By Ko Chuan Zhen, Group CEO, Plus Xnergy Holding,
Renewable energy in Malaysia faces numerous challenges, given urgency by our national 31% renewable energy (RE) goal by 2025. By end 2021, the Energy Commission projects us as being halfway to meeting it, at 17%, with only three years remaining.
Although it is a tall order, I foresee that solar power will find its place in our energy future, thanks in part to sustainable finance. Put simply, sustainable finance is any form of financial service integrating environmental, social and governance (ESG) criteria. ESG investing has seen huge growth with global ESG assets set to exceed $53 trillion by 2025. Inevitably this drives the sustainable finance agenda, making such financing models more widely accessible.
For businesses, sustainable financing can spell the difference between using fixed electricity tariffs and potentially generating their own electricity for long term savings. For our country, its implications are greater, helping us meet our national RE goal, towards a greater energy transition.
Plus Xnergy-installed solar PV rooftop at an AJIYA factory in Segamat, Johor
Challenges for businesses
Solar’s upfront cost is still a large consideration for many businesses, in spite of photovoltaic module prices plummeting by 89% since 2009-2019. Businesses are still held back despite understanding solar power’s advantages – up to 25% reduction in monthly electricity bills, which draws a clear line to savings.
Moving forward, aligning investments to ESG principles will be key to securing financing for solar power, as a mandate by the Kuala Lumpur mayor states that all future development projects in the state, commercial or residential, must rely on 30% RE.
Businesses may be understandably burdened with this announcement, as they would need to adapt and incur unexpected expenditures. This also means that more companies must consider renewable energy, and in my opinion, sustainable financing is the sensible first step.
The role of sustainable finance
In such uncertain times, the sustainable finance that banks provide has an important impact on the economy at large by supporting its backbone of small, medium enterprises (SMEs). For Malaysian SMEs looking to install solar photovoltaic (PV) systems, there are several financing options.
Businesses that struggle greatly with cashflow at a time of recurring lockdowns should consider a Power Purchase Agreement (PPA). Through it, businesses gain recurring and reduced electricity tariffs at no upfront capital expenditure (CAPEX) over a 15-20 year lease-to-own tenure. Once mature, business owners take full ownership of the solar setup and its savings benefits.
A PPA is a lease-to-own solar financing model that does not involve CAPEX spend on part of the adopter. Aimed at optimizing cashflow, adopters enjoy lower electricity tariff rates, saving on their monthly TNB bills.
Operation and maintenance (O&M) costs of the solar system are borne by the investor throughout the typically 15-20 year lease period. Therefore, adopters will not incur unexpected expenditure whilst continuously benefitting from lowered operational expenditure (OPEX).
The government has also put forth financial incentives for solar adopters. The Net Energy Metering (NEM) 3.0 significantly improves return on investment periods to as low as three years. The scheme allows excess solar photovoltaic generated energy to be exported back to the grid on an offset basis, meaning attractive returns on every excess kiloWatt generated.
It is highly beneficial to end-users operating in industrial, commercial, and residential sectors as excess solar energy will be routed to the national grid and recorded in credit, and offset from one’s TNB bill, resulting in lower payback periods and swifter ROI.
The government has additionally introduced a significant tax allowances, the Green Investment Tax Allowance (GITA). Combined with Capital Allowance, up to 48% of a solar PV system’s cost can be recovered, depending on a company’s tax bracket.
Additionally, banks have also made sustainable financing available for SMEs who are interested in adopting solar solutions. The financing can cover up to 100% of the cost to purchase and install a solar photovoltaic system, relieving businesses of up-front costs. These loans have advanced private sector participation, mainly in the manufacturing, industrial, and services industries, to invest in green technology and clean energy.
Sustainable finance plays a crucial role in advancing our clean energy aspirations, however, transitioning from fossil fuels is a complex task as oil and gas account for about 20% of national GDP up to 2019.
The NEM’s scheme’s allocation for businesses (NEM NOVA) at 300MW quota is subscribed by over 90% in just 3 months, showing aggressive uptake of solar solutions. The quota should be increased, looking at adopters’ appetites.
Separately, we do require a national smart energy grid, one equipped to automate the efficient distribution of energy. TNB has made efforts with grid-wide upgrades, recently with planned investments of RM9 billion a year until 2024. This will enable grids to receive RE to support dynamic two-way energy flow, while maintaining voltage stability.
This year, approved investments in Malaysia are projected to rise by 13% to RM185bil. The private sector foresees that these investments will drive the ESG agenda, leading to a rise in renewable energy-related projects.
Sustainable finance – A gateway
The upfront costs of solar investments should not be a deterrent, instead, businesses should make calculated decisions that take advantage of the readily available government schemes and financing solutions. As future competition between businesses intensifies in current conditions, sustainable financing could mean lowered OPEX and increased margins.
From our experience, with clients who adopt solar, ESG compliance for Malaysian products has proven to lend a competitive advantage in mature markets such as Europe where ESG criteria are taking center stage.
On a broader note, as our country makes the transition to renewable energy and enhances its infrastructure with cleaner sources of energy, sustainable financing will be a major gateway to ensure this becomes a reality.