Solar power generation in Peninsular Malaysia was 53 per cent cheaper than fossil fuels in 2023, a recent report by energy think tank Ember showed.
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The costs are based on the lowest auction rates submitted by bidders for the Malaysian government’s Large Scale Solar (LSS) programme, a competitive bidding initiative aimed at driving down the levelised cost of energy for large scale solar power since 2016.
Ember found that the lowest auction rates for LSS programmes have fallen 64 per cent from US$0.082 in 2016 to $0.029 in 2021, during the fourth iteration of the programme (LSS4). The fifth round of the LSS bidding process was opened in April this year for packages totalling more than 2,000 megawatts.
“These costs represent the price at which electricity is sold upon project commissioning, with projects from auctions held between 2016 and 2021 starting to generate electricity from 2017 to 2023,” said Ember’s Southeast Asia electricity policy analysts Dr Dinita Setyawati and Shabrina Nadhila, who co-authored the report.
The trend aligns with the global decline in the costs of solar generation, which according to the International Renewable Energy Agency fell 55 per cent over the same period, the report said.
“Solar generation costs [in Malaysia] have reached parity since 2021 and have continued decreasing, while fossil fuel generation costs fluctuated over time. The shift of fossil fuels could potentially reduce the electricity tariff for non-domestic customers by 38 per cent in 2023, cheaper than the actual electricity tariff applied after the surcharge ($0.089 USD per kilowatt-hour).
It is important to consider, however, that the costs calculated by Ember did not include the investments needed for grid upgrades to accommodate more solar power, which could affect how the electricity tariff rate is calculated, said the report’s authors.
“It is also worth noting that the bid prices from competitive solar auctions in Peninsular Malaysia can be lower than the levelised costs of electricity, demonstrating a challenge when comparing both prices,” Ember’s report said.
“Despite the discrepancies, using these tender-determined prices as a benchmark to see solar price trends in Malaysia is a useful indication that the government should consider prioritising solar projects in the coming years.”
Lower returns than fossil fuels
Still, the low rates submitted by bidders have not always translated into successful solar projects, Malaysian media reported in April. Under the LSS4 programme, low bids did not account for the eventual increase in material and equipment costs, foreign exchange fluctuations and higher interest rates, leading to project delays.
Such programmes have typically attracted companies that are looking for a steady, long-term source of income, said Yin Shao Loong, deputy director at Malaysian think tank Khazanah Research Institute, but added that not all companies and financiers approached projects in the same way. The LSS programme, for instance, has largely attracted infrastructure services firms instead of oil and gas players.
Citing financial industry numbers, Yin said that the rate of return for renewable energy projects stands at about 5 per cent compared to 12-15 per cent for fossil fuel projects.
“Just because renewables are cheap doesn’t mean that it’s profitable to invest in them,” he told Eco-Business on the sidelines of a recent climate finance summit in Kuala Lumpur. “If you’re in an institution that has a mandate to generate returns on investment, [why would you go into renewables] unless there’s policy intervention?” he said.
The country’s largest investment bodies, with the latest being civil service pension firm, The Retirement Fund Inc (KWAP), have expressed support for the government’s renewable energy goals under its National Energy Transition Roadmap, which aims to increase the share of renewables in Malaysia’s energy mix to 70 per cent by 2050. The document estimated that an estimated RM637 billion (US$143 billion) was required in new investments for renewables alone.
Still, the roadmap has not yet looked at the financial barriers to implementation and investment, said Yin. “I don’t think the government has understood [that lack of profitability] as a problem to be solved,” he told Eco-Business.
Ember’s report also highlighted gaps in investments for more battery energy storage solutions (BESS), which is especially critical as a solution to address peak demand for electricity in the evenings. It pointed out that the government allowed for LSS developers to adopt BESS technology in the third and fourth iterations of the LSS programme, but successful bidders may have shied away from installing batteries as this would increase solar costs.
The report proposed several different policies targeted at scaling up the use of BESS technology, including integrating it in existing government programmes or establishing a different tariff scheme for the technology.
“Conducting studies to analyse the economic and technical viability of utility-scale BESS systems would…enable the government to demonstrate the bankability of BESS projects in Malaysia,” it said.
