This article first appeared in The Edge Malaysia Weekly on November 18, 2024 - November 24, 2024

Renewable energy certificates (RECs), which are issued when one megawatt-hour (MWh) of renewable energy (RE) is generated, are a common method for corporates to offset their Scope 2 emissions from electricity use.

In fact, some 400 global companies under the RE100 initiative, including tech giants such as Apple and Google (see box story), have committed to sourcing 100% of electricity from renewable sources, whether by generating it themselves or purchasing RECs.

This has fuelled demand for RECs and attracted the interest of Malaysia, which wants to persuade these multinational corporations — such as those with data centres — to set up shop in the country, by promoting its wealth of RE resources.

It is not a bad strategy. According to the International Tracking Standard Foundation, which provides one of the most widely used standards, I-REC(E), Malaysia was one of the top 10 markets for the issuance of RECs in 2023, showing a growth of 441%, which exceeds the rest of the markets (refer to table).

But based on conversations with industry players that are assisting clients in developing and trading RECs, corporates interested in purchasing RECs in Malaysia face several roadblocks, such as the lack of acceptance for certain types of RECs, restrictions on the cross-border purchase of RECs and pricing issues.

Many players cite Vietnam, which currently has an oversupply of RECs, as a case study in failing to match demand and supply that Malaysia should avoid.

“For example, someone who was looking to buy RECs recently was asking for third-party sustainability certifications for the hydropower RECs. One of my sellers said without this, they cannot sell it. This requires third-party consultants to assess the overall sustainability of the project, the community and biodiversity impact, based on international standards,” says Soon Hun Yang, founder and CEO of Eco-Ideal Consulting Sdn Bhd.

Amid this come calls for Malaysia to have its own national standard for the production, management and usage of RECs — like Singapore’s SS673 — and strike agreements with other countries for the mutual recognition of REC attributes. Some stakeholders also want more transparent pricing, sectoral carbon targets and more focus on the environmental and social impact of RECs.

These could translate into a clearer understanding of the demand and supply for RECs in and outside of the country.

“Those committed to the RE100 are the biggest buyers, and that’s why REC prices in Singapore are so high, as many of them are parked there. Companies that follow the Science Based Targets initiative (SBTi), which requires them to follow the GHG Protocol guidance, also need to have RE targets,” says Reik Ong, managing director of Saxon Renewables, a subsidiary of Solarvest Holdings Bhd (KL:SLVEST).

However, RE100 companies cannot use RECs generated from a grid that is not connected to offset their electricity emissions. This is because the initiative wants corporates to push for local governments to increase their supply of RE, instead of sourcing RECs from elsewhere. The only international single markets that RE100 recognises are Europe (excluding certain countries), the US and Canada.

This creates a major bottleneck for the sourcing of RECs from Malaysia for use in Singapore or elsewhere.

“That’s why now, there are several parties working on the Asean power grid, hoping that one day it will be connected. For the RE100, if Singapore and Malaysia establish a [mutual recognition of REC attributes and alignment of policies], most importantly, it must be recognised by RE100 too,” says Ong, who is based in Singapore.

Enabling cross-border transactions of RECs is the hottest topic in Singapore now, he observes. In Malaysia, however, local companies still have little understanding of how to purchase RECs.

“They need consultation on how to account the technology, prepare the timeline and how to plan,” says Ong.

The companies need to know what kind of RECs their parent companies accept before purchasing it. This is a point also stressed by Soon, who suggests that buyers have their own purchasing criteria.

For now, corporates are purchasing RECs on a voluntary basis to meet their climate targets or due to pressure from their buyers or investors, who have their own climate targets.

They cannot be used to offset the impact of carbon taxes in jurisdictions like Singapore, which only targets Scope 1 emissions. As for the European Union’s Carbon Border Adjustment Mechanism, which imposes a carbon fee on imports into the region, RECs generated from a power purchase agreement (PPA) or direct physical link, as currently interpreted, are likely to be accepted.

This refers to bundled RECs, whereby the company buys the actual electricity and RECs from the same source. In contrast, an unbundled REC is when the company purchases electricity from one supplier and buys the REC elsewhere.

To enhance demand for RECs, Soon suggests the government set sector emission targets for different industries so that companies are incentivised to purchase RECs to offset their emissions. Otherwise, the government could clarify whether RECs can be used in Malaysia’s upcoming carbon pricing regime.

In the Philippines, RECs are traded by electricity suppliers, who are mandated to increase their power generated from RE every year under the Renewable Portfolio Standards obligations.

Not everyone thinks that such a measure is needed. Even on a voluntary basis, there is demand for RECs. This can be improved with more clarity on what RECs can be accepted and where.

According to the industry players interviewed by ESG, companies that are not part of RE100 tend to be more lax about cross-border transactions of RECs. But they could be more particular about the origins of the RE, social and environmental impact, and vintages, which is when the RECs were issued.

Generally, those issued within a year or two are accepted by buyers. European companies, meanwhile, are less keen on RECs generated from large hydropower.

“Multinational corporations are our largest buyers, aligning RECs with their global sustainability targets. For instance, Intel Malaysia has adopted RECs to comply with local regulations and support its parent company’s environmental, social and governance (ESG) goals. Additionally, many Malaysian small and medium enterprises are utilising RECs to meet their Scope 2 compliance needs, especially as they play a role in larger manufacturing supply chains,” says Nirinder Johl, founder and CEO of Asia CarbonX Change.

Nirinder is currently involved in efforts to create an Asean REC framework. The existing Laos-Thailand-Malaysia-Singapore agreement, he believes, is a promising regional model for cross-border REC co-operation, which could connect REC buyers and suppliers. Singapore is currently working with partners to establish a framework that recognises RECs from cross-border electricity trade.

More can be done to adjust existing RE programmes.

Many of Malaysia’s solar RECs come from the large scale solar or LSS programme, which are unbundled RECs. More recent programmes like the Corporate Renewable Energy Supply Scheme (CRESS) generate bundled RECs.

CRESS is widely welcomed by industry players. However, there have been many complaints on the pricing structure of CRESS. For instance, the wheeling charges are considered too high, and the requirement that only additional loads can qualify for CRESS is too stringent.

To ensure demand for Malaysian RECs, the range of RE sources beyond large hydropower should also be expanded — into solar, wind, small hydro and biomass — and allow for RE developers to own the RECs they generate.

“With the ownership of the environmental attributes, it adds liquidity and allows them to sell at different prices. It makes the market more exciting,” says Nirinder.

Otherwise, Malaysia could emulate Singapore in introducing its own national guidance for RECs. Singapore’s SS673 is a set of voluntary rules intended to facilitate consistency in the production, tracking, management and usage of RECs for making RE claims in Singapore. It covers, among other things, eligible types of RE sources and recommendations on the use of RECs. It could also be in the form of a regulatory framework that matches supply and demand, suggests Wilson Puon, head of integrated clean energy solutions for Ditrolic Energy. This would avoid the problems faced in the Vietnamese market.

“The regulatory framework can include quotas that help ensure the supply of RECs aligns with the level of demand, penalties for non-compliance, and a carbon management platform can help match REC supply,” says Puon.

Before the electricity markets of Malaysia and Singapore are harmonised, an alternative is to “have a plant-to-system direct green electricity injection, similar to what is done between Batam and Singapore to address this issue”, suggests Puon.

Most RECs are traded over the counter, and in less common cases — such as the Bursa Carbon Exchange (BCX) — via auctions. The price of RECs is therefore, rather opaque, although industry players like S&P Global have been collecting such data from traders.

According to the interviewees, the price of large hydropower RECs is the lowest at around US$1 (RM4.38), while that for solar RECs is the highest, which could go up to US$6. The prices of RECs from biomass and small hydro fall in the middle.

RECs that are issued more recently and offer additionality — meaning it is a new RE capacity that is added, instead of an REC issued from older, existing plants — fetch higher prices. In some cases, RECs generated from projects with co-benefits, such as positive environmental and social impact, are also higher in demand.

“One such example is the RECs from the Zoo Negara solar system, which Ditrolic funded, would be sought after due to the social impact,” says Puon.

Biogas RECs generated from palm oil mills are attractive because they turn waste to energy, but are affected by allegations of deforestation done by the palm oil industry. Sustainability certification for these mills is therefore crucial.

Additionally, “RECs not aligned with I-REC or RE100 standards typically fetch lower prices, reinforcing the importance of internationally recognised standards for building buyer confidence. Globally, 430 companies are registered with RE100, 130 of which are based in Malaysia, and they often require RECs from plants under 15 years old with grid connectivity”, says Asia CarbonX Change’s Nirinder.

Corporates that purchase RECs tend to prefer private placements and longer-term forward agreements (which could be between one and three years), and favour fixed pricing for predictability (which is where the auction model may fall short).

This is acknowledged by Bursa Malaysia Bhd, which held the inaugural REC auction on BCX in June.

“Mass adoption of new approaches introduced by BCX, such as auction, continuous trading and off-market trading, will take time. Evidently, even at the initial stage, trading over BCX offers several benefits, including the handling of counterparty risks, screening of participants prior to onboarding, promotion of price discovery and very competitive platform fees,” said the regulator in response to ESG’s questions.

The inaugural auction saw large hydropower RECs from Sarawak cleared at RM4.50 per REC. Another auction will be held on Nov 28 for price discovery of solar, bioenergy and small hydro RECs, with indicative floor prices of RM23 per solar REC, RM17 per small hydro REC and RM5.70 per bioenergy REC (vintage 2024).

To help corporates plan ahead more efficiently, greater transparency in pricing is needed. Puon suggests a centralised or bidding platform where all REC pricing data is publicly available, including information on average current REC prices, historical data and market trends.

“Increasing transparency could drive demand and confidence in the market, helping buyers better understand what they’re paying for,” says H P Ong, group CEO of Sunview Bhd (KL:SUNVIEW).

The buying of RECs, after all, is driven by a corporate’s voluntary desire to meet their — or their clients’ — climate targets. For cost savings, installing a solar panel to generate RE might be a better option.

“We have some clients who buy many RECs year on year, so we tell them to install solar panels [or other forms of RE] first, then they can enjoy the savings. Use those cost savings to buy solar RECs [to make up the shortfall],” says Ong.

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