January 2021 Electricity supply industry reform and design of competitive electricity market in Malaysia OIES Paper: EL 44 Maragatham Kumar, OIES-UNITEN Supernumerary Research Fellow, OIES Rahmat Poudineh, Senior Research Fellow, OIES Amanuddin Shamsuddin, Project Leader, OIES-UNITEN Supernumerary Research Project Contents Contents ................................................................................................................................................. i Figures ................................................................................................................................................... i Tables ..................................................................................................................................................... i Acknowledgement .............................................................................................................................. iii 1. Introduction ...................................................................................................................................... 1 2. Electricity supply industry background ......................................................................................... 3 3. Electricity market reform model for Malaysia ............................................................................. 10 4. Implications of decentralization for the Malaysian electricity sector ....................................... 31 5. The design of renewable support schemes for the Malaysian electricity sector .................... 42 6. Conclusion ...................................................................................................................................... 52 Bibliography ....................................................................................................................................... 58 Figures Figure 1.1: Map of Malaysia: Peninsular Malaysia, Sabah and Sarawak .............................................. 1 Figure 2.1: Key challenges in the power sector in Malaysia .................................................................. 7 Figure 2.2: Timeline of core national policies that drive the resource supply utilisation in Malaysia ...... 8 Figure 3.1: Current Structure of Malaysia Energy Supply Industry (MESI) .......................................... 15 Figure 3.2: Planned restructuring of power sector under government initiatives (MESI 2.0) ............... 16 Figure 4.1: System Demand Profile in Peninsular Malaysia ................................................................ 36 Figure 4.2: Residential daily load of Malaysia ...................................................................................... 39 Tables Table 2.1: Summary of past and current motivation for power sector reform ........................................ 5 Table 2.2: Summary of energy related national policies in Malaysia ..................................................... 9 Table 4.1: Old NEM scheme (2016) and revised New NEM scheme (2019) ....................................... 33 Table 5.1: Allocated quota for renewable resources under FiT scheme .............................................. 44 Table 6.1: Summary of findings on suitable reform model for the Malaysian electricity sector ............ 53 Table 6.2: Summary of findings for the effect of decentralization on Malaysian power sector ............ 55 Table 6.3: Summary of findings for research question on renewable support scheme design and implementation ..................................................................................................................................... 57 i The contents of this paper are the authors’ sole responsibility. They do not necessarily represent the views of the Oxford Institute for Energy Studies and the Institute of Energy Policy and Research (IEPRe) or any of their members. Copyright © 2021 Oxford Institute for Energy Studies (Registered Charity, No. 286084) and the Institute of Energy Policy & Research (IEPRe) of Universiti Tenaga Nasional (UNITEN) This publication may be reproduced in part for educational or non-profit purposes without special permission from the copyright holder, provided acknowledgment of the source is made. No use of this publication may be made for resale or for any other commercial purpose whatsoever without prior permission in writing from the Oxford Institute for Energy Studies and the Institute of Energy Policy and Research (IEPRe) of UNITEN. ISBN 978-1-78467-171-6 ii Acknowledgement This paper was written as part of the OIES-UNITEN Fellowship in Malaysian Energy Studies Programme, and the authors would like to thank Universiti Tenaga Nasional (UNITEN) for sponsoring the Programme. The programme in collaboration between Oxford Institute of Energy Studies (OIES) and Institute of Energy Policy & Research (IEPRe) of UNITEN for which this Study entitled “Electricity Supply Industry Reform and Design of Competitive Electricity Market in Malaysia” is aimed at examining and evaluating electricity supply reform, challenges and market design issues and options in Peninsular Malaysia. The findings from the study would enable formulation of a reform model for Malaysian electricity sector which promotes competition, security and sustainability of supply including impact of decentralisation, compatible with the country’s own context and government policy. The authors would like to thank all the contributors of the project team mentioned below including stakeholders for the unwavering support to complete this study. The work also benefited greatly from valuable inputs obtained from the stakeholders and project team, hence the authors would also like to express their sincere appreciation and gratitude for their active participation including the invaluable views and remarks they contributed to help complete this study. All views and remaining errors are the responsibility of the authors. We would like to eXpress our heartfelt thanks to Prof. Dato’ Ir. Dr. Kamal Nasharuddin Mustapha, Vice Chancellor, UNITEN, for being instrumental for inception of this study and being a very supportive and passionate patron of the OIES-UNITEN Fellowship in Malaysian Energy Studies Programme. The authors would like to take the opportunity to eXpress our gratitude to the following professionals and representatives from the related Malaysian Authorities, Government Agencies and Malaysian Industries who contributed to the success of this study: OIES Sustainable Energy Development Authority Dr. Bassam Fattouh (SEDA) Malaysia. Dr. Rahmat Poudineh Federation of Malaysian Manufacturers (FMM). Dr. Anupama Sen Malaysian Rubber Glove Manufacturers Association (MARGMA). UNITEN Malaysian Iron and Steel Industry Federation Prof. Dato’ Dr. Siti Salbiah Mohamed Shariff (MISIF). (Advisor) Association of Independent Power Producer of Prof. Ir. Dr. Kumaran Palanisamy (Managing Malaysia (Penjana Bebas). Director, URND) Generation Division, Tenaga Nasional Berhad. Dr. Siti Indati Mustapa @ Jaafar (Director, IEPRe) Grid Division, Tenaga Nasional Berhad. Prof. Ir. Dr. Tuan Ab Rashid Tuan Abdullah Grid System Operator (GSO), Tenaga Nasional (former Project Leader) Berhad. Dr. Amar Hisham Jaaffar (Team Member) Distribution Network Division, Tenaga Nasional Berhad. Dr. Maryam Huda Ahmed Phesal (Team Member) Retail Division, Tenaga Nasional Berhad. Dr. Tan Ee Sann (Team Member) Single Buyer. Malaysian Authorities, Government Strategy and Regulatory Division, Tenaga Agencies and Industries: Nasional Berhad. Energy Commission (EC). TNB Renewables Sdn. Bhd. Ministry of Science, Technology and YTL Power Generation Sdn. Bhd. Innovation (MOSTI). Segari Energy Ventures (Lumut). Malaysia Programme Office for Power Electricity Reform (MyPOWER) Corporation. iii 1. Introduction 1.1 Introduction Malaysia is a member state of the Association of Southeast Asian Nations (ASEAN)1 and is classified as an upper middle-income economy2 (WB, 2020). The country is divided into three main regions: Peninsular Malaysia, Sabah, and Sarawak (see Figure 1.1). Sarawak and Sabah are located on the island of Borneo and are separated from Peninsular Malaysia by the South China Sea. Peninsular Malaysia shares a land border with Thailand and a maritime border with Singapore, while Sabah and Sarawak share land borders with Indonesia and Brunei. Figure 1.1: Map of Malaysia: Peninsular Malaysia, Sabah, and Sarawak Source: www.worldatlas (2020) Since the 1990s, Malaysia has been in the process of restructuring its electricity sector with the aim of improving the efficiency, governance, and administration of the sector, maintaining/enhancing the security of electricity supply, and encouraging the growth of low-carbon technologies (see Chapter 2). The country has faced a number of challenges in all elements across the electricity supply chain and this led to the creation of the Malaysian Electricity Supply Industry (MESI 1.0) reform initiatives. This reform aimed at awarding tenders to competive independent power producers (IPPs), incentive based regulation (IBR) with imbalance cost pass through (ICPT), accounting unbundling, and the gradual rationalization of gas subsidies. In the years following MESI 1.0 a range of new industry megatrends – such as digitalization (examples: smart energy network using digital technologies), decentralization (examples: customer participation and integration of distributed resources), and electrification (examples: increase in electricity demand due to electric vehicles and other appliances)