BIX ARTICLE
An Analysis of The Growth in Renewable Energy and The Installed Capacity Mix in Malaysia
Jun 08, 2022
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17 min read
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| 1 Introduction |
It is no surprise that electricity has become a basic necessity in every household. Electricity is generated from power plants using either renewable (hydro / solar) or non-renewable sources (coal / natural gas). In Malaysia, majority of the electricity is generated using coal and natural gas, but will they remain as the main power sources as concerns over climate change increase?
In this research paper, we will study the installed capacity mix of Malaysia at this juncture and assess each power generation source, i.e. coal, natural gas and solar, based on the capacity mix. The 2019 data will be used in BPAM’s analysis based on the most comprehensive and detailed publicly available data obtained from the Malaysia Energy Statistics Handbook 2020. BPAM observed that the renewable energy capacity proportion in 2019 (22%) is not significantly different from that in 2020 (23%) and hence, will not have a material impact to our analysis.
We will also analyse the recent spread against the Malaysian Government Securities (MGS) of the power plant-related bonds in the Ringgit bond market. The power generation development plan in Malaysia will also be discussed in the following sections.
| 2 Power Generation Sources in Malaysia: Renewable and Non-Renewable |
Malaysia is abundantly endowed with renewable sources such as hydro and solar, which are used to generate electricity, thanks to its geographical location, which is situated near the equator and surrounded by the ocean, as well as the ever-changing wind patterns from both sea and land breezes.
Apart from that, Malaysia fully imports coal from Indonesia (63%), Australia (24%), Russia (11%) and South Africa (2%) and the country is also rich with natural gas and is the fourth largest natural gas reserve holder in the Asia-Pacific region.
In this section, the installed capacity mix of Malaysia is highlighted in Figure 2.1 and 2.2 below, which shows the changes in the renewable sources and non-renewable sources capacity mix in 2019 as compared to the year 2014. As at 31 December 2019, the overall installed capacity for renewable sources had grown from 18.95% to 21.66%, whereas the overall installed capacity for non-renewable sources had fallen from 80.88% to 78.11%. This is likely due to the rise in installed capacity for solar and biogas which grew from 0.54% to 2.92% and from 0.05% to 0.41% respectively, while diesel/Marine Fuel Oil (MFO) had shrunk from 4.39% to 1.59%.
In Figure 2.3, the installed capacity mix was further broken down into the Peninsular Malaysia, Sabah and Sarawak in order to compare the installed capacity mix between these areas for the year 2014 versus the year 2019.
Source: Energy Commission (Energy Commission, 2021)
Note: Data exclude plants that are not in operation.
Figure 2.1 The Installed Capacity Mix of Malaysia as at 31 December 2014
Source: Energy Commission (Energy Commission, 2021)
Note: Data exclude plants that are not in operation.
Figure 2.2 The Installed Capacity Mix of Malaysia as at 31 December 2019
.PNG "Figure 2.3 The Installed Capacity Mix of East and West Malaysia (2014 versus 2019)")
Source: Energy Commission (Energy Commission, 2021)
Note: Data exclude plants that are not in operation.
Figure 2.3 The Installed Capacity Mix of East and West Malaysia (2014 versus 2019)
2.1 Renewable Sources
As seen in Figures 2.1 and 2.2, hydro has been the most highly used renewable power generation source in Malaysia in 2019. In fact, the main power generation source for Sarawak is hydro as illustrated in Figure 2.3. The state currently has 3 major hydro dams, i.e. Bakun Dam, Murum Dam and Batang Ai Dam, amounting to 3,452-megawatt (MW). A hydro power plant works in such a way that the falling water from the dam is collected and channelled through a turbine, causing the turbine to spin and generate electricity from the resulting kinetic energy. The amount of electricity generated depends on the height from which the water falls, volume of water flowing in the turbine and its flow rate.
Meanwhile, although solar only comes up to 2.92% or 1,056.3MW of the installed capacity mix in Malaysia, it is a renewable source that is rising in popularity due to heightened concerns over environmental issues over the years (more details in Section 5). A solar power plant operates in such a way that a single solar panel is able to absorb sunlight through its many photovoltaic (PV) cells, and use that light energy to create electricity through the photovoltaic effect.
In addition, it is worth highlighting that the statistics in Figure 2.2 and Figure 2.3 had not yet taken into account the capacity awarded by the government during the second, third and fourth cycle of its Large Scale Solar (LSS) scheme, given that the data included only plants that are in operation as at 31 December 2019.
The plants under the second, third and fourth instalments of the LSS scheme are only due for commercial operations in 2019/2020, 2021 and 2022/2023 respectively (Kenning, 2017). To note, the first solar farm from the second instalment of the LSS had only achieved commercial operation in January 2020. The total amount of additional capacity expected from the power plants awarded in the second, third and fourth cycles of the LSS scheme is a whopping 1,876MW. When these power plants achieve commercial operations, the installed capacity for solar power plants would almost double the amount registered as at 31 December 2019.
Biomass, which is another renewable source, is the mass combustion of organic materials from plants and animals. The most commonly used biomass materials in Malaysia are palm fruits and rice husk. The remnants of palm fruits post-extraction of palm oil are used for direct combustion to produce high-pressure steam in boilers which will then generate power through the steam turbines.
2.2 Non-Renewable Sources
On the other hand, there are two main non-renewable power generation sources in Malaysia, i.e. coal and natural gas. Similar to biomass, both coal and natural gas power plants, also known as thermal power plants or fossil fuel power plants, undergo the process of burning fossil fuels in a boiler to generate highpressure steam, and electricity is then generated using steam turbines.
Most natural gas power plants are combined-cycle gas turbine (CCGT) power plants, where a simple cycle plant consisting of a gas turbine connected to a generator, is combined with another external combustion engine. As at point of writing, the largest CCGT power plant in Malaysia is Edra Energy’s 2,242MW CCGT power plant located in Alor Gajah, Melaka. The construction of the power plant was recently completed on 28 February 2022.
In this section, we will be assessing possible factors such as cost, efficiency and, the reliability and controllability of each power generation source, that could have influenced the current installed capacity mix. Then, we will further explore the factors that had driven coal and natural gas to be the main power generation sources in Malaysia. For a more focused assessment, we will only include the coal, natural gas and solar power plants.
3.1 Reliability and Controllability
Reliability and controllability refer to the consistency and ability to control the amount of electricity generated.
Solar is unreliable and uncontrollable as it depends on the climate which is unpredictable in nature. Although Malaysia is situated near the equator, there might not be consistent sunshine available throughout the day.
Therefore, when the availability of sunshine is intermittent throughout the day, this affects the amount of electricity generated for that day. Meanwhile, for natural gas and coal, they are relatively easier to control and more reliable than solar since the exact amount of electricity can be anticipated once the fossil fuels are extracted and burned regardless of the time or weather forecast.
3.2 Efficiency
There is no common feature to compare the efficiency between the various types of power plants, due to the different technology used to produce electricity for each of them. In this case, we will look at two tangible factors, i.e. fuel efficiency and space.
3.2.1 Fuel Efficiency
The fuel efficiency of a power plant describes the percentage of the total energy capacity of a power plant’s fuel that can be extracted and converted to electricity. For example, how much of that sunlight that hits the surface of the solar panel can be transformed into usable electricity?
The efficiency of a solar power plant varies depending on several factors such as materials, modules used and orientation of the solar panel. Majority of the solar power plants operating in Malaysia uses solar panels made out of monocrystalline and polycrystalline, which have efficiency rates ranging between 15% and 22%.
On the other hand, the overall efficiency of a coal power plant can come up to 40%, while natural gas has the highest rate of up to 45%. The gap in efficiency between solar and fossil fuels could be due to the nature of the sun where sunlight and its solar energy’s wavelength harnessed by solar panels can vary on a daily basis.
3.2.2 Space
Generally, compared to thermal power plants, solar power plants would require a significantly larger land size since each solar panel needs to be facing the sun and cannot overlap one another. To put this into context, Tanjung Bin Energy’s 1,010MW coal-fired power plant covers about 161 acres of land, while Kimanis’ 285MW CCGT power plant covers roughly 41.74 acres. Conversely, Edra Solar’s 50MW solar PV plant covers around 260 acres and Tadau Energy’s 50MW solar PV plant takes up around 170 acres of land.
3.3 Cost
Source: Energy Commission (Energy Commission, 2021)
Table 3.1 Average Levelised Cost of Electricity – Operating Cost for Each Power Generation
The average levelised cost of electricity (LCOE) comprises the average building cost and the operating cost per unit of total electricity generated over an assumed lifetime. For the purpose of this research paper, cost will refer to the operating cost per unit portion of the LCOE as it would be more relevant to analyse the ongoing operating costs rather than construction cost. As most coal-fired power plants in Malaysia were built some time ago, these historical costs may not be useful for the purpose of our analysis. The last coal-fired power plant built was Jimah East Power’s 2x1,000MW coal-fired power plant back in December 2019.
As seen in Table 3.1, the LCOE of the coal-fired power plants is roughly the same as natural gas at USD99.3 per MWh and USD112.69 per MWh respectively. On the other hand, the LCOE for solar power plants is roughly 10 times lower than both the natural gas and coal-fired power plants as majority of its operating cost stems from only the operations and maintenance cost, and in the absence of the relatively high fuel costs. Once the solar panels have been set up, they are left to their own devices and would only require maintenance from time to time.
In this section, we will be looking into the spread against Malaysian Government Securities (MGS) of power plant-related bonds. For easier comparison, we will compare bonds with remaining tenure of 5 years that are issued by independent power producers (IPPs), entities that own, operate or develop power plants, or entities that were formed to raise funds for the construction of power plants in the Ringgit bond market. Sections 4.1 to 4.3 will analyse the spreads of bonds pertaining to the coal, natural gas and solar power generation source separately while Section 4.4 will compare the bond spread performance across these 3 sources. For a more relevant analysis, only bonds issued by the top 5 issuers with a liquidity score1 of more than 1 will be included for comparison purposes.
4.1 Coal-fired Power Plant
Source: Bond Pricing Agency Malaysia
Figure 4.1 5Y Spread Against MGS – Coal-fired Power Plant
As seen in Figure 4.1, the spread against MGS for Jimah East Power (JEP) IMTN 5.590% 04.06.2027 – Tranche 13 had tightened slightly between August and October 2021. JEP develops and operates a 2x1,000MW ultra-supercritical coal-fired power plant, which utilises an ultra-supercritical technology (USC) that has a higher thermal efficiency of 40% in comparison to conventional coal-fired power plant with a 36% efficiency. JEP also won the award for Clean Coal Technology Utilisation for Large Power Generation in the ASEAN Energy Awards 2021 that was held around mid-September 2021. Being a high-profile coal-fired power plant could have contributed to the narrowing of the spread despite the fact that one of the plant’s two units had exceeded the unplanned outage limits of 6% and 8% as agreed in a Power Purchasing Agreement with Tenaga Nasional Berhad (TNB) between April and June 2021.
Conversely, the spread against MGS for TBE IMTN 5.700% 16.03.2027 (Tranche 12) had widened around mid-August 2021 compared to the other local IPPs as the sukuk was traded at about 45 bps higher from its current level at that point in time.
4.2 CCGT Power Plant
Source: Bond Pricing Agency Malaysia
Figure 4.2 5Y Spread Against MGS – CCGT Power Plant
In the case of CCGT power plants, the spread against MGS for Edra Energy IMTN 5.940% 05.07.2027 – Tranche No.12 had tightened gradually between the months of April and October 2021 compared to the other CCGT power plant-related bonds, as illustrated in Figure 4.2. Prior to achieving its commercial operation date in February 2022, it was expected that Edra Energy’s power plant would be the largest CCGT power plant operating in Southeast Asia. This could have sparked investors’ interest to tap into the possible economic benefits that the plant could bring. Incidentally, Edra also has the highest liquidity score among the other CCGT power plant-related issuers.
Besides that, it can be seen in Figure 4.1 that Kimanis’ spread had tightened around mid-May 2021, which was a result of their rating upgrade from AA3 to AA2. Kimanis operates a CCGT power plant in Kimanis Bay, Sabah, where the plant had performed well in terms of UOR, availability and heat rate. In addition, they demonstrated the workability of their self-operating model with their parent company, Petroliam Nasional Berhad or PETRONAS as their technical supporter.
4.3 Solar Power Plant
Source: Bond Pricing Agency Malaysia
Figure 4.3 5Y Spread Against MGS – Solar Power Plant
As seen in Figure 4.3, the spread against MGS for Quantum Solar Park (Semenanjung) (QSPS) Green Sri Sukuk 5.560% 06.10.2027 – T18 had narrowed roughly around 60bps in the beginning of March 2021 when QSPS had their ratings upgraded to AA3/Stable as they exhibited steady operational performance corresponding with the expectation of the rating agency, Malaysian Rating Corporation Bhd. Since then, the QSPS sukuk as well as reNIKOLA IMTN 4.200% 11.05.2027 had shown a continuous narrowing in the spread against MGS, as oppose to the rest that remained largely range-bound.
According to some market players, this could be due to the fall in demand for coal-fired power plant-related bonds and investors have been moving towards solar and other renewable power generation sources-related bonds instead, as more companies have been adopting ESG practices amidst the gradual growth in climate change awareness. As QSPS has the highest liquidity score amongst the other solar power plant bonds in the Ringgit bond market, the actively traded sukuk would also be a more accurate inference of the recent favourable market appetite for solar IPPs.
4.4 Coal-fired Power Plant vs CCGT Power Plant vs Solar Power Plant
Source: Bond Pricing Agency Malaysia
Figure 4.4 Average 5Y Spread Against MGS – Coal vs CCGT vs Solar
Apart from analysing the spread of power plant related bonds for each power generation source separately, the average 5Y spread against MGS for each power generation source was compiled to observe the changes in trends throughout 2021.
It is observed in Figure 4.4 that the average 5Y spread against MGS for solar power plants had notably tightened relative to the spread of the fossil fuel power plants since the end of March 2021 until to-date. Meanwhile, the average spread for coal-fired power plants had increased such that its spread is above CCGT power plants starting around mid-July 2021. This could indicate a shift in market players’ preference from coal to solar or companies could be seeking to demonstrate their own awareness to the importance of ESG by aligning their goals to the growing demands surrounding this theme.
As mentioned in Section 4.4, there has been a glimpse of a shift in demand from fossil fuel power plants to solar power plants, despite the fairly small sample size of power plant-related bonds used in Section 4. Businesses may have begun to broaden their role in society towards more sustainable practices as the world faces an increase in vulnerability to climate change.
Evidently, the emissions of carbon dioxide from the burning of fossil fuel has caused a significant degradation in the environment, resulting in the rise of greenhouse gas (GHG) emissions, thus contributing to global warming.
In response to the global trends in fighting climate change, the Malaysian government tabled the 12th Malaysia Plan in September 2021 with a carbon-neutrality target of 2050 along with other measures to accelerate green growth. Malaysia would be committed to a 45% reduction in GHG emissions by 2030 compared to a 2005 baseline, which is in line with the Paris Climate Agreement signed in 2015.
According to the Ministry of Energy and Natural Resources, Malaysia aims to increase the share of renewable energy in its power capacity mix to 31% in 2025 and 40% in 2035 (2019: 22%, 2020: 23%) (Abdullah, 2022).
For this purpose, the Malaysian government pledged that they will no longer build new coal-fired power plants. Meanwhile, the last non-renewable power plant built was Edra Energy’s CCGT power plant, which will end productions in 2040.
Bank Negara Malaysia had also implemented the Climate Change Principle-based Taxonomy (CCPT) and the Value-based Intermediation Guidelines (VBI). The CCPT is a framework that facilitates standardised categorisation of economic activities based on their impacts on climate change and to channel capital and funds to activities that would encourage more businesses in the transition to a low carbon economy. On the other hand, the VBI is a guidance for Islamic Bank Institutions which aims to achieve the outcome of Islamic financing that produces positive and sustainable impact to the economy, community and environment.
All in all, electricity in Malaysia is still mostly generated from coal and natural gas power plants as they appear to be more reliable, controllable and efficient compared to solar power plants and due to the long running history of the utilisation of such sources. However, the heavy reliance on these fossil fuel power plants cannot be sustained in the near future due to the exponentially increasing environmental cost. The Malaysian government is also wary of the systematic risk faced and has aimed to achieve the Net Carbon Zero target by 2050 and to increase the share of renewable energy in its power capacity mix to 40% in 2035.
At this point, it is still hard to say whether Malaysia could completely phase out fossil fuels in its future plans for electricity generation. And where possible, the transition process is not expected to be easy and would be a lengthy process. Nonetheless, the strong growth in the ESG segment, the increasing demand for the solar power plant-related Ringgit bonds and the analysis of the installed capacity mix in Malaysia have shown clear indicators of the preference for renewable energy which would propel the growth of this segment in the near future.
Source: [BPAM] An Analysis of the Growth in Renewable Energy and the Installed Capacity Mix in Malaysia (2022, 08 Jun). BPAM MARKET AND PRODUCT RESEARCH. Retrieved from BPAM
DisclaimerNote: Data exclude plants that are not in operation.
Figure 2.1 The Installed Capacity Mix of Malaysia as at 31 December 2014
Source: Energy Commission (Energy Commission, 2021)
Note: Data exclude plants that are not in operation.
Figure 2.2 The Installed Capacity Mix of Malaysia as at 31 December 2019
Source: Energy Commission (Energy Commission, 2021)Note: Data exclude plants that are not in operation.
Figure 2.3 The Installed Capacity Mix of East and West Malaysia (2014 versus 2019)
2.1 Renewable Sources
As seen in Figures 2.1 and 2.2, hydro has been the most highly used renewable power generation source in Malaysia in 2019. In fact, the main power generation source for Sarawak is hydro as illustrated in Figure 2.3. The state currently has 3 major hydro dams, i.e. Bakun Dam, Murum Dam and Batang Ai Dam, amounting to 3,452-megawatt (MW). A hydro power plant works in such a way that the falling water from the dam is collected and channelled through a turbine, causing the turbine to spin and generate electricity from the resulting kinetic energy. The amount of electricity generated depends on the height from which the water falls, volume of water flowing in the turbine and its flow rate.
Meanwhile, although solar only comes up to 2.92% or 1,056.3MW of the installed capacity mix in Malaysia, it is a renewable source that is rising in popularity due to heightened concerns over environmental issues over the years (more details in Section 5). A solar power plant operates in such a way that a single solar panel is able to absorb sunlight through its many photovoltaic (PV) cells, and use that light energy to create electricity through the photovoltaic effect.
In addition, it is worth highlighting that the statistics in Figure 2.2 and Figure 2.3 had not yet taken into account the capacity awarded by the government during the second, third and fourth cycle of its Large Scale Solar (LSS) scheme, given that the data included only plants that are in operation as at 31 December 2019.
The plants under the second, third and fourth instalments of the LSS scheme are only due for commercial operations in 2019/2020, 2021 and 2022/2023 respectively (Kenning, 2017). To note, the first solar farm from the second instalment of the LSS had only achieved commercial operation in January 2020. The total amount of additional capacity expected from the power plants awarded in the second, third and fourth cycles of the LSS scheme is a whopping 1,876MW. When these power plants achieve commercial operations, the installed capacity for solar power plants would almost double the amount registered as at 31 December 2019.
Biomass, which is another renewable source, is the mass combustion of organic materials from plants and animals. The most commonly used biomass materials in Malaysia are palm fruits and rice husk. The remnants of palm fruits post-extraction of palm oil are used for direct combustion to produce high-pressure steam in boilers which will then generate power through the steam turbines.
2.2 Non-Renewable Sources
On the other hand, there are two main non-renewable power generation sources in Malaysia, i.e. coal and natural gas. Similar to biomass, both coal and natural gas power plants, also known as thermal power plants or fossil fuel power plants, undergo the process of burning fossil fuels in a boiler to generate highpressure steam, and electricity is then generated using steam turbines.
Most natural gas power plants are combined-cycle gas turbine (CCGT) power plants, where a simple cycle plant consisting of a gas turbine connected to a generator, is combined with another external combustion engine. As at point of writing, the largest CCGT power plant in Malaysia is Edra Energy’s 2,242MW CCGT power plant located in Alor Gajah, Melaka. The construction of the power plant was recently completed on 28 February 2022.
| 3 Possible Factors Explaining the Installed Capacity Mix in Malaysia |
In this section, we will be assessing possible factors such as cost, efficiency and, the reliability and controllability of each power generation source, that could have influenced the current installed capacity mix. Then, we will further explore the factors that had driven coal and natural gas to be the main power generation sources in Malaysia. For a more focused assessment, we will only include the coal, natural gas and solar power plants.
3.1 Reliability and Controllability
Reliability and controllability refer to the consistency and ability to control the amount of electricity generated.
Solar is unreliable and uncontrollable as it depends on the climate which is unpredictable in nature. Although Malaysia is situated near the equator, there might not be consistent sunshine available throughout the day.
Therefore, when the availability of sunshine is intermittent throughout the day, this affects the amount of electricity generated for that day. Meanwhile, for natural gas and coal, they are relatively easier to control and more reliable than solar since the exact amount of electricity can be anticipated once the fossil fuels are extracted and burned regardless of the time or weather forecast.
3.2 Efficiency
There is no common feature to compare the efficiency between the various types of power plants, due to the different technology used to produce electricity for each of them. In this case, we will look at two tangible factors, i.e. fuel efficiency and space.
3.2.1 Fuel Efficiency
The fuel efficiency of a power plant describes the percentage of the total energy capacity of a power plant’s fuel that can be extracted and converted to electricity. For example, how much of that sunlight that hits the surface of the solar panel can be transformed into usable electricity?
The efficiency of a solar power plant varies depending on several factors such as materials, modules used and orientation of the solar panel. Majority of the solar power plants operating in Malaysia uses solar panels made out of monocrystalline and polycrystalline, which have efficiency rates ranging between 15% and 22%.
On the other hand, the overall efficiency of a coal power plant can come up to 40%, while natural gas has the highest rate of up to 45%. The gap in efficiency between solar and fossil fuels could be due to the nature of the sun where sunlight and its solar energy’s wavelength harnessed by solar panels can vary on a daily basis.
3.2.2 Space
Generally, compared to thermal power plants, solar power plants would require a significantly larger land size since each solar panel needs to be facing the sun and cannot overlap one another. To put this into context, Tanjung Bin Energy’s 1,010MW coal-fired power plant covers about 161 acres of land, while Kimanis’ 285MW CCGT power plant covers roughly 41.74 acres. Conversely, Edra Solar’s 50MW solar PV plant covers around 260 acres and Tadau Energy’s 50MW solar PV plant takes up around 170 acres of land.
3.3 Cost
Source: Energy Commission (Energy Commission, 2021)
Table 3.1 Average Levelised Cost of Electricity – Operating Cost for Each Power Generation
The average levelised cost of electricity (LCOE) comprises the average building cost and the operating cost per unit of total electricity generated over an assumed lifetime. For the purpose of this research paper, cost will refer to the operating cost per unit portion of the LCOE as it would be more relevant to analyse the ongoing operating costs rather than construction cost. As most coal-fired power plants in Malaysia were built some time ago, these historical costs may not be useful for the purpose of our analysis. The last coal-fired power plant built was Jimah East Power’s 2x1,000MW coal-fired power plant back in December 2019.
As seen in Table 3.1, the LCOE of the coal-fired power plants is roughly the same as natural gas at USD99.3 per MWh and USD112.69 per MWh respectively. On the other hand, the LCOE for solar power plants is roughly 10 times lower than both the natural gas and coal-fired power plants as majority of its operating cost stems from only the operations and maintenance cost, and in the absence of the relatively high fuel costs. Once the solar panels have been set up, they are left to their own devices and would only require maintenance from time to time.
| 4 Difference in Bond Spreads between the Power Generation Sources |
In this section, we will be looking into the spread against Malaysian Government Securities (MGS) of power plant-related bonds. For easier comparison, we will compare bonds with remaining tenure of 5 years that are issued by independent power producers (IPPs), entities that own, operate or develop power plants, or entities that were formed to raise funds for the construction of power plants in the Ringgit bond market. Sections 4.1 to 4.3 will analyse the spreads of bonds pertaining to the coal, natural gas and solar power generation source separately while Section 4.4 will compare the bond spread performance across these 3 sources. For a more relevant analysis, only bonds issued by the top 5 issuers with a liquidity score1 of more than 1 will be included for comparison purposes.
4.1 Coal-fired Power Plant
Source: Bond Pricing Agency Malaysia
Figure 4.1 5Y Spread Against MGS – Coal-fired Power Plant
As seen in Figure 4.1, the spread against MGS for Jimah East Power (JEP) IMTN 5.590% 04.06.2027 – Tranche 13 had tightened slightly between August and October 2021. JEP develops and operates a 2x1,000MW ultra-supercritical coal-fired power plant, which utilises an ultra-supercritical technology (USC) that has a higher thermal efficiency of 40% in comparison to conventional coal-fired power plant with a 36% efficiency. JEP also won the award for Clean Coal Technology Utilisation for Large Power Generation in the ASEAN Energy Awards 2021 that was held around mid-September 2021. Being a high-profile coal-fired power plant could have contributed to the narrowing of the spread despite the fact that one of the plant’s two units had exceeded the unplanned outage limits of 6% and 8% as agreed in a Power Purchasing Agreement with Tenaga Nasional Berhad (TNB) between April and June 2021.
Conversely, the spread against MGS for TBE IMTN 5.700% 16.03.2027 (Tranche 12) had widened around mid-August 2021 compared to the other local IPPs as the sukuk was traded at about 45 bps higher from its current level at that point in time.
4.2 CCGT Power Plant
Source: Bond Pricing Agency Malaysia
Figure 4.2 5Y Spread Against MGS – CCGT Power Plant
In the case of CCGT power plants, the spread against MGS for Edra Energy IMTN 5.940% 05.07.2027 – Tranche No.12 had tightened gradually between the months of April and October 2021 compared to the other CCGT power plant-related bonds, as illustrated in Figure 4.2. Prior to achieving its commercial operation date in February 2022, it was expected that Edra Energy’s power plant would be the largest CCGT power plant operating in Southeast Asia. This could have sparked investors’ interest to tap into the possible economic benefits that the plant could bring. Incidentally, Edra also has the highest liquidity score among the other CCGT power plant-related issuers.
Besides that, it can be seen in Figure 4.1 that Kimanis’ spread had tightened around mid-May 2021, which was a result of their rating upgrade from AA3 to AA2. Kimanis operates a CCGT power plant in Kimanis Bay, Sabah, where the plant had performed well in terms of UOR, availability and heat rate. In addition, they demonstrated the workability of their self-operating model with their parent company, Petroliam Nasional Berhad or PETRONAS as their technical supporter.
4.3 Solar Power Plant
Source: Bond Pricing Agency Malaysia
Figure 4.3 5Y Spread Against MGS – Solar Power Plant
As seen in Figure 4.3, the spread against MGS for Quantum Solar Park (Semenanjung) (QSPS) Green Sri Sukuk 5.560% 06.10.2027 – T18 had narrowed roughly around 60bps in the beginning of March 2021 when QSPS had their ratings upgraded to AA3/Stable as they exhibited steady operational performance corresponding with the expectation of the rating agency, Malaysian Rating Corporation Bhd. Since then, the QSPS sukuk as well as reNIKOLA IMTN 4.200% 11.05.2027 had shown a continuous narrowing in the spread against MGS, as oppose to the rest that remained largely range-bound.
According to some market players, this could be due to the fall in demand for coal-fired power plant-related bonds and investors have been moving towards solar and other renewable power generation sources-related bonds instead, as more companies have been adopting ESG practices amidst the gradual growth in climate change awareness. As QSPS has the highest liquidity score amongst the other solar power plant bonds in the Ringgit bond market, the actively traded sukuk would also be a more accurate inference of the recent favourable market appetite for solar IPPs.
4.4 Coal-fired Power Plant vs CCGT Power Plant vs Solar Power Plant
Source: Bond Pricing Agency Malaysia
Figure 4.4 Average 5Y Spread Against MGS – Coal vs CCGT vs Solar
Apart from analysing the spread of power plant related bonds for each power generation source separately, the average 5Y spread against MGS for each power generation source was compiled to observe the changes in trends throughout 2021.
It is observed in Figure 4.4 that the average 5Y spread against MGS for solar power plants had notably tightened relative to the spread of the fossil fuel power plants since the end of March 2021 until to-date. Meanwhile, the average spread for coal-fired power plants had increased such that its spread is above CCGT power plants starting around mid-July 2021. This could indicate a shift in market players’ preference from coal to solar or companies could be seeking to demonstrate their own awareness to the importance of ESG by aligning their goals to the growing demands surrounding this theme.
| 5 Power Generation Development Plan in Malaysia |
As mentioned in Section 4.4, there has been a glimpse of a shift in demand from fossil fuel power plants to solar power plants, despite the fairly small sample size of power plant-related bonds used in Section 4. Businesses may have begun to broaden their role in society towards more sustainable practices as the world faces an increase in vulnerability to climate change.
Evidently, the emissions of carbon dioxide from the burning of fossil fuel has caused a significant degradation in the environment, resulting in the rise of greenhouse gas (GHG) emissions, thus contributing to global warming.
In response to the global trends in fighting climate change, the Malaysian government tabled the 12th Malaysia Plan in September 2021 with a carbon-neutrality target of 2050 along with other measures to accelerate green growth. Malaysia would be committed to a 45% reduction in GHG emissions by 2030 compared to a 2005 baseline, which is in line with the Paris Climate Agreement signed in 2015.
According to the Ministry of Energy and Natural Resources, Malaysia aims to increase the share of renewable energy in its power capacity mix to 31% in 2025 and 40% in 2035 (2019: 22%, 2020: 23%) (Abdullah, 2022).
For this purpose, the Malaysian government pledged that they will no longer build new coal-fired power plants. Meanwhile, the last non-renewable power plant built was Edra Energy’s CCGT power plant, which will end productions in 2040.
Bank Negara Malaysia had also implemented the Climate Change Principle-based Taxonomy (CCPT) and the Value-based Intermediation Guidelines (VBI). The CCPT is a framework that facilitates standardised categorisation of economic activities based on their impacts on climate change and to channel capital and funds to activities that would encourage more businesses in the transition to a low carbon economy. On the other hand, the VBI is a guidance for Islamic Bank Institutions which aims to achieve the outcome of Islamic financing that produces positive and sustainable impact to the economy, community and environment.
| 6 Conclusion |
All in all, electricity in Malaysia is still mostly generated from coal and natural gas power plants as they appear to be more reliable, controllable and efficient compared to solar power plants and due to the long running history of the utilisation of such sources. However, the heavy reliance on these fossil fuel power plants cannot be sustained in the near future due to the exponentially increasing environmental cost. The Malaysian government is also wary of the systematic risk faced and has aimed to achieve the Net Carbon Zero target by 2050 and to increase the share of renewable energy in its power capacity mix to 40% in 2035.
At this point, it is still hard to say whether Malaysia could completely phase out fossil fuels in its future plans for electricity generation. And where possible, the transition process is not expected to be easy and would be a lengthy process. Nonetheless, the strong growth in the ESG segment, the increasing demand for the solar power plant-related Ringgit bonds and the analysis of the installed capacity mix in Malaysia have shown clear indicators of the preference for renewable energy which would propel the growth of this segment in the near future.
Source: [BPAM] An Analysis of the Growth in Renewable Energy and the Installed Capacity Mix in Malaysia (2022, 08 Jun). BPAM MARKET AND PRODUCT RESEARCH. Retrieved from BPAM
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