Out of gas weighing our energy options


With TNB’s recent price hike, it is time to review Malaysia’s energy situation, focusing on electricity supply. The economics suggest that Peninsular Malaysia will go for coal in the long term, unless drastic measures are taken soon.

As fossil fuel resources become increasingly expensive, energy-exporting countries have to realise that in order to meet domestic energy demands, they will have to become net energy importers. Malaysia, while a major global energy exporter, may have already crossed that line. We have become a net importer of petroleum products since 2011, and we are also importing the vast majority of our coal. The government forecasts Malaysia’s energy demands to triple by 2050 as part of, or a result of, its planned growth trajectory, making energy subsidies and below-market energy rates increasingly difficult to sustain.

TNB’s price hike earlier this year gives us an opportunity to review Malaysia’s energy situation, focusing on electricity. Over the past 30 years, the Malaysian electricity supply has been growing exponentially. One of our landmark policies, the Four Fuel Diversification Strategy of 1981, reacted to the oil shocks of the 1970s and worked to phase out most of our oil power plants, which were then becoming increasingly more costly to operate due to rising oil prices. Oil power plants were gradually replaced with coal and gas power plants.

By the end of 2011, installed capacity had reached about 24,242MW in Peninsular Malaysia1. This means that the electricity infrastructure is sufficient for now; Peninsular Malaysia has a 33% installed capacity margin, above its peak demand of about 15,000MW in 2012. More than half of this installed capacity in Peninsular Malaysia comprises natural gas plants, which is somewhat positive considering that natural gas, although a fossil fuel, is regarded as “clean” energy due to lower emissions and a relatively high efficiency at a theoretical 60% conversion rate. The next largest source of electricity comes from coal, which has a 33% global average efficiency and 45% for state-of-the-art, ultra-supercritical heating coal plants, and which can be cheaper than natural gas. The remainder is taken up by hydropower and other fuel sources. Future plans up to 2020 are to expand another 10,882MW of conventional capacity: 5,067MW of gas; 5,010MW of coal; and 805MW of hydropower2.

Natural gas and coal compete

Malaysia remains gas-rich. It has the second highest proven reserves of natural gas in South-East Asia – 2,350 billion cubic metres by the end of 2012, with a production rate of 61 billion cubic metres a year3. Half of our production is used domestically, while the rest is exported: we were the second largest liquefied natural gas (LNG) exporting country in the world in 2012, supplying Japan, South Korea, Taiwan and China. The Sabah Oil and Gas Terminal will further unlock an additional 1.0 billion cubic feet a day of natural gas for liquefaction and export.

The global natural gas industry is projected to continue growing – the International Energy Agency (IEA) expects global natural gas demand to outperform all other fossil fuels thanks to shale gas. The US shale gas industry is emerging as a major exporter, leading to an increase in global supply. The IEA predicts that there will be an ample global supply of gas for at least another half-century. However, the geographical position of Peninsular Malaysia for natural gas production is becoming weaker: the gas fields off the peninsular coast are depleting and East Malaysia has already overtaken them as the main producer of natural gas.

Natural gas extraction, compared to oil and coal, faces additional challenges. It requires more upfront infrastructure to distribute natural gas through pipelines. If gas does not flow through pipelines, it requires processing at a liquefaction facility to become LNG before it can be exported; then, LNG vessels must be constructed to ply the route between terminals, and a regasification facility must be built and commissioned to turn the LNG back into useable gas. Peninsular Malaysia’s gas infrastructure is relatively developed. We have an extensive pipeline stretching from Thailand down the west coast to Singapore, with a branch connecting gas fields off the peninsula’s east coast. In mid-2013, the Lekas regasification terminal (RGT)4 in Sungai Udang, Malacca came online and a second RGT in Pengerang, Johor is being built. They could not have come any sooner, as production on the peninsular east coast has been dwindling and the proposed natural gas pipeline connecting East and West Malaysia has been scrapped. New liquefaction plants in Sarawak may provide the LNG to satisfy Peninsular demand5.

The infrastructural vulnerability of natural gas was particularly highlighted in late 2010, when a maintenance check on a gas rig caused a fire, which in turn reduced gas supply. With a temporarily insufficient natural gas supply, TNB had to purchase extremely expensive distillates and fuel oil to keep the gas power plants running. To manage the situation, TNB signed a cost sharing agreement, the Alternative Fuel Cost Differential, with the government and Petronas, valid until the Lekas RGT is up and running. From January 2010 to July 2012, the cost shared may have been up to RM4.666bil. In addition, TNB unprecedentedly signed cross-border agreements in separate incidences to buy electricity from Singapore and Thailand to make up for the shortfall6.

According to one source, the average cost of gas for Petronas is US$7.8 per million British thermal units (BTU), compared to TNB on-grid power at US$4.5 per million BTU7. Given that we are significantly increasing gas power plants’ capacity and depleting production in Peninsular Malaysia, peninsular gas pricing will inevitably go up. Purchasing additional natural gas through pipeline from neighbouring countries may be difficult – piping gas from Singapore would be extremely costly, Thailand is already a net importer of gas and Indonesia, while holding significantly more natural gas reserves, has much of its production locked away in long-term contracts with most of its discoveries being further afield, and is facing a gas shortage of its own.

Domestic production will have to be supplemented by LNG imports, hence the role of the Lekas RGT. However, the nature of the global natural gas market is such that there is not one single market, but fractured, geographically-separate regional markets. The divergence has expressed itself since 2005, and in 2008, there was such a sharp increase in natural gas prices that Asia-Japan Crude Cocktail (JCC) prices hit US$21 per million BTU, while European and American prices were significantly lower (US$14-US$17 and US$3 per million BTU, respectively). Analysts seem optimistic that global gas production is set to boom; in this state of flux, it may still be possible to import LNG at relatively cheap prices. Petronas may be trying to exploit the differential between Asian and American prices by investing in a Canadian LNG plant8, but the question remains: will Petronas be alleviating gas supplies in Peninsular Malaysia at all?

A coal future

The other mainstay of electricity for Malaysia is coal. Despite taking up 27% of the installed power capacity in Malaysia, it comprises 47% of fuel consumption for electricity generation in 2011 and 46% in 2012. While it is considered the dirtiest, it is also the cheapest fuel source and building a plant to exploit it is a rather simple matter. We have relatively small coal reserves though, and rely on Indonesian imports to fire coal plants on the peninsula. We have also partially diversified our coal sources to include Australia (18%) and South Africa (16%).

While coal has remained cheap historically, coal prices are volatile in Organisation for Economic Co-operation and Development (OECD) countries. For example, in 2008, Europe imported steam coal at US$210 per ton, which nine months later fell to US$120 per ton. Because Malaysia is completely reliant on coal imports, there is little that planners can do domestically to insulate us from international price volatility.

Despite this, TNB expects the fuel mix to move largely to coal by 203011. If natural gas and LNG continue to take a high price in the international markets (especially in Asia), it makes financial sense for a cooperative TNB and Petronas to switch to coal as much as possible.

Hydropower and renewables

Hydropower’s potential remains limited in Peninsular Malaysia. It was once true that hydropower took a strong share of energy input (20%-30%) in the mid-1980s, but rapid construction of gas power plants in the 1990s and coal in the 2000s has made hydropower a marginal electricity source. The total installed capacity of hydropower in Peninsular Malaysia is only 1,937MW; in comparison, total hydropower generation in Peninsular Malaysia can come from a single large coal or natural gas power plant. Further planned developments may only achieve another theoretical 1,354MW, which is ultimately paltry compared to coal and gas.

Most of Malaysia’s hydroelectricity development is projected to come from Sarawak under the Sarawak Corridor of Renewable Energy (Score), which is promoted to have a potentially huge 20,000MW of renewable energy. The Bakun Dam, which has been partially online since 2011 and will be fully online soon, is rated to provide 2,400MW, while the Murum Dam, which is beginning to flood now, has an installed capacity of 944MW. The latest proposed dam at Baram may have an installed capacity of 1,000MW. Sadly, even if hydropower can be ethically exploited, the undersea HVDC cable project connecting Sarawak to Peninsular Malaysia has been cancelled, foreclosing the load-sharing that Sarawak and Peninsular Malaysia could have performed for each other. Neither is “clean” hydropower free from controversy – the construction of dams entails the flooding of forest floors, which destroys flora and fauna reserves. One example is Bakun Dam’s surface area – at 695km2, it is only slightly smaller than Singapore and involved the resettlement of 10,000 to 15,000 people.

Our foray into renewable energy is slow, if not falling short. In 2001, the Four Fuel Diversification Strategy was revised into the Five Fuel Diversification Strategy to include renewables – micro-hydropower, solar power, biogas and biomass. The Eighth Malaysia Plan (2001-2005) implied that the target would be to achieve five per cent renewable energy in Malaysia’s mix, while the Ninth Malaysia Plan (2006-2010), would be to achieve 300MW in Peninsular Malaysia. The subsequent and current 10th Malaysia Plan lays out the goal to achieve 985MW of renewable power by 2015, 2,080MW by 2020 and 4,000MW by 2030. One programme that was put into place was the Small Renewable Energy Power Program (SREP) in 2001, which allowed small power producers to sell electricity to the relevant utility for a maximum of 21 years. It seems to have received little take up: only a total of 61.7MW was in operation by February 2010.

In 2011, a new act created the Sustainable Energy Development Authority Malaysia (Seda) as the government authority in charge of renewable energy development. Seda reported that at the end of 2012, it had approved 450MW of renewable capacity, although another source indicates the actual electricity generated online is only 121MW12. Primarily driving renewable development is the Feed-in Tariff (FiT) mechanism, which began in December 2011 and is administered by Seda. Our FiT mechanism, modelled after the German FiT system, works by allowing renewable power producers to sell to the grid at a higher premium, which digresses over time to return to parity rates. The FiT is self-funded through the Renewable Energy Fund, collected by one per cent levy from consumers’ electricity bills. This one per cent was hoped to be increased to two per cent, but was only boosted to 1.6%13.

Regardless, while renewable energy may reduce our dependence on fossil fuels, even at the 4,000MW target, the plan remains to be dependent on fossil fuels to generate the bulk of our energy needs.

Drifting apart from East Malaysia

While relatively secure in terms of infrastructure and distribution, we may be in the midst of a transition as the peninsula runs out of gas and moves to reduce its reliance on expensive imported Asian LNG. This may depend on whether the US and other countries can develop their shale gas production. With greater international supply, they would be able to exploit the higher natural gas prices of the Asian market, thus easing the tightness. In such a case, both the Asian natural gas price and the opportunity cost for using gas domestically can be reduced, which would ease export pressure and allow East Malaysian LNG to be rerouted for domestic use.

It makes more financial sense for Petronas to exploit high LNG prices in Asia than to build a pipeline connecting East and West Malaysia, which would have better secured gas for the peninsula. Otherwise, imported coal becomes the simpler and more economical option despite the emissions and lower efficiency. In the short term, we will

need to pay attention to the coal plants currently being planned to ensure they are equipped with the latest ultrasupercritical technology, despite the higher capital expenditure. Carbon capture technology is still a nascent technology and is uneconomical. If implemented at all, it raises the price of coal plants which in turn would have to be funded by a higher electricity price.

Malaysia is in a strange position, facing shortage of gas on one side of the country while remaining one of the largest LNG exporters in the world (which might be necessary to bolster revenue for a government that has been running an increasing deficit since 1997) on the other. But overall, despite the tariff increase, our electricity prices remain lower than in many developed countries; in Japan and the UK, residential prices can hit above US$0.25 per kWh. Cheap electricity rates mean that the proposed electricity link between Sarawak and Peninsular Malaysia may not be a cost-effective measure for now, and it is unlikely that the country will take renewable energy as a long-term commitment. In the meanwhile, TNB will continue to use and build cheap fossil fuel plants to stay financially viable.

Suruhanjaya Tenaga, National Energy Balance 2011, p50.

2 This particular source does not include two more possible hydropower developments, i.e. the Nenggiri and Telom dams, which may cumulatively contribute another 548MW.

3 US Energy Information Administration, Malaysia Overview, www.eia.gov/countries/country-data.cfm?fips=MY

4 A regasification terminal turns LNG into useable gas.

5 Kamalavacini Ramanathan, “Malaysia to fully meet local LNG demand by 2016”, The Malaysian Reserve, December 22, 2013, http://themalaysianreserve.com/main/news/corporatemalaysia/ 5229-malaysia-to-fully-meet-local-lng-demand-by-2016

6 TNB Annual Report 2011, www.tnb.com.my/tnb/application/uploads/annualreports/b9541634ceb 42977021f5064bebab605.pdf

7 Wood MacKenzie Consulting (September 2012), Comparative Energy Framework in Malaysia, Indonesia and Thailand, Fourth National Energy Forum, www.st.gov.my/index.php/download-page/category/73-4th-national-energy-forum-2012.html?download=228:comparative-energy-framework-inmalaysia- indonesia-and-thailand

8 Ng Weng Hoong (November 6, 2012), Malaysian state-owned energy company Petronas's liquefied natural gas investment in B.C. faces hurdles, www. straight.com/news/523771/malaysian-state-owned-energy-company-petronass-liquefied-natural-gas-investment-bc-faces-hurdles

9IEA,Developing A Natural Gas Trading Hub:Obstacles and Opportunities,2013,www.iea.org/publications/freepublications/publication/AsianGasHub_ FINAL_WEB.pdf

10 IEA, Key World Energy Statistics 2013, www.iea.org/publications/freepublications/publication/ KeyWorld2013.pdf

11 Tenaga Nasional Berhad, Yearly Report 2012, p58.

12 Seda Annual Report 2012. http://seda.gov.my/?omaneg=00010100000001010101000100001 000000000000000000000&s=3136. Also see: “Cypark to gain from New Surcharge”, The Star, December 5, 2013, www.thestar.com.my/Business/Business-News/2013/12/05/Cypark-to-gainfrom- new-surcharge-Firm-gets-steady-income-from-RE-Fund.aspx

13 Free Malaysia Today, “SEDA: New Surcharge to be used in FiT scheme”, www.freemalaysiatoday. com/category/business/2013/12/04/seda-new-surcharge-to-be-used-in-fit-scheme/

Ho Yi Jian was with the International Institute for Strategic Studies (Asia) based in Singapore and was assisting the Sultan Hassanal Bolkiah Energy fellow with a study on energy policy decisions in South-East Asia. He is now a Masters candidate in International Relations at the Australian National University.

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