As renewables markets mature, renewables investors are looking to new markets for their next source of growth.

In this series of e-briefings, we summarise the opportunities and risks for international investors in the developing renewables markets of South East Asia. The renewables sector in South East Asia is nascent (with some notable exceptions). However, the commitments made by Asian countries at COP 21 indicate that renewables enjoys broad support throughout the region.

Together with Mah-Kimariyah & Philip Koh and our other partners, we are pleased to outline for you some of the key issues involved in developing a renewables project in Malaysia.

  1. Market Readiness

1.1 Overview

The electricity industry in Malaysia is mostly vertically integrated and monopolistic, and a single utility is responsible for all generation, transmission and distribution activities for electricity in each region.

The principal utility companies are Tenaga Nasional Berhad (TNB), Syarikat SESCO Berhad (formerly known as the Sarawak Electricity Supply Company) (SESCO) and Sabah Energy Sdn Bhd (SESB), each covering the regions of Peninsular Malaysia, Sarawak and Sabah, respectively.

TNB is wholly owned by the Malaysian Government. In 1998, SESB became a subsidiary of TNB. In all three regions, Independent Power Producers (IPPs) complement the principal utility companies and supply a portion of the electricity to the utility companies. All three of the main electricity utilities in Malaysia are Government-linked companies, where the Government is the majority shareholder.

The vast majority of generation activities are conducted by a corporation heavily controlled by the Government and, at the wholesale level, there is no competition. Transmission and distribution activities are vertically integrated with the three principal utilities in Peninsular Malaysia, Sabah and Sarawak.

In 1993, licences were issued to IPPs to build, operate, and own power plants and a large number of Power Purchase Agreements (PPAs) were signed. The Malaysian power sector is currently dominated by a state generator and operator, alongside IPPs. The current IPPs include: YTL Power Generation, Pahlawan Power and TNB.

TNB also transmits and distributes electricity along the grid. In Sabah, Sarawak, SESB and SESCO respectively generate, transmit, and distribute electricity in their respective State grids.

1.2 Statutory Framework

The Renewable Energy Act 2011 (REA) is the principal statute governing renewables in Malaysia. The REA sets out the mechanics for a feed-in tariff (FIT) for renewables.

REA defines “renewable energy” as electricity generated or produced from “renewable resources” and “renewable resources” means, under the REA, recurring and non-depleting indigenous biogas, small hydropower, solar photovoltaic and geothermal resources.

Various rules have been issued under the REA, including the following:

  • the Renewable Energy (Feed-in Approval and Feed-in Tariff Rate) Rules 2011
  • the Renewable Energy (Technical and Operational Requirements) Rules 2011
  • the Renewable Energy (Renewable Energy Power Purchase Agreement) Rules 2011
  • the Renewable Energy (Criteria for Renewable Resources) Regulations 2011
  • the Renewable Energy (Allocation from Electricity Tariffs) Order 2011
  • the Renewable Energy (Recovery of Moneys by Distribution Licensee) Rules 2011
  • the Renewable Energy (Administrative Fees) Rules 2011

The Electricity Supply Act 1990 (ESA) is also relevant to the renewables sector. The ESA regulates a number of aspects of the electricity supply industry, including:

  • the supply of electricity at reasonable prices
  • licensing, registration, and control of any electrical installation, plant and equipment with respect to matters relating to the safety of persons
  • efficient use of electricity

1.3 Current Renewables Capacities

The table below (extracted from SEDA’s official website shows the total installed capacities (in MW) granted with Feed-in Approvals under the FIT mechanism, which have achieved the FIT commencement date:

Click here to view table.

1.4 Targeted Renewables Capacities

TNB predicts that peak demand will occur at 20.669 GW by 2020. TNB has stated that the demand for electricity is being driven by economic growth, which is expected to grow at an annual rate of 3% up to 2030. 

According to publicly available sources in Malaysia, Malaysia has targeted 985 MW, or about 6% of its total electricity generation, to be derived from renewables sources by 2015. The Malaysian Government anticipates strong progressive growth in renewables capacity through to 2050.

On 6 October 2015, SEDA reported that Malaysia is set to record over 2 GW of energy from renewables sources by 2020 following two new mechanisms approved by the Government, namely net-metering and utility-scale solar.

The capacity target is implemented in stages by SEDA and SEDA updates its capacity targets annually.

1.5 Key Regulators

The Energy Commission is the national regulator for the Malaysian power sector.

The Malaysian Sustainable Energy Development Authority (SEDA) is the statutory authority empowered under the Sustainable Energy Development Authority Act 2011 to, among other things, promote Malaysia’s national policy objectives for renewable energy, promote investment in the renewable energy sector and advise the Malaysian Government on sustainable energy.

1.6 Grid

The Malaysian Grid Code (2015 version) stipulates that in Peninsular Malaysia, TNB is the Grid Owner and is the entity entrusted to carry out the transmission function. TNB’s Transmission Division can be viewed as performing three functions, that is acting as the Grid System Operator (GSO), undertaking Transmission Asset Development and undertaking Operation and Maintenance (collectively, the TNB Transmission System). The Grid Owner is entrusted to plan and develop the Grid System in order to maintain adequate grid capacity.

The GSO is entrusted with the operation of the Grid System. Other parties associated with the Grid System are known as “Users”, and comprise the “Grid Owner” (who owns, operates and maintains the TNB Transmission System), “Generators”, “Distributors”, “Directly Connected Customers”, “Network Operators” and “Interconnected Parties”.

(Source: The Malaysian Grid Code, Energy Commission, 2015)

1.7 Feed-in-Tariff

The FIT is Malaysia’s principal mechanism incentivising the generation of renewables projects of up to 30 MW in size. A FIT is available in each of Peninsular Malaysia, Sabah and Labuan. No FIT is available in Sarawak.

Malaysia's FIT programme obliges Distribution Licensees (DLs) to buy from Feed-in Approval Holders (FIAHs) the electricity produced from renewable resources (renewable energy) and sets the FIT rate. DLs pay for renewable energy supplied to the grid for a specific duration.

Part II of the REA establishes the FIT. Under section 4 of the REA, generally only persons who produce renewable energy from a renewable energy installation having an installed capacity of not more than 30 MW (or such higher installed capacity as may be approved by the Minister), and who meet such other criteria as may be prescribed by SEDA, are eligible for the FIT.

The applicable FIT rate will depend on the following factors:

  • type of renewable resource used. Biomass (including municipal solid waste), biogas (inclusive of landfill/sewage), small hydro and solar photovoltaic are all eligible for a FIT. These technologies were chosen because they are proven and because of their considerable technical potential in the local environment. SEDA support is not currently available for wind
  • installed capacity of the renewable energy (RE) installation). The maximum installed capacity of any eligible RE installation is 30 MW, unless special approval from the Minister is obtained. The FIT rate is reduced as the installed capacity increases, based on the assumption that cost optimisation will result from economies of scale
  • whether the RE installation will meet any criteria entitling it to additional bonus FIT rates. Additional FIT rates are available for those RE installations which meet certain criteria
  • FIT commencement date. The date the RE installation is completed, connected to the grid and ready to produce RE for commercial sale (the FIT Commencement Date) is also an important factor for the FIT rate. FIT rates for all renewable resources (except for small hydropower) decrease over time according to their respective annual degression rates. Degression occurs at the start of each new calendar year from 2013 onwards. The degressed or reduced FIT rate for each RE installation is determined by the applicable rate at the time of its FIT Commencement Date. Consequently, RE installations that are completed in later years will have a lower FIT rate. However, the rate is not reduced any further once the FIT Commencement Date has been achieved. The purpose of the degression rate is to reflect the fact that the costs of the RE technologies are expected to drop as the technologies mature. The degression rate therefore reflects the maturity and the existing cost reduction potential of all renewable resources (except for small hydropower).

The SEDA website provides the latest update of Renewable Energy quota available for any Feed-in Approval. The relevant website refreshes every 5 seconds to ensure that the latest information is available.

1.8 Power Purchase Agreements

Capacity sold under PPPAs for renewables projects have not been guaranteed in the past.

Electricity consumers in Malaysia are charged a surcharge of 1.6% on their electricity bills, although consumers using 300 kWh or less electricity are currently exempted from such surcharge.

The surcharge funds a renewable energy fund established under the REA, and this fund finances the FIT programme for electricity produced from RE sources. Developers sell capacity under a renewable energy power purchase agreement (REPPA) executed with power utilities. REPPAs are regulated by the Renewable Energy (Renewable Energy Power Purchase Agreement) Rules 2011. There are nine standardised REPPA forms for Malaysia’s FIT programme and they are available from SEDA’s website:

Click here to view table.

FIT tariffs under REPPAs are all paid in Malaysian Ringgit and are governed by, and construed in accordance with, the laws of Malaysia.

Based on the standardised REPPAs (as regulated under the REPPA Rules 2011), except for “Form PV1” (refer to response in above table) all other standard form REPPAs have standardised dispute resolution and arbitration clauses which state that, if the parties to the REPPA are unable to mutually resolve a dispute within three months from the date the dispute arises or such other time frame as the parties may agree, then the matter shall be settled by arbitration before a single arbitrator under the auspices of the Kuala Lumpur Regional Arbitration Centre. Any deviation by the parties from the standard form dispute resolution and arbitration clauses requires SEDA’s prior written approval.

Form PV1 is silent on the seat of arbitration. However, the standardised dispute resolution clause therein stipulates that either party may refer such difference or dispute to SEDA and that SEDA’s determination shall be final and binding on both parties.

  1. Project Considerations

2.1 Content Requirements

According to SEDA, there is no local preference or content requirement. SEDA confirmed in March 2016 that bidders are selected on a first come, first served basis. Applications may be made through SEDA’s website, which also sets out eligibility criteria.

However, under the FIT Rules 2011, foreign companies who wish to be eligible for a Fit-In-Approval to sell renewable energy to a Distribution Licensee at the FIT rate, will have to partner with a Malaysian company. This is because only 49% of foreign ownership is permitted in order for a company to participate in the FIT programme.

2.2 Land Requirements

RE generation projects can be carried out either on Government-owned land or on private land. Legal ownership of private land is proven by registered title.

A non-citizen or a foreign company may acquire land in Malaysia, but the prior approval of the relevant State Authority is required.

2.3 Consents and Permits

To be eligible to sell renewable energy at the FIT rate to a Distribution Licensee, a Feed-In Approval (FIA) is required from SEDA.

The SEDA website has two step-by-step guides:

  • how to Apply for FIA for Solar PV Installations ≤ 72 kW
  • how to Apply for FIA for other RE Installations

These guides are available from SEDA’s website.

In addition, a developer will likely require a licence under the ESA.

Broadly speaking, two licences under ESA (as issued by the Malaysian Energy Commission with the approval of the Malaysian Minister of Energy, Green Technology and Water) are required by persons using, working or operating or supplying electricity generating plant or equipment for renewal energy projects that are FIA approved:

  • first, a provisional license that is required for the initial commencement for such project under the REA
  • second, a permanent licence issued subsequent to the provisional licence upon the generating facility achieving its initial operation date, which may be granted for a maximum period of 21 years, subject to the approval of the Minister of Energy, Green Technology and Water

Both licenses are subject to such terms and conditions as the Malaysian Energy Commission may impose. The Energy Commission has issued guidelines on the requirements relating to the application of the issuance of both provisional and permanent licenses (including paid-up capital requirements and other eligibility requirements). These are also available on SEDA’s website.

2.4 Tax

Malaysian incorporated and resident companies that undertake green technology projects or provide green technology services may apply to the Malaysian Investment Development Authority (MIDA) for its approval for the grant of Green Technology tax incentives. In order to benefit from those incentives, the project or investment will need to satisfy certain criteria set out by MIDA. Solar projects which have been approved with a FIT by SEDA are not eligible for any Investment Tax Allowance.

  1. General Investment Considerations

3.1 Foreign Ownership

According to Rule 3(c)(i) of the FIT Rules 2011, foreign companies who wish to be eligible to apply to FIA to sell renewable energy to a Distribution Licensee at the FIT rate will have to partner with a Malaysian company. This is because only 49% foreign ownership is permitted in order for a company to be eligible for the FIT.

In addition, the Malaysian Energy Commission, in its Guidelines on the Application for a Provisional License, has indicated that shareholders in a renewable energy company that is a Feed-in Approval Holder must remain in place for at least 2 years from its commercial operation date.

Under Malaysia’s foreign exchange administration policies, non-residents are free to invest in any form of Malaysian Ringgit assets in Malaysia. Non-residents may also remit out of Malaysia divestment proceeds, profits, dividends or any income arising from these investments.

3.2 Incorporating Companies

The two types of companies that can be incorporated under the Malaysian Companies Act 1965 are:

  • a company limited by shares (identified through the words ‘Sendirian Berhad’ or ‘Sdn. Bhd.’ appearing together with the company’s name) or public company ‘Berhad’ or ‘Bhd’ appearing together with the company’s name)
  • An unlimited company

Incorporating a new company in Malaysia should take 5-10 working days from the date that directors and shareholders sign the incorporation documents. However, the incorporation timeline is largely dependent on the accuracy and completeness of the information and the documents lodged with the Companies Commission of Malaysia (SSM).

3.3 Selling or Pledging Shares

The REA does not contain any restrictions on selling or pledging shares.

3.4 Availability of Debt Finance

SEDA indicated in March 2016 that CIMB Bank Berhad and Malayan Banking Berhad (both Malaysian banks) had provided financing for renewable energy projects. Pursuant to Malaysia’s Foreign Exchange Administrations Policies, a resident company is allowed to borrow in foreign currency in any amount from a licensed onshore bank.

The Malaysian government has implemented a Green Technology Financing Scheme (GTFS), which is administered by participating Malaysian financial institutions.

Based on information provided by MGTC on its website:

  • the GTFS scheme is open to projects located within Malaysia, utilising local and/or imported technology. Private companies that could benefit from this financing scheme are producers or users of green technology products or systems
  • GTFS for producers or users are as follows:

Click here to view table.

  • the scheme is only applicable for any new project and retrofitting or expansion that incorporates Green Technology elements, which have not been funded or partly funded. The GTFS is not available for projects that have already commenced or been completed. 

Eversheds would like to thank Mah-Kimariyah & Philip Koh, International Finance Corporation, Wind Prospect and Ernst and Young for their contribution towards the e-briefing.