This article first appeared in Forum, The Edge Malaysia Weekly on July 17, 2023 - July 23, 2023

Fossil fuels — particularly coal and natural gas — make up most of the country’s energy mix. This dependence on fossil fuels poses a significant challenge to the decarbonisation of the energy sector, especially the power generation sector.

Recently, Asian Development Bank (ADB) announced that it would no longer finance coal mining or oil and natural gas production and exploration. The coal ban policy is a decade late, but it still helps build the economic case for the energy transition for governments and investors, the bank said. To reduce reliance on fossil fuels, Malaysia is dealing with a significant energy transition challenge as it seeks to phase out coal-based power plants.

Coal generates about 50% of the country’s electricity. Also, substantial investments in renewable energy (RE) and energy storage infrastructure will be required. The phase-out of coal requires replacing a lot of energy generation capacity in coal-fired power plants. Natural gas, solar electricity, wind power and hydropower are the alternative energy sources that Malaysia needs to replace its coal-fired power plants. It will require new energy infrastructure as well as upgrades to the system in order to include RE sources. The Malaysia Renewable Energy Roadmap (MyRER) set a target to reach 31% of RE share in the national installed capacity mix by 2025, and to achieve a 40% target or 18gw  cumulative RE capacity by 2035. Recently, Malaysia announced that it would increase its RE ambition to about 70% of the national electricity mix by 2050. This target supports the country’s global climate commitment to reduce its economy-wide carbon intensity (against gross domestic product) of 45% in 2030 compared with the 2005 level. Realisation of the government’s vision is crucial in supporting the nation to achieve its nationally determined contributions (NDC) targets.

Eliminating the relatively inexpensive coal could increase the cost of electricity generation, despite its environmental benefits. In addition, the development of RE initiatives require significant infrastructure and financing investments, which can be challenging in the absence of supportive policy frameworks and incentives. This could have repercussions for Malaysian industry as well as for the prices paid by consumers. In addition to the higher upfront costs associated with renewable and green energy sources, the socioeconomic impacts of phasing out coal must also be taken into consideration. This is especially important for workers in the coal industry as well as towns that are reliant on coal-fired power plants. Retraining and reskilling programmes will assist people in making the transition to jobs in the RE sector. As is well known, RE sources such as solar and wind can have high upfront costs, especially when compared to conventional energy sources like natural gas and coal. Especially when tariffs are low, this can make it difficult for RE initiatives to compete on price.

Currently, electricity tariffs in Malaysia are extensively subsidised by the government, so consumers pay below market rates for electricity consumption. The government is allocating RM10.76 billion to cover electricity bill subsidies for both domestic and non-domestic consumers (1H2023). Natural Resources, Environment, and Climate Change Minister Nik Nazmi Nik Ahmad said this covers users in micro, small, and medium enterprises (PMKS), restaurants, retail stores and small workshops, as well as users in the agricultural category such as farmers, breeders and smallholders. “This means that 9.5 million electricity users, who represent 99% of all users in Peninsular Malaysia, will not be affected by the increase in fuel costs for electricity generation. While this subsidy policy has helped keep electricity prices low and affordable for consumers, it has also posed several challenges to the nation’s energy transition. Without tariffs that adequately reflect their true value, it can be challenging for RE initiatives to achieve financial viability, especially in the power sector.

In addition, low prices due to subsidies can also encourage excessive energy consumption, which can increase greenhouse gas emissions and worsen the climate crisis. This can also increase the demand for heavily subsidised fossil fuels in Malaysia, further straining the country’s energy resources. There is a growing consensus among energy experts and policymakers that electricity tariffs in Malaysia should be revised to better reflect the true cost of energy production and consumption and to provide more incentives for the development of RE.

Instead of blanket subsidies, a more reasonable option would be targeted subsidies to support the poor and those in need. Introducing targeted subsidies could be an effective way to reconcile the need for affordable energy access for consumers with the promotion of sustainable energy practices and the reduction of greenhouse gas emissions. Targeted subsidies can be designed to provide financial aid to households and businesses with the greatest need while reducing subsidies for those who can afford to pay more for energy consumption.

In addition, the targeted subsidies can be used to encourage the adoption of sustainable energy practices, such as the use of solar rooftop panel installation, especially among residential customers. This can aid in the reduction of global energy consumption and the promotion of the use of RE sources. However, it is essential to design targeted subsidies in an efficient, effective, and sustainable manner. Subsidies that are not well targeted can be costly and contribute to waste and overconsumption. In addition, poorly designed subsidies can create market distortions that discourage private investment in the energy sector and hinder Malaysia’s decarbonisation pathways towards net zero emissions. The escalation of energy costs has had a profound effect on various sectors, including people, businesses and global economies. The fundamental root of this predicament lies in the fact that the worldwide energy infrastructure is heavily dependent on exhaustible and non-renewable resources, namely fossil fuels, whose availability is progressively diminishing and whose extraction is becoming increasingly expensive.

In future, one plausible resolution to this predicament is the implementation of just tariffs, which guarantee that the expense of energy is impartially apportioned among all consumers, irrespective of their financial standing or usage patterns.

In response to this matter, various nations globally are undertaking a shift towards sustainable energy sources, including but not limited to solar, wind, hydropower and hydrogen, to facilitate a sustainable energy transition. However, this transformation poses inherent challenges, such as substantial initial expenditure and requisite infrastructure investments. Moreover, numerous nations grapple with the predicament of reconciling the imperative of a viable energy infrastructure with the imperative of ensuring fair and accessible pricing for all. Furthermore, just tariffs possess the potential to motivate consumers to adopt energy-conserving behaviours and diminish their aggregate energy usage, consequently mitigating the strain on the energy infrastructure and the total energy expenditure. The realisation of a sustainable energy source necessitates a concerted worldwide effort from governmental bodies, corporate entities and individual citizens.

Through the adoption of RE sources and the implementation of fair and just tariffs, we can guarantee that the shift towards sustainable energy is both impartial and financially feasible for all.

Dr Nora Yusma Mohamed Yusoff is the director of Institute of Energy Policy and Research, Universiti Tenaga Nasional. She can be reached at [email protected]

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