyond the specified conditions, the agency must refer to the relevant State Authority for approvals.

Such an approach does not require any amendments to the laws affecting land use and planning, thereby minimising (if not totally eliminating) any concerns of State Authorities’ with federalisation or reduction of state rights.

(b) Improve environmental standards to spur innovation

Studies in the EU have shown increasing environmental standards do not decrease economic activity but instead improves economic activity (in general) and innovation (in particular) 42 . Malaysia’s current environmental standards can be improved because:

(1) The applicable principal legislation (Environmental Quality Act 1974), preserves and supports the externalising of cost of environmental damage, as there is no need for firms to adopt costeffective technologies to ensure compliance is minimised thereby reinforcing a “businessasusual” thinking;

(2) Despite providing for the licensing of noise and air polluters, there are no prescribed regulations which specify the acceptable noise levels or ambient air quality standards. The Department of the Environment (DOE) in 1988 43 has provided guidelines to the air quality with respect to CO 2 , SOx, NOx, particulate and suspended particulate and noise planning guideline issued on 2004 44 only.

The lack of appropriate environmental regulations has the exact opposite effect as firms and businesses in Malaysia adopt leastcost options, continue to pollute (unless higher standard countries demand action) and generally consider compliance with environmental standards as unimportant (i.e. NIMBY syndrome).

Once the RE Law is introduced, a support measure is to improve the environmental standards. This would have the effect of improving technology use (i.e. more efficient boilers in palm oil mills) which in turn will spur the need for R&D and business growth. KeTTHA may need to work with the DOE to secure the introduction of these new standards.

42 See “The Contribution of Good Environmental Regulation to Competitiveness” by the Network of Heads of European Environment Protection Agencies (November 2005) 43 See DOE’s Air Quality Guideline available at http://www.doe.gov.my/dmdocuments/Udara/3%20RMAQG.pdf (accessed on 8 May 2008) 44 DOE’s Noise Pollution Guidelines (2004) available at http://www.doe.gov.my/dmdocuments/guidelineBunyiBising.pdf (accessed on 8 May 2008)

7.2. Strategic Thrust 2: Provide Conducive Environments for RE Businesses

Malaysia has been successful in attracting foreign direct investment through the provision of a package of incentives tied to performance (i.e. export). Existing FDI policy which encourages the setting up of manufacturing related services sector 45 in RE should continue. According to Grant Thornton’s 2008 International Business Report, the primary constraints faced by Malaysian businesses compared to East Asian businesses and Global businesses are skilled workers, demand or orders for their products or services, working capital and financing costs, as shown in Figure 7.2 below.

Figure7.2: Business constraints 46

The institutional arrangement to implement this thrust effectively requires the intervention of Economic Planning Unit (EPU) to coordinate the actions of various Government ministries and agencies to develop RE as one of the new areas for national economic growth, and Ministry of Finance and Bank Negara Malaysia for financing and fiscal related actions.

Direct actions need to be taken to encourage entry into the RE market, with supporting actions aimed at stimulating demand for RE goods or services. The main actions are summarised and described in Table 7.7 below.

45 Note: This sector covers the establishments of OHQ, IPC, RDC, RO and RE and other support services such as integrated logistics services, integrated market support services, integrated central utility facilities, cold chain facilities for food products, research and development (R&D), and renewable energy

46 Source: International Business Report 2008 – Malaysia, produced by Grant Thornton

7.2.1. Creation of Evaluation Process for Lending to RE Power Producers

This action is to smoothen the entry into either RE power generation or the RE Industry sector by addressing the financial difficulties currently faced. RE producers have found it difficult to secure loans because the financial institutions were unaware of the nature of RE business activity. Such difficulties can be overcome by creating a RE funding evaluation process which existing financial institutions must subscribe to and apply.

This is not new as there exist similar approaches for example the simplified lending process to small and medium scale industries backed by a guarantee from the Credit Corporation of Malaysia or in the provision of microcredit.

The problem faced by RE producers is not that there are insufficient funds in the capital market but the lack of skills of the financial institution to evaluate the applications and provide the funds expeditiously. The treatment of RE borrowers as a normal corporate debtor ignores the nature of the RE project; particularly with the introduction of a feedintariff in the new RE Law. This provides added security to the financial institutions in lending to RE power generation projects.

Through the creation of a standard evaluation process by the financial institutions, the provision of working capital to RE producers in a timely and appropriate fashion can be realised. This allows for the unlocking of the capital market for RE producers instead of Government having to provide funds for them.

To create the standard evaluation process, the Government should use leading banks (at least two banks in which the Government is a shareholder) to lead the way by setting up RE financing teams who are trained in RE and can draw up the standard evaluation criteria and process to be implemented. Mandating the evaluation process can be undertaken by BNM. Additionally the banks should be given specific RE loan targets by the Government for which they are to be held accountable for failing to meet those targets.

As a standby provision, the Government can offer financial assistance to RE power generation firms that are unable to secure funding despite there being an agreed and understood evaluation process. This financial assistance fund is estimated to be RM 500 million to be used over 5 years.

7.2.2. Continue Existing Fiscal Incentives

The set of Government fiscal incentives is not a long term or sustainable policy tool. It does have the immediate effect of encouraging the establishment of a new sector, and can have positive direct impacts 47 on the viability of RE projects by increasing the IRR and cashflow. On the other hand, the incentive effect of some fiscal measures may be marginal, e.g. the benefits of tax relief may be considered marginal by an investor, especially when the existing corporate tax rate is sufficiently low.

Therefore for the shortterm the existing fiscal incentives offered should be continued. An evaluation of their relevance and usefulness to firms should be undertaken in Year 4 after the RE Law has been brought into force, to determine if any revisions are required. However it is projected by 2019 the fiscal incentives should be permanently discontinued.

7.2.3. Special Incentives to Use Locally Created/Developed R&D

This action is related to Thrust 4. Firms which adopt and use locally created or developed R&D for RE should be granted special fiscal reliefs by the Government in order to stimulate the innovation system to produce local RE technology (of comparable quality and cost to international benchmark). This would enable to create a demand for local RE technology by RE power generation firms. The special fiscal reliefs are:

(a) Group tax relief so losses in one subsidiary can be used to offset the profits in another; and

(b) Double deduction of the costs of the local innovation or R&D in RE technology used.

47 Note: The positive direct impacts are on internal rates of return (IRR) and payback periods for implementing RE projects by (i) increasing IRR by as much as 2% and (ii) reducing the payback period by as much as 3 years. The indirect effect is to lower the burden of a company’s annual taxes between 32% to 53% via investment tax allowance, thus increasing the bankability of RE and cash flow.

The grant of group tax relief provides the ability of a group of companies to benefit from the investment by a member of the group in RE. Hence if a member incurs a loss, such loss can be used by a profitable member of the group to reduce its tax liability. That loss can arise from low sales in a market which is still not sufficiently mature; or from the double deduction of the cost of acquiring the local innovation which changes the profit to a loss. This incentive is proposed for a period of 10 years.

7.2.4. Local Content Incentives

Manufacturers of RE finished products and components for export should be encouraged to use local material in their finished products and components. This can help develop a supply chain for the large RE manufacturers. The incentives would be:

(a) The provision of double deduction of the costs of local material as an allowable expense (for domestic manufacturers only) if the local content is in excess of 50% with a proviso this deduction is for a maximum period of 4 years;

(b) For foreign manufacturers investing in Malaysia, the incentive is to either extend their tax holiday by a further 2 years or if they have adopted an investment tax allowance, the grant of a 2 year tax holiday. This incentive is only available when the local content has exceeded 50%. The incentive is a onetime provision. Hence when the foreign manufacturer has reached 50.1% local content it can apply for the 2 year tax holiday, and upon the expiry of the 2nd year, this tax holiday incentive is no longer available.

The local content requirement and incentive should be extended to utilisation of local services, and firms who use in excess of 50% local service providers would be eligible to a waiver or refund of all service tax paid.

7.2.5. Create an RE Centre for SMEs

This action is related to Thrust 5. The SME sector in Malaysia is a significant group accounting for 32% GDP (2005), 56.34% jobs created (2005) and employing 5.6 million workers 48 . However the SME sector lacks informational assistance to venture into new areas despite having the necessary entrepreneurialism. SMEs often find it difficult to select and apply the most appropriate science and technology to grow their business or to venture into new areas such as RE generation or RE Industry.

To assist the SME sector to participate in this new market, Government should consider establishing a RE Centre in the RE Implementation Agency. The establishment of a RE Centre with clear objectives will help SMEs to engage effectively with the relevant parties in the National RE Innovation System. The Centre should focus on providing information to SMEs about RE technologies, opportunities and risks; and assist them to participate in incentive programmes, and match their interests with possible partners or providers.

Such a RE Centre should be able to secure advices from a government appointed agency with cooperation from SMIDEC. This agency would have the expertise and competency to advise and assist SMEs with RE specific matters while SMIDEC will have an overall responsibility for all sectors in which SMEs are involved in and not the RE expertise.

The illustrative cost estimates for the establishment and operations of the RE Centre based on 10 personnel renting appropriate premises and having the necessary facilities is RM 20 million over five years.

7.2.6. Involve GLCs and Specifying Their RE Contributions

This action calls for Government Linked Companies (GLC) to support and participate in RE generation because they either have suitable RE resources, for example Sime Darby is in the palm oil plantation businesses thus can use the palm oil waste (EFB or POME) for power generation or that they have assets which can be shown as demonstration projects.

48 SME Annual Report 2007 published by Bank Negara Malaysia and available at http://www.smeinfo.com.my/index.php?&pg=286&ch=2&ac=727&lang=en (accessed on 20 Feb 2009)

Furthermore according to the Putrajaya Committee 49 on GLC Transformation, the role that GLCs are to have is to be highperforming entities which are critical for the future prosperity of Malaysia. The GLC Transformation programme covers 2 additional areas, namely delivery of significant benefits to stakeholders and a strong corporate social responsibility.

The rationale for getting the GLCs involved is to enable the Government to leverage these external assets to kickstart the growth of the RE generation sector, which in turn will spur the development and growth of RE Businesses. The leveraging takes the form of direct participation in RE generation either as a viable business or as a demonstration project. Such leveraging by Government of these assets is consistent with the GLC Transformation programme to deliver significant benefits to stakeholders (not just shareholders) and for GLCs to have a strong corporate social responsibility (which can be evidenced by GLCs participation in Government’s socially beneficial programme). From their efforts of helping to improve the environment through the reduction of CO2equivalent emissions, introduction of clean technologies and creation of new job opportunities, the GLCs would provide significant benefits to the people of Malaysia.

The role of the Government is also important as an incentive for the GLCs to be involved, it is necessary for Government to:

(a) Identify those who can contribute directly since not all GLCs are suitable for the undertaking of RE generation; and

(b) Specify the RE contribution by specified GLCs which should be monitored by KeTTHA and could be made mandatory.

The suggested approach of Government identifying GLCs and specifying the RE targets by them is consistent with a leveraging of these assets by government for the benefit of the people as a whole. The possible identifications and targets for GLCs role are summarised below:

7.2.7. Involve Existing MNCs in RE Activities

Malaysia has a significant number of MNCs that are not only environmentally conscious (such as IKEA, INTEL, Western Digital, Daimler and many others), but have their long standing relationships with local suppliers. In a sense, this is a ‘natural asset’ in the country which could be exploited positively by Government. The MNCs should be encouraged to engage in RE generation for themselves and/or to exert their positive influence on local suppliers to encourage them to do likewise. This requires KeTTHA or the Government appointed agency to engage with MNCs to discuss ways by which they can help and what Government can offer as incentives. The incentive scheme will be formulated upon the adoption of the RE Policy.

7.2.8. Additional Measures

Other additional measures are specifically targeted at building refurbishment, to help stimulate the emergence of RE Power Generation and further development of RE Industries.

49 Putrajaya Committee on GLC High Performance (PCG) (http://www.pcg.gov.my) was formed in January 2005 to follow through and catalyse the GLC Transformation Program. PCG is chaired by the Second Finance Minister, with participation from the heads of the GovernmentLinked Investment Companies (GLIC.’s) namely Khazanah Nasional Bhd (KNB), Permodalan Nasional Bhd (PNB), Employees Provident Fund (EPF), Lembaga Tabung Amanah Tentera (LTAT), Lembaga Urusan Tabung Haji (LTH), and representatives from the Ministry of Finance Inc. (MOF) and the Prime Minister’s Office, to work together to monitor developments and to recommend further measures of improvements.

(i) Strategic use of public procurement

Government should use its public procurement power strategically to spur RE generation and industry growth. Government should, in upgrading its federal buildings include the use of building integrated RE as a requirement. This will create the demand for RE materials and skills which in turn will encourage market entry of related businesses. The strategic use of Government’s procurement power can demonstrate Government’s commitment to RE, which will in turn motivate the participation of the private sector. This can be achieved by incorporating design elements for RE technology, in particular BIPV, into the Government’s (EPU) Standard and Cost guidelines and procedures. This also requires the respective Government agency implementing the construction or renovation tenders to provide preference for RE technologies and tolerance for the additional cost incurred which could be partially offset by the displaced building materials.

(ii) Rewards for new buildings (including refurbishment) that incorporate BIPV

Special rewards should be provided to commercial and agriculture building owners that integrate RE technologies (e.g. PV in building claddings) into their new or refurbishment buildings, such as:

(a) Group tax relief – so losses in one subsidiary can be used to offset the profits in another;

(b) Special expenditure relief in the form of a 125% deduction of allowable expense or as part of the investment tax allowance; and

(c) Reduction of import duties and/or sales tax for RE related equipment for a 3 year period.

Whilst in an economic downturn, it is possible for building owners to take the opportunity to refurbish their buildings to be prepared when the economy improves. Those who are prepared to do so would benefit from the availability of these rewards. The possible loss in revenue by the Government may, however, be small in comparison to the effect of stimulating the growth of RE businesses.

7.2.9. Alternative Choice of Implementing Mechanism

Instead of the usual mechanisms by which incentives are provided by Governments (i.e. where incentives are prescribed and available to those who apply), offering incentives in unique ways may be considered as the mechanism itself may provide an incentive to interested parties to be first or choose Malaysia as their investment destination. Details of the proposed alternative mechanisms are set out in Annex C of the report. Obviously more indepth analyses of these alternative mechanisms are needed before they can be implemented.

7.3. Strategic Thrust 3: Intensify Human Capital Development

Human capital development is a key thrust because it has the potential to create the greatest impact on the country. Malaysia’s Knowledge Economy Master Plan identifies the importance of human resource development as it can increase the overall productivity and adaptability of the Malaysian economy which is fundamental for the transition to the Keconomy, and calls on the Government to build the necessary infrastructure 50 . The focus on human capital development in Thrust 3 is in line with the Keconomy master plan. Recognising this, there is unfortunately a current lack of available courses which are of use and relevant to RE businesses.

However as the percentage of those with tertiary education in the country is small (about 13.9% as at 2001), encouraging individuals to enter tertiary colleges is a necessary step to increasing this percentage. This requires a determination of what motivates a person to have a tertiary education; and how the Government can provide incentives for such individuals.

The proposed actions are designed to simultaneously build up the local expertise and skilled workers in RE, and to provide the right incentives for ordinary individuals to acquire new skills and expertise. However these actions are subject to a ‘sunset’ condition. The institutional arrangement to implement this thrust effectively requires the intervention of Ministry of Finance, Ministry of Higher Education, Ministry of Human Resources and other relevant Government agencies to coordinate the actions in intensifying the human capital development to meet the requirement of the RE industry.

50 Additionally the Government is called to improve the function of the markets in order to unleash the creative power of markets, while the private sector should be proactive in increasing its knowledge capability and knowledge content of its activities as well as raise its international competitiveness to a new threshold.

7.3.1. Incorporate RE in Technical and Tertiary Curricula

The availability of RE technology courses in local IHLs and training centres would need to be increased. This can be done through the collaboration with relevant ministries in designing an RE course curriculum which meets the need of RE. Certifying training courses according to the National Skills Development Act 2006 and the Malaysian Qualifying Board should also be pursued. Discussions would be required with DSD and MOHE on the course structure. This move is anticipated to produce graduates and technical personnel who would be ready to work in the RE industry.

7.3.2. Development of Training Institutes and Centre of Excellence

The availability of adequate and quality training facilities would need to be enhanced to meet the expected demand for RE courses. Such facilities also need to meet certain international standards for quality RE education and cater for technical competency and professional as well as management levels. Centre of Excellence (CoE) for RE should also be created at universities to further promote high class facility which will produce quality graduates and researches.

7.3.3. Provision of a Subsidy and Fiscal Reliefs

Providing the necessary courses at institutions of higher learning and technical training centres may of themselves not necessarily produce the necessary skills. Since most Malaysians prize education, providing an education incentive would not only stimulate demand, it will also expedite the take up of these courses. The direct action calls for the provision of a subsidy for RE technical training and/or fiscal reliefs to individuals who pay the course fees for graduate courses in RE at institutes of higher learning, as detailed below.

(i) Technical training subsidy

The technical training, for which the fees for RE courses are subsidised (e.g. RE technician’s courses), must be certified under the National Skills Development Act 2006. There are potentially 232 technical training centres in and around Malaysia 51 which could provide such RE courses, and provides easier accessibility for intending trainees. An advocacy programme targeted at training centres would be used to encourage them to introduce RE technical training courses.

Those individuals who wish to improve themselves will benefit from the subsidy and payment to the training institution should only be made upon confirmation the individuals have completed the course. Timing for the payment of the subsidy is after the eligible individuals completes the course within the time limit set by the college and are awarded the appropriate certificate, and not before. This is to avoid subsidising individuals who dropout of the course and fraud by the centre. However the centres receipt of this subsidy is still subject to income tax.

It is necessary to engage with the Department of Skills Development (“DSD”), Ministry of Human Resource to secure the introduction of the RE curriculum at these training centres. The illustrative cost estimate of the subsidy is projected at RM100 million over 5 years.

(ii) Fiscal reliefs for higher education

Fiscal reliefs for the costs of graduate courses should be given to individuals who undertake graduate courses in RE with local institutes of higher learning (IHLs). The total fee payable in a tax year to the IHL would be treated as an allowable expense from the individual total income.

Such a fiscal relief will encourage individuals to undertake RE course, which will encourage IHLs to offer courses involving RE. The likely impact on Government is minimal since the number of individuals prepared to undertake RE courses may be small, yet the benefits of such incentive would outweigh its costs to Government.

Currently the field of engineering and architecture is not a popular choice of course among students. This is attributed to the fact that these courses are difficult to gain entrance to and the coursework are very demanding. Table 7.9 below shows in 2007, only 14,574 or 18% out of 83,119 graduates are from the field of the engineering and architecture. The same trend is also seen in the postgraduate (nondoctoral) and students who undertook doctoral courses in engineering and architecture in local universities (public and private) are 12% and 15% respectively.

51 See Department of Skill Development, Ministry of Human Resources, at http://espkm.nvtc.gov.my/Modules/2.4_MIS/2.4.3_SearchEngine/frmSearchACC. (accessed on 24 February 2009)

Usually only 8% of all graduates went to pursue a postgraduate course. Therefore if an optimistic assumption of 20% on all engineering and architecture graduates who would pursue a postgraduate degree due to the fiscal relief, the likely number of individuals who would benefit would be 3,000. This will have a significant impact on the availability of RE skill sets in Malaysia, but not necessarily on the amount of tax collected.

Both the training subsidy and fiscal reliefs should sunset over time to avoid entrenching a human capital development program which is subsidyladen. The proposed duration of the incentives is 4 years for applications and once granted will be applicable for the duration of the course.

7.3.4. Additional Measure

Permit withdrawal from the HRDF Firms in Malaysia have been obliged to contribute a percentage of their employees’ salary to the Human Resource Development Fund (HRDF). Withdrawal from the HRDF is permitted to pay for training at approved training facilities. Therefore if there are firms who are willing to or have entered the RE generation or RE Industry markets, these firms should be permitted to withdraw their contribution from the HRDF to pay for the cost of retraining of their personnel. This requires the facilities which provide RE skills training have prior approval by HRDF. Discussions with HRDF are needed for there to be a smooth and simple approval process for the training facility. This would reduce the financial burden on firms who are willing to enter this industry but require appropriately trained personnel.

7.4. Strategic Thrust 4: Enhance RE Research and Technology

It must be recognised and acknowledged whilst there are positive economic benefits to Malaysia from greater private sector investment in R&D, the principal limit to the amount of businesses outlay is the perceived returns in the marketplace. If there is no or low returns, the private sector is unlikely to make an investment. This raises the question on the role which the Government can play to stimulate R&D in RE in Malaysia, and what strategies could employed to accomplish the mission.

The state of the art of RE technology has progressed significantly when clear incentives were introduced by Government policy. However the current state of plants and equipments using biomass as a combustion fuel is inefficient. At the same time there are some RE technologies which require indigenous R&D to be undertaken to make them viable domestically.

This situation provides an opportunity for firms to enter and develop indigenous RE technology to be offered for biomass plant upgrading to improve efficiencies. R&D incentives targeting this action (rather than the subsector REbiomass) would bear more positive fruits.

7.4.1. R&D Issues and Innovation System

An innovation system comprises actors, networks and institutions (including regulation), and their interaction with each other. Walz et al 53 conclude that innovation processes are shaped by the following factors:

(a) Innovation is not a linear process, but consists of many feedback loops between invention, technology development and diffusion;

52 Source: MOHE at http://www.mohe.gov.my/web_statistik/index.htm?navcode=NAV038?m=3&navcod. (accessed on 24 Feb. 09) 53 Walz R., Ragwitz R., and Schleich J., “Regulation and innovation: the case of renewable energy technologies” Fraunhofer Institute Innovation and System Research, Germany

The interaction of the various actors in RE, as illustrated by Walz et al, is illustrated in Figure 7.3 below. It begins with (1) the demand for RE technologies, which leads to (2) the supplier of the technology and (3) investors in RE technology. RE technology demand leads to (4) transmission and distribution of electricity. The interactions are not oneway but bidirectional indicating each could influence the other. Along each of these interactions, policy could have an influence.

Figure 7.3: The triple role of regulation within the system of innovation of wind energy

The diffusion for the technology becomes an important aspect which influences various functions of an innovation system. Innovations in RE technologies, according to Walz et al are shaped by regulation. Further high level of regulation is needed to foster diffusion of the technologies.

7.4.2. State of R&D in Malaysia

Research and development are essential for the emergence of inventions and innovations in society. Malaysia’s 2005 R&D expenditure as a percentage of GDP as reported by MOSTI is 0.64% 54 . In comparison, the R&D expenditures of Singapore, Taiwan and Japan are 3, 4 and 5 times respectively compared to that of Malaysia.

However R&D activities are held back by insufficient funding, lack of expertise and poor coordination of R&D among research institutions. Duplication of R&D efforts is not uncommon. The lack of commercialisation of R&D in RE technologies reduces the support which R&D firms need.

Effective research activity is also a prerequisite to attracting R&D investment. Local research institutions have a poor track record of commercialisation of R&D activities, specifically RE technology. There is also a lack of coordinated research activity undertaken in RE technology by these research institutions.

54 Source: National Survey of Research and Development 2008 Report – Data for Year 2006 from Ministry of Science, Technology and Innovation available at http://www.mosti.gov.my/mosti/failpdf/fact&figure.pdf (accessed on 13 Feb 2009).

Research Funding Focus

Government has allocated RM 4.4 billion in the 9 th Malaysia Plan to fund R&D activities as shown in Table 7.10 55 below.

Of the total RM 4.4 billion, RM 1.4 billion has been allocated for precommercialisation and commercialisation funding in five areas i.e. biotechnology, ICT, industry, sea to space and S&T Core with the 3 following areas having subfocus areas.

There is inherently a strong focus on the funding of ICT and biotechnology R&D (as can be clearly seen by the total amount of both specific and general funds made available to these two sectors). This naturally edges out RE as it must compete for both recognition and funding with other technology areas which already have a high degree of Government support.

R&D Policy Actions in RE

Currently there is no specific policy or roadmap for R&D specifically focussing on RE. Most research institutions and universities map out their own path for R&D based on the priority and interests of their management. In the government sector the responsibility of charting the path for R&D for any particular area is under the jurisdiction of MOSTI.

55 Available from MOSTI.

MOSTI has made some initial efforts to increase R&D in RE. The steps that have been taken to support R&D in RE technologies

Current Status of R&D in Malaysia

The current public sector funding for R&D has a strong focus on the biotechnology and ICT sectors. These two sectors account for 33% of the total available funds for R&D (without taking into account the focus areas of the general funds). The precommercialisation and commercialisation funding is available for only five specific technology clusters.

RE is not identified as one of the focus areas for R&D thus it has to compete with other subjects for research funds. As a result, RE research is subject to a high degree of competition amongst the various technology clusters funded (i.e. inter competition) as well as competition amongst technologies within the ambit of “Alternative Energy” (which includes nuclear as well as renewable energy, i.e. intra competition). As a result it is unlikely generic funding of RE research would be successful, when such a clear preference towards ICT and biotechnology sectors exists.

The current status of R&D whilst is a positive move towards supporting the Strategic Thrust 4, is inadequate because the actions are geared towards provision of money, instead of developing a conducive environment which encourages R&D activities in RE technologies. The Australian approach provides valuable lessons as they have reported the creation of conducive environment is an important element. R&D focus should be on the activities which will help the sector, i.e. activity based focus and monitored and performance specific.

Further, the gaps in the current approach should be addressed. The Government needs to play a leadership role to guide the private sector involved in R&D as the private sector:

(a) Is very conscious about costs (about 70% of Malaysian businesses think cost management is a main source of competitive advantage); and

(b) Is not sufficiently putting focus on innovation as a source of competitive advantage (only 44% of Malaysian businesses consider innovation as a source of competitive advantage) 56 .

In Malaysia the provision of public money by the Government may be insufficient however the Government can play a key role to help identify the research needs (i.e. the problem to be solved) and which research funding could be made available.

56 International Business Report 2008 – country focus (Malaysia), Grant Thorton available at www.internationalbusinessreport.com

7.4.3. Develop an RE R&D Action Plan

Government should not expect the R&D activity to produce inventions but the thrust should be considered a success if R&D activity produces innovation. The difference between the two words “invention” and “innovation” needs to be clearly appreciated, in order that expectations are clear 57 and funding could also be made available for innovative processes or actions.

The key features of the RE R&D Action Plan are as listed in Table 7.12 below:

The problem requires research to be done – e.g. improving the efficiency of biomass boilers will be identified. This is called “demand articulation”: • Demand articulation -defines the problem to be solved by the research, identification of the technology and market availability; • Should be prescribed in RE Research Flagship which has specific objectives framed by a good understanding of the needs of researches, users, customers and the community; • The role could be played by Government as private sector does not see innovation source of competitive advantage. Sunset clause: Demand articulation should be for a specific duration of 5 years and if it needs to be extended, a debate in Parliament is necessary to amend the enabling law.

Whilst initially using demand articulation will help local firms identify the market but over time the government should refrain from doing so. Therefore the R&D Action Plan should provide for the availability of market information so firms will be able to identify market potential of research areas.

Resources – Availability of skilled people

Without adequate skilled workers R&D programmes have a low chance to succeed. Therefore: (i) Permit the importation of high quality foreign skilled workers (i.e. knowledge workers) to address the immediate shortage. (ii) Encourage local individuals to undertake post-graduate courses via the incentive programme (in Thrust 3).

Requirement of establishment of an RE research lab/ Centre of Excellence which the research cooperatives can use.

Provide funds by the Government; and continue with the R&D fiscal incentives is required. Funds would be subject to the performance and monitoring framework.

Design an effective institutional framework, where the joint venture of public and private sectors is reflected in a cooperative research centre, with these features (i) Close interaction between researchers and users of research; (ii) Industry contribution to the centre’s education programmes to produce industry-ready graduates; and (iii) As a place where higher degree programmes can be undertaken.

Monitoring and evaluation framework

The recipient of the funds must be subject to a proper monitoring and evaluation mechanism which is fair, transparent and accountable.

A fair and proper monitoring and evaluation mechanism is transparent and accountable without any risks of bias or a conflict of interests.

Clear and transparent rules for awarding funds to bidders, avoidance of conflicts of interests, proper and legally binding undertakings to preserve intellectual property of bidders; accountability process and grievance mechanism.

Introduce a feed-in-tariff law with the specified degression which encourage technological innovation to reduce the RE technology cost.

Roles and Responsibilities

Clearly identifying the roles and responsibilities of the parties and their accountability.

57 R&D funding is not about patent filing only. Availability of invention is a small arena of R&D activity. Innovation is the primary action of R&D. Not all innovation can be patented because of legal requirements in Patent Laws which may not be met. This does not mean that there is no protection or that there is no value to the innovation. Governments should realise this difference and R&D activities should be supported if they are to innovate the RE technologies.

The illustrative estimates of the cost of Thrust 4 is about RM 600million to be spent on capital and operational expenditure as well as funding of R&D activities.

The institutional arrangement to implement this thrust effectively requires the intervention of Ministry of Science, Technology and Innovation, Ministry of Higher Education and other relevant Government agencies to develop and implement the RE R&D Action Plan.

7.5. Strategic Thrust 5: Design and Implement an RE Advocacy Programme

The RE Policy must continue to build or acquire political capital because of the long term nature of policy to bear fruits. Malaysia is unfortunately fond of showing immediate success “through harvesting low hanging fruits” (i.e. easy targets or more visible ones). However RE Policy is not a short term policy nor can a short term approach produce positive results. Without long term political capital the sustainability of the RE Policy may diminish as it would not be able to attract authority and funds from the political authority. Consequently a policy advocacy programme is needed which helps build political capital for the sustainability of the RE policy.

What is a Policy Advocacy Programme

A policy advocacy programme (sometimes referred to as social marketing) is a programme designed to provide information of the policy, its objectives and its outcomes to the stakeholders to achieve and sustain ongoing public support. Furthermore advocacy programmes provide results to the public and political authority.

The objective of a policy advocacy programme is not just about providing factual information but the provision of information which helps build political sustainability of the policy (i.e. buyin) and minimise policy resistance.

Rationale

The introduction of RE Policy is a significant change from the “businessasusual” approach which requires different stakeholders’ contribution and support. Civil society as the contributor of the public fund, needs to be convinced that the idea of the fund and the contribution is sound and there is no risk the fund will be abused.

Thus different stakeholders have different interests and it is important these are addressed by way of tailored messages to target audiences. Nonetheless the soundness of policy is and should be advocated as the common theme. If there is no clear advocacy programme the stakeholders on whom the success of the policy depends on will turn against it, and the policy is doomed no matter how suitable, appropriate or effective it may have been.

Therefore the rationale for the advocacy programme is to win the cooperation and support of various stakeholders to secure their willing participation for the future success of the RE policy which will bring benefits to the society.

Types of Advocacy Programmes

Awareness programmes are one type of the range of advocacy programmes which should be adopted. Another approach is the commissioning of independent evaluations published locally or engaging third party public sector bodies to organise workshops, discussion forums, seminars or case studies or even public hearings, briefings or consultations. Social marketing is another form of advocacy programme.

However all advocacy programmes are designed to achieve two objectives which are to provide information and secure support for a new action by Government.

7.5.1. Design an Advocacy Programme

A prerequisite of successful advocacy is a programme design which takes into account the target audience, the timing of the programme and the message to be given. This means the implementation of the advocacy programme has to be carried out in phases.

Table 7.13 provides an indication of the target audience and the possible message in each phase of the advocacy programme.

Target audience Phase 1

(Understanding) Message

Phase 2 (Participation) Message

1. Environmental awareness and overcome the NIMBY syndrome, and commitment to environmental sustainability; 2. RE Law, its purpose and how it benefits them; 3. How RE benefits people; 4. Importance of the contribution mechanism and the RE Fund.

5. Report to the people the status of RE initiatives; 6. Inform of the training incentives to encourage them to take up the courses; 7. Identify the R&D programmes they may want to participate.

1. Environmental awareness, commitment to environmental sustainability 2. How RE benefits people

3. Environmental awareness strengthening 4. How RE benefits people

1. Viability of funding RE projects

2. Viability of funding RE projects 3. Solicit feedback on ways to improve process 4. lending process evaluation with banks

1. Environmental awareness, overcome the NIMBY syndrome and commitment to environmental sustainability; 2. RE Law, its purpose and how it benefits them; 3. How RE benefits people; 4. Importance of the contribution mechanism & the fund.

8. Make them the messenger of the various initiatives that Government is introducing. 9. Get them to encourage their suppliers to look at RE businesses as an option. 10. Showcase their RE activity

5. Incentives on offer for improved involvement;

6. Their involvement – what can they do;

7. Incentives on offer for improved involvement.

1. Environmental awareness, overcome the NIMBY syndrome & commitment to environmental sustainability; 2. RE Law, its purpose and how it benefits them; 3. How RE benefits people; 4. Importance of the contribution mechanism and the RE Fund. 5. How can they become RE Businesses

6. Inform them of specific investment opportunities 7. How and why they should become RE businesses

1. The role that they can play to help achieve the Thrusts

2. Ensure that their policies and regulatory instruments are consistent with the RE Policy.

The Third Sector58

1. The role that they can play to help achieve the Thrusts 2. Be the champion for the RE Law, contribution and RE Fund

3. Make them the messenger of the various initiatives that Government is introducing.

Government agencies (e.g. DOE, MOHR, MIDA, EPU etc)

1. Environmental awareness & overcome the NIMBY syndrome; 2. RE Law, its purpose and how it benefits them; 3. How RE benefits people; 4. Be the champion for the RE Law, contribution and RE Fund

5. Environmental awareness and overcome the NIMBY syndrome; 6. RE Law, its purpose and how it benefits them; 7. How RE benefits people; 8. Be the champion for the RE Law, contribution and RE Fund; 9. Promote RE Businesses.

Note: The regulatory bodies would encompass such as BNM, SC, MCMC, SPAN, Cooperative Commission, CCM, BURSA.

58 The Third Sector is the sector that is neither the public sector nor the private sector. It encompasses civil society and NGOs or any organization not within the first two.

The key features of the Advocacy Programme are:

Table 7.14: Key Features of the RE Advocacy Programme

Features of Advocacy Programme

Detail explanation

Specifying champions within and outside KeTTHA

These champions are people who believe in the new RE Policy and are the spokesperson on all matters relating to the RE Policy. Their enthusiasm can be harnessed to secure other supporters.

Methods to use all media and the new media

A proper media usage plan is needed to maximise the reach of the message to all stakeholders. This way the cost of face to face meetings can be avoided completely.

Indentify all stakeholders

All stakeholders should be identified (not just be category but by name if possible).

The programme must be sufficiently flexible to adapt to changes in the social, business, economic and political climate of the country.

Periodic monitoring & evaluation

Periodic monitoring and evaluation of the results produced by the programme is necessary in order to continue, change or revise the detailed activities of the Advocacy Programme.

The estimated cost of the advocacy programme over a 5 year period is RM 120 million.

The institutional arrangement to implement this thrust effectively requires the intervention of Ministry of Information, Communication and Culture, Ministry of Education and other relevant Government agencies to design and implement the RE advocacy programme.

7.6. Summary

7.6.1. Impact on Policy Objectives

The direct main actions of each Thrust and their impact and influence on realising the five Policy Objectives are summarised in the matrix in Table 7.15.

Thrusts

Direct Main Action to be taken

Policy Objectives

Introduce RE Law

Create lending evaluation process

Continue with current fiscal incentives

Special incentives for using local R&D tech.

Local content incentives

Market entry for SMEs via SME RE Centre

RE Contribution by GLCs

Technical and tertiary curricula

RE training institutes and Centre of Excellence

Financial and fiscal incentives for technical and tertiary education

Develop a RE R&D Action Plan

Design an Advocacy Programme that promotes understanding

The direct main actions of each Thrust also addressed the key issues affecting RE as identified and discussed in Chapter 3, as shown in Table 7.16 below. Thus, with the effective implementation of each of the Strategic Thrust the barriers to RE deployment would be removed.

Table 7.17: RE Action Plan Implementation Timeline

7.6.3. Direct Cost and Development Budget

The estimates of the funds the Government will have to spend over the next 5 years in implementing the various Thrusts of the RE Action Plan, being moneys the Government will actually pay out (but excluding moneys not received e.g. tax revenue because of tax breaks or reliefs) is approximately (20112015) RM 1.5 billion.

Note: The 2% collection from electricity revenues for the RE Fund is not included as developmental budget. The O&M cost and service fees for the utilities and implementing agencies in implementing the feedin tariff are covered by the RE Fund. However, the cost of designing the detail of the RE Act, feedin tariff and RE Fund mechanisms should be included as the developmental budget.

Table 7.20: Detail Activities and Corresponding Budget for RE Advocacy Programme (Thrust 4)

8. EVALUATION CRITERIA AND SUCCESS INDICATORS

In determining the effectiveness of the implementation of the RE strategic thrusts to achieve both the RE Policy Objectives and the Policy Vision, it is necessary to develop the evaluation criteria and identify the success indicators. This would allow for the creation of a baseline against which evidence can be obtained to determine if any improvement or positive progress has been achieved; and proposals for changes without relying on emotional response to a situation or personal intuition made.

The data obtained in subsequent years will help determine if there has been improvement from the baseline or otherwise. This provides the empirical evidence necessary for the continued support of the policy. Detractors will be hardpressed to argue against empirical data showing positive results.

As the RE Policy is a new and forwardlooking policy it is important the evaluation be done periodically. The success indicators may be reviewed from time to time to determine its relevance and ambition of the Government. Without such evaluation, policy makers will not be able to empirically ascertain whether the actions identified for each Thrust are bearing fruit or require change midstream. Only through evaluation can the outcomes of the Policy Objectives be realised.

8.1. Base Lining

There is a need to undertake a baseline assessment of Malaysia position with regards to RE power generation, RE Industry, R&D in RE technology, public awareness of RE and skill levels. This provides the basis for future assessments and evaluation to determine whether an action is to continue, revised or removed altogether. Developing a base line helps identify the data requirements for current and future assessments as well as data collection issues. For most of the thrusts a base line needs to be established.

The initial amount funding required breakdown of costs for determining the various baselines identifies would be RM 11.5 million as in Table 8.1.

Table 8.1: Baseline Costs (per Annum)

Baseline studies

RM million per annum

Detail RE resources and targets (capacity and energy mix)

RE technology cost

Number and types of RE businesses (developers) in the country

Number of RE jobs and types

Number of SMEs in RE business and sector

Number of banks providing RE financing, rates and terms

Number of RE licenses and REPPAs

Local resources and contents in applied RE technologies/ systems

Number of RE importer and technology

Number of institutes of higher learning offering RE courses and types

Number of technical colleges with RE courses and types

Number of RE students enrolled and passed (and quality)

Number of locals employed in RE business

Number of local RE R&D applied in the RE industry (local/ international)

Number of R&D collaboration and joint-ventures

Public awareness of RE

Public acceptance of RE

Public’s willingness to invest in RE

Undertaking a comprehensive baseline work would cost approximately RM 50 million to RM 100 million depending on the number of baselines to be done, the extent of the baseline and the availability of data to develop the baseline.

8.2. Thrust 1 Criteria

The criteria for a successful regulatory framework are as follows.

8.2.1. RE SMART Targets

Based on the detailed analysis set out in Chapter 5, the SMART targets to be achieved at different points of time form the basis of the key success indicators for the RE Action Plan as set out below. The SMART target is a very important aspiration to be achieved but room must be given for it to be achieved. A tolerance of 10% of the target is allowable and the targets also need to be reviewed periodically every 3 year period.

Table 8.2: SMART Targets

Year

Cum. Total RE

Capacity (MW)

Share of

RE Capacity

Annual RE

Generation (GWh)

RE Mix

Annual CO2

Avoidance (tonne)

8.2.2. Number of RE Businesses

Another success criterion is the number of RE Businesses which have entered the RE power generation and RE industry markets. An increased in number of RE businesses mean the regulatory framework is providing the necessary incentive, clarity and support needed for their entry. Therefore data of this RE businesses needs to be collected.

8.3. Thrust 2 Criteria

8.3.1. Performance Factors

Table 8.3 identifies the performance factors to be used to evaluate strategic Thrust 2, the weightage and their reasons.

Turnover from the construction of renewable energy powered installations

The nature of constructing RE power plants is not sufficiently unique to be easily identifiable. Therefore to avoid over-stating the benefit, turnover from construction industry is reduced by 50%.

Key outcome is socio-economic development which is shown by these criteria. This has direct relationship with the actions

New firms entering the RE business

SMEs entering the RE industry

Loans provided by commercial banks

Lending per se may not be attributable solely to the Actions, as firms with strong balance sheets and assets may be able to secure financing regardless of the use of the funds. Hence a 50% discount is to be applied.

Turnover of the RE industry

Key outcome is socio-economic development which is shown by these criteria. This has direct relationship with the actions

Number of REPPAs signed within a specified time period (say 1 month, 3 months etc).

This is indicative of the effectiveness of the RE Law

Local content in RE industrial products

Key outcome is socio-economic development which is shown by these criteria. This has direct relationship with the Actions

Number of distributors of imported RE products

This is a counter-measure to local content and R&D. If more businesses are distributors then the stimuli needs to be change.

8.3.2. Develop Baseline

Identifying the performance baseline provides the basis for improvements. Increase in percentage terms of performance factors would evidence the actions taken to implement Thrust 2 are bearing positive results.

Therefore it is necessary to firstly determine the performance baseline of the RE industry as at 2009. The baseline should obtain data for the same evaluation points as identified in subchapter 8.3.1 above. The development of this baseline and obtaining appropriate data from relevant agencies or surveys would provide the empirical basis for determining whether the Thrust 2 main actions are producing the outcome (i.e. Policy Objective). This is realised when there is evidence of an increase from the baseline. If there is no increase or a decrease, two follow up actions may be required:

(a) Change the advocacy programme; or

(b) Review and revise the actions in this Thrust.

8.4. Thrusts 3, 4 and 5 Criteria

8.4.1. Evaluation of Thrust 3

Based on the main action for Thrust 3, the performance criteria should be:

(a) Number of Institutes of Higher Learning that offer courses where RE is included as the main focus;

(b) Number of technical training colleges that offer quality and recognised technical training courses in RE;

(c) The number of students graduating from the technical and tertiary colleges in the specified course (including postgraduate courses); and

(d) The number of trained graduates hired by the private sector.

8.4.2. Baseline and Periodic Surveys

To evaluate Thrust 3, a base line is to be undertaken to determine the current situation to ascertain whether the introduction of technical and tertiary incentives have produced the required results. It also provides a defence to any allegation the data is not legitimate. If the result is zero (as expected) it is the base from which the programme starts.

Periodic surveys

Periodically (i.e. biannually) undertake a survey of the same target group (of randomly selected subjects) to determine if the programme is showing improvement. If there has been no movement or a reduction the programme needs to be revised.

8.4.3. Evaluation for Thrust 4

The RE R&D implementation plan should develop its own evaluative measures. However one measure which should not be used is the number of patent filings because the R&D is focused on innovation (rather than invention) and patenting contains legal restrictions such as the concept of prior art.

8.4.4. Evaluation for Thrust 5

The method by which success of this Thrust is to be measured is through public surveys. What is analysed is the increase between survey years. If the awareness survey shows there has been an increase of awareness in the public from the previous year, the advocacy programme should continue.

Base lining

A baseline of the target group should be determined. This group is surveyed to determine the level of awareness of RE Policy in general and Government’s initiatives. The information obtained from Phase 1 can inform the design of survey questions in subsequent years. Base lining provides a basis for determining the level of awareness, which can be compared by subsequent surveys to see if the level of awareness is rising. This would indicate that the advocacy programme is working.

Periodic surveys

Periodically (i.e. biannually) undertake a survey of the same group to determine if the advocacy programme has improved the awareness, buyin and participation of the target group. If there has been no movement or a reduction the advocacy programme needs to be revised.

The SREP programme introduced by the Government of Malaysia has been implemented for almost eight years. However the progress of RE development in the country has been quite minimal. Studies and reviews have been done with the expectation the palm oil mills would be a key participant of the programme because they had the raw materials (EFB) to be used as a fuel source to generate electricity. There were many who were enamoured by this good idea – it was logical, attractive and leveraged national strengths. However what appeared to be a good idea has been frustrated by the market, evidencing that Government cannot predict how markets will work or perform.

It was believed the palm oil industry would have been very attracted at the opportunity to use their waste to produce electricity however they were cautious. In fact postimplementation studies showed the palm oil mills had been utilising their EFBs and other oil palm wastes for fuel to generate power for their own use. Interests however unexpectedly came from third party developers who made the assumption that the EFB had little or no value and palm oil mills would readily give it away for free. The scenario which has developed was these third party developers created a market for the EFB by introducing a demand which resulted in the suppliers knowing they could sell their EFBs rather than give it away for free. This led to fuel supply agreements being needed and with severe limitations.

Initially the government has made the decision that electricity generated from using biomass and biogas were given a higher tariff (i.e. 21 sen/kWh) as compared to minihydro (17 sen/kWh) when it was perceived the target SREP participants would be the palm oil industry. This however does not result in the anticipated rapid growth of RE generation from biomass sources.

There are many different technologies which can be used to generate renewable energysuch as minihydro, solar PV, geothermal and wind. R&D activities in these areas are generating newer, costeffective and innovative solutions and technologies. The RE industry is an area which Malaysia can actively participate in and could become a world leader.

We are approaching the end of the 9 th Malaysia Plan and preparations need to be made for the 10 th Malaysia Plan. The timing is right for the government to make available a new RE Policy as a continuing effort after the launching of the National Green Technology Policy last July 2009. This opportunity provides the avenue for a complete overhaul of the existing RE Policy in order to promote a sustainable and forwardlooking renewable energy development in the country and pursue green technology development in a systematic and aggressive manner. Sufficient policy experiences exist today in many countries such as Germany, Spain, Italy, Japan, Korea and even developing countries such as Thailand compared to the situation a few years ago.

The recommended RE Policy is clear, robust and forwardlooking. With the policy and the introduction of the renewable energy law which includes the provision of a mandatory feedin tariff, RE Fund and an implementing agency, it is anticipated that there will be significant and positive impacts on the economy of the country, as evidence from the case studies from other countries who have introduced such measures.

The Renewable Energy Law requires an Act of Parliament to be introduced. This is a key and fundamental thrust of the RE Policy. It is the foundation upon which the success of the entire policy rests. If such an Act of Parliament is not introduced or is delayed, then there would be no conducive regulatory environment that is needed to spur the growth of RE in Malaysia. In fact the environment would be no different than the one that exist currently.

The RE Law is the foundation upon which Thrusts 2, 3 and 4 sit, indicating that without the RE Law it would be very difficult for these Thrusts to produce results, be successful or gain traction amongst stakeholders. Whilst the overlay of the advocacy programme shows that Thrust 5 is necessary to bring on board all stakeholders to support the changes introduced the RE Policy. This is graphically represented as follows:

Figure 9.1: Synergies of RE Action Plan (Strategic Thrusts) leading towards a successful RE Policy

The policy requires effective and reasonable evaluation criteria which provide a basis for determining whether the policy has been successful or not. Therefore detailed SMART targets are proposed for both energy and capacity targets that RE is to achieve at various intervals. It is anticipated that 13% power capacity and 10% energy generation will come from RE by 2030. This would avoid 131 million tones of CO 2 being produced by the conventional power generation sector.

The proposed estimate of the direct cost of implementing the various thrusts including developing the baselines for proper evaluation is RM1.5 billion over a 5 year period (this cost does not include the contribution to the RE Fund).

In addition, there are other criterion that have been designed to be used to assess the success or failure of the other thrusts, including undertaking of a baseline assessment, so there is appropriate evidence of the state of play today.

There are however, other policy areas, such as conventional energy price subsidies, the energy market in Malaysia, mass and public transport systems, vehicle taxes, biofuels and environmental standards and pollution, that should be addressed if renewable energy is to be promoted wholeheartedly and as a mainstream energy source for Malaysia. These areas are under the purview of many Ministries and agencies and are outside the scope of this Report.

In conclusion the success of the forwardlooking RE Policy and Action Plan is dependent not only on the actions and support of the Government but also of the privatesector and the Third sector (i.e. NGOs etc.). The RE Policy and Action Plan must be seen by all stakeholders as producing public value, sustainable from a political and legal standpoint and must be administratively feasible. Only when all of these elements are in place can and will the policy be successful. Consequently it is forecasted the RE Policy and Action Plan would enable new businesses to emerge, new jobs to be created and new growth areas to be developed, paving the way for Malaysia to become the leading country in this region for green technologies and low carbon economic growth.

Annex A: Current SREP Programme Guidelines

“During this initial phase, SCORE will adopt the following Guidelines in promoting the development of gridconnected small RE power plants:

1. SREP shall apply to all types of renewable sources of energy, including biomass, biogas, municipal waste, solar, minihydro and wind.

2. Project developers will have to negotiate the Renewable Electricity Purchase Agreement with the relevant Utility, including the selling price on a willingseller, willing buyer basis, based on take and pay.

3. The RE electricity producer shall be given a licence for a period of 21 years, to be effective from the date of commissioning of the plant.

4. RE electricity producers will be responsible for all the costs of the gridconnection, the relevant Utility system reinforcement (electric cables, transformer, switchgears and other protection equipment) and the necessary metering installation. The distribution grid interconnection shall be made at a voltage between 11 – 33 kV.

5. The small RE power plant shall be located within a distance of 10km from the nearest interconnection point. Exception is given for hydro power generation project.

6. No standby charges shall be levied. However, if back energy is requested by project developers, it will be charged accordingly with the prevailing tariff.

7. Power generation through cogeneration technology shall be given special preference.

8. Maximum capacity of a small RE power plant designed for sale of power to the grid shall be 10 MW. A power plant can be more than 10 MW in size, but the maximum capacity that will be allowed for power export to the distribution grid will be no more than 10 MW.

9. The small RE power plant must be ready for gridconnection within 12 months from the date of approval for such grid connection. This is applicable for existing plant that wishes to connect to the grid. However, in the case of proposals for setting up new RE power plants (or where “repowering” is proposed) that require the installation of new boilers or turbogenerator systems, the plant shall be commissioned within 24 months. The stipulated period of construction until commissioning shall be counted from the date of signing of the Renewable Electricity Purchase Agreement (REPA) between the developer and the utility.

10. The RE power plant must meet all environmental regulations set by the Department of Environment (DoE), and the developer of the project is responsible for obtaining the necessary approval of DoE, and any other statutory approvals required.

11. The minimum of 30% equity in an RE power plant project must be by Bumiputera shareholder(s). Foreign agency/company is allowed to participate in SREP project with maximum participation equity of 30%.”

Source: Extract from the KTAK’s website 59

Annex B: Renewable Energy Feedin Tariff (REFiT) Law

B.1. What is a Feedin Tariff (FiT) Law

Renewable energy (RE) Feedin Tariff (FiT) is a mechanism that allows electricity that is produced from RE resources to be sold to power utilities at a fixed premium price and for a specific duration. A Feedin Tariff Law has proven to be the best available mechanism for accelerating the uptake of renewable energy in gridconnected areas. Furthermore, a good FiT system is a truly democratic policy because:

• It is costeffective for the public to generate their own clean electricity;
• It returns the control to generate electricity to the people.

B.2. What is not a FiT Law

There are many kinds of support mechanisms promoting electricity supply from renewable sources, with various names, all over the world. Whilst they can be combined with FiTs, it is important to distinguish FiT Laws from these other mechanisms

e.g. quota systems and tender schemes (see B.9 for further details).

B.3. How do FiTs work

FiTs oblige energy utilities to buy renewable energy from producers, at a mandated price. By guaranteeing access to the grid and setting a favourable price per unit of power, FiTs ensure that renewable energy is a sound longterm investment, for companies, for industry, and for individuals, thereby creating a strong economic incentive for investing in renewable energy.

B.4. Who pays for the FiTs

The most common method for funding the FiT involves sharing the costs amongst all endusers (electricity consumers). The result being that the increase in price per household is very small among the users.

B.5. What are the benefits of a FiT Law

When designed effectively, FITs are proven to:

• Reduce CO 2 emissions by replacing fossil fuelbased power production with clean, renewable sources of energy.
• Create jobs, for example in 2006 the German renewables industry employs around 234,000 people. Almost 60% of which were employed as a direct result of the German FiT Law.
• Help secure domestic energy supply, enabling countries to reduce their reliance on imported fossil fuels.
• Guarantee investment security for renewable energy investors.
• Drive technological innovation.
• Provide fair market conditions for renewables, which without this renewables would be unable to fairly compete with heavily subsidised conventional energy.

B.6. Impact of Feedin Tariff: Example of Germany

The German Government pioneered in the year 2000 an effective FiT mechanism that is now replicated in many countries around the world (e.g. Spain, Greece, France, Italy, Portugal, South Korea, Switzerland, etc, for the full list please refer to B.8 post). An evaluation in 2007 by the German Federal Ministry for the Environment, Nature Conservation and Nuclear Safety (BMU) identified the main impacts of FiT are as follows:

(1) By 2006, Germany achieved 12% (30,924 MW) of RE share in the gross energy consumption as compared to only 6.3% (11,448 MW) in year 2000 (see Figure B.1).

(2) In 2006, more than 230,000 people have been employed in the RE sector due to the rapid development of the RE industry.

(3) By 2006, the German RE businesses are leading the world with 15% of global market share with trading values equivalent to €22.9 billion.

(4) In 2006, the German Government has avoided the external cost to manage green house gas (GHG) emissions by as much as €3.4 billion due to the electricity generation from RE.

(5) By 2005, the average electricity production cost for RE has reduced to €0.1 per kWh and expected to reduce further to €0.07 per kWh by 2020.

(6) Between 2000 to 2006, €9.4 billion of economic benefits have been derived from the FiT policy against the cost of €3.3 billion to implement the FiT.

Figure B.1 Development of electricity generation from RE in Germany

B.7. Common Criticisms towards FiTs

FiTs are often rejected for being ‘interventionist’, for interfering in the free market, and for being inefficient or ineffective as a result. In reality, all renewable energy support mechanisms are interventions in the market. What makes FiTs unique is that they have proven to be the most effective mechanism for increasing the uptake in renewable energy, and the best at creating market growth. It is also worth noting that those who argue that FITs are ‘interventionist’ frequently advocate some form of quota system or ‘renewable portfolio standard’. However, quota systems are just as interventionist: while FiTs fix the amount to be paid for the electricity, and allow the market to determine the amount of electricity generated; quota systems fix the latter, and allow the market to determine the former.

B.8. Where has FiT been introduced?

The table below identifies the various countries that have introduced FITs Laws as at the end of 2008.