Initial results of Malaysia's FiT scheme hold lessons for all
Malaysia's new renewable energy feed-in-tariff (FiT) regime has had mixed results since applications opened at the beginning of the month. While almost the entire allocation of FiT budget earmarked for solar photovoltaic (PV) projects through to the middle of 2014 was applied for within 24 hours, other types of renewables covered by the scheme have proven to be considerably less popular thus far.
The country is following the familiar FiT model but with a quota system for different types of renewable energy (RE), designed to avoid the bubbles in RE project development as seen in the European solar sector. To pay for the FiT Tenaga Nasional Bhd, the state-controlled electricity company, is charging customers a one percent levy on electricity bills starting this month. This is expected to raise MYR250 million (about USD80 million) in subsidies by the end of 2012.
The Sustainable Energy Development Authority Malaysia (SEDA) website shows that the only solar PV quota through to June 2014 now available for application is 5.76 MW in a subcategory reserved for individuals. The initial and conservative target of getting 50MW of solar PV generation on-line by end of 2012 has been comfortably exceeded by 20 MW.
According a SEDA chief corporate officer, Wei-nee Chen, this is because few developers have been able to meet all the criteria needed to get the highest possible FiT. With a lower average FiT rate the fixed budget pool is able to fund a larger installed capacity total. This variability also makes the expression of remaining quota, in terms of megawatts, imprecise but SEDA has not published the underlying budget pool figures.
In the slow lane
Looking beyond the runaway solar PV sector at biogas, biomass and small hydro, which are also covered by the new FiT regime, project developers have been in a lot less haste to apply for quotas even though they are also being given out on a first come-first serve basis with only small hydro not being subject to an annual rate degression.
Biomass, for which the initial target by the end of 2012 was 80 MW, thus far has a healthy 76.9 MW of project commitments for the period. With a lower average FiT rate than the initial conservative projection, however, there's still enough funding in the pool for around 35 MW of biomass capacity to be installed by the end of next year. Looking through to mid-2014, however, biomass applications are less than 50 percent of available quota with the municipal solid waste subcategory having no applications beyond the first half of 2012.
The biogas action has been even slower so far, with 10.49 MW committed to the end of 2012 against an initial target 30 MW. Through to mid-2014 the total applied for is just 14.49 MW which accounts for only about 20 percent of the available quota.
Under biogas the landfill and sewerage subcategory – which is expected to account for a third of the target and earns a significantly higher FiT – is actually quite strong, with around 53 percent of quota through to mid-2014 spoken for. However the main biogas category, which covers agricultural sources, has a 50-MW target through to mid-2014 but a paltry 2.13 MW has been applied for.
Small hydro has just 6 MW committed up to the end of 2012 against an initial target of 30 MW, although it has garnered greater interest in the longer term with 54.61 MW applied for through to mid-2014, representing about 46.5 percent of the funding pool for that sector.
It is still early days for Malaysia's new FiT allocation system and in the coming weeks and months the slower moving categories may yet catch up. Also, come 1 July 2012, quota applications for the second half of 2014 will open with SEDA free to re-allocate any remaining FiT budget from 1H2012 as it deems wise.
That would no doubt cheer up the solar PV sector, which has been complaining that its quota allocation through to the end of 2012 is too small.
Shamsudin Khalid, president of the Malaysia Photovoltaic Industry Association (MPIA), was quoted by RechargeNews.com last week as saying: “The market must have some scaleable size, and also be able to create economies of scale so that the industry can bring down costs. It won’t be easy to bring down system and component costs when volumes are so small.”
Value for money
Looking at Malaysia's FiT budget allocation from a value-for-money perspective, however, a rather different picture emerges. The basic FiT rates for solar PV range from MYR1.23 to 0.85 (USD0.39 to 0.27) per KWh depending on the size of the installation, compared to MYR0.32 to 0.28 (USD0.10 to 0.09) per KWh for biomass and a similar range for biogas while small hydro gets MYR0.24 to 0.23 (about USD0.075) per KWh. The bonus FiT incentives are also skewed toward solar PV.
Looking at the figures available on the SEDA website, it can be roughly estimated that Malaysia's solar PV sector has been allocated around 55 percent of the FiT budget through to the end of 2012. For this the solar sector has come up with 42.8 percent of the RE generating capacity commitment for next year.
This figure is likely to fall a bit as additional applications for 2012 quota in other categories come in. In the unlikely event that all 2012 allocations are taken up, solar PV's share would fall to around a quarter of the total RE supply committment.
A superficial conclusion from the early results of Malaysia's first tranche of quota applications is that that the market has nonetheless spoken decisively in favor of solar power. Of course, what they really mean is that the project developers much prefer the rate of return they can get on solar PV in comparison to the alternatives on offer and that is a function of solar having FiT rates three to four times higher.
Malaysia enjoys plenty of sunshine, which makes solar PV a more economically viable proposition that it is in Germany, for example. However, the country's equatorial climate also means that biomass grows very quickly and the Malaysian plantation industry – which produces plenty of unused biomass byproduct – is well developed. The country's policy aim of getting a third of renewably generated electricity from solar and a third from biomass therefore looks about right.
Get the balance right
Given the emphatic differences, however, there's reason to believe the initial pattern in FiT applications will hold true in future if current comparative difference in FiT rates continues to prevail. A rational response would therefore be to cut the solar PV FiT faster and perhaps raising those of biomass, biogas and small hydro a bit.
That is not really in SEDA's ambit as the FiT rates are embedded in Malaysia's Renewable Energy Bill 2010 which was drafted more than a year ago. Since then solar module prices have plunged by as much as half.
Starting in 2013 annual degression of the FiT rates – currently set at 0.5 percent for biogas and biomass 8.0 percent for solar PV – will kick in. At that pace, however, it will take until 2021 for the fall in Malaysia's solar PV FiT rates to match the decline in solar module prices over the last year and that is clearly ridiculous.
So too is the assertion by the MPIA's Khalid that the current level of subsidies will do little to spur a take-off in the solar market. He is right that Malaysia is a relatively small market and that economies of scale are needed to drive down prices. In what is a global market, however, economies of scale are obviously being made elsewhere – especially in China and the US.
And Malaysia already has a pretty big solar manufacturing industry, said to be the world's fifth largest. And, in the last six month Bosch has announced plans to invest USD736 million in a solar plant in Penang while Panasonic is building a USD580 million plant in Kedah.
SEDA does have duty under the Renewable Energy Act to review the degression rates at least once every three years and to submit a report, with or without recommendations for adjustments, to the minister responsible for power supply – currently YB Dato' Sri Peter Chin Fah Kui, the Minister of Energy, Green Technology and Water – to act upon as he or she sees fit.
The Siren's call
Both SEDA and Minister Kui would be wise to ignore the siren calls from the solar lobby for a bigger slice of the subsidy pie and rapidly accelerate digression on solar PV considerably for any new projects applied for after 30 June 2012. Perhaps the rush to lodge applications for solar PV quota is an indication that the industry believes that is what will happen.
In doing so, the government will not be risking its goal of having 11 percent of the country's electricity generated from renewable sources by 2020, with a substantial portion of that coming from solar. Solar projects can be implemented very rapidly and in a few years’ time little, if any, subsidy will be needed.
In the meantime the Malaysian Government should also look at ways to ramp up biogas, biomass and small hydro sectors so electricity consumers get much better value from the one percent levy. If Malaysian investors do not want to step up, then removing the 49 percent cap on foreign investment in RE projects would be a smart move.
Only when Malaysia's FiT quota system is tuned to deliver better value for money should the government be talking up the possibility of doubling the RE levy on electricity bills.
There are also lessons – both positive and negative – in the Malaysian experience for those outside the country. The most obvious is the fallacy of embedding FiT rates into legislation. The legislative framework should layout the principles of governance and leave considerable leeway for regulators to respond to market developments.