The following commentary is contributed by Arthur D Little Malaysia Associate Director and Head of Public Sector Tan Qizhen
Strategic Priorities: Balancing Rapid Demand Growth with Energy Transition
Malaysia’s energy challenge is changing quite quickly. We are no longer talking only about how to add more renewable energy (RE) into the system. At the same time, we are seeing much stronger electricity demand from data centres, advanced manufacturing and the wider digital economy, while still needing to maintain reliability and keep energy costs competitive.
So, for Budget 2027, I think the priority should be to look at the energy system as a whole. We need enough generation capacity, but equally important is whether the grid, storage and other flexibility mechanisms can keep up with the new demand profile. Energy security and energy transition should not be treated as two separate agendas — if designed properly, they should reinforce one another.
This is already becoming a very real issue. Tenaga Nasional Bhd (TNB) reported that by end-2025, 35 data centre projects representing around 4.5GW of capacity had been connected to the grid, although actual load utilisation was still around 850MW at that point. TNB has also indicated that data centre demand could approach 13GW by 2030. That is a major new source of demand within a relatively short period of time.
Malaysia should therefore continue accelerating RE, in line with the National Energy Transition Roadmap (NETR) target of 70% RE share of installed capacity by 2050, but the conversation has to go beyond renewable capacity alone. We will also need grid reinforcement, battery storage, energy efficiency, demand-side management and sufficient flexible generation to support reliability when renewable output fluctuates.
In fact, the government’s own Pre-Budget Statement 2027 already points in this direction, highlighting renewable capacity and battery storage, national grid upgrades, ASEAN interconnection and energy efficiency. I think the focus for the Budget should now be on how we execute these together, rather than as separate programmes.
From Arthur D Little’s work globally, this is also how we increasingly see the energy transition. The issue is not simply how much RE you can build; it is whether the overall power system becomes flexible enough to absorb it while continuing to provide reliable and affordable electricity. Ultimately, Malaysia’s energy transition will only be successful if it also strengthens our competitiveness and energy security.
Addressing Infrastructure Bottlenecks & Enhancing System Flexibility
I would say the biggest gap is increasingly the ability of the wider system to bring power to where it is needed, when it is needed. Generation is obviously important, but if the transmission network, substations, connection capacity and system flexibility do not develop at the same pace, then power infrastructure itself can become a bottleneck to investment.
This is particularly relevant because data centre growth is geographically concentrated, especially around areas such as Johor and the Klang Valley. These are very large and relatively concentrated loads. It is a good problem to have because it reflects strong investment into Malaysia, but we need to make sure our infrastructure planning is one step ahead of that demand rather than always trying to catch up afterwards.
The second gap is system flexibility. Malaysia is adding more solar and other RE, but these resources are intermittent. Storage therefore becomes increasingly important, not only to store excess renewable power but also to support frequency, voltage and other grid-balancing requirements. Malaysia has already taken an important first step through the MyBeST programme, with four grid-connected Battery Energy Storage Systems projects (BESS) totalling 400 MW/1,600 MWh targeted for commissioning in 2027. The next question is how we scale from there.
Thirdly, I think we need better coordination between industrial policy and energy infrastructure planning. When we approve large data centres, semiconductor investments or other energy-intensive projects, the question should not only be whether land and investment approvals are available. We should also understand where the electricity will come from, how quickly the grid can connect it, and how the new load fits into the long-term development of the system. For instance, I know from inside sources that new data centres would require them to build their own power generation, this is one of the good policies that would ensure the grid is not disrupted with the data centre boom.
Budget 2027 can help by accelerating critical grid upgrades, strengthening planning and connection processes, and supporting digitalisation of the grid so that capacity can be managed more intelligently. Large users should also increasingly become part of the solution through energy-efficiency commitments, long-term renewable power arrangements, storage and demand-response mechanisms where appropriate.
Arthur D Little’s recent work on hybrid renewable ecosystems makes a similar point. Data centres can be very suitable long-term counterparties for RE because their demand is large and relatively predictable, while BESS can help manage intermittency and improve system stability. If Malaysia can connect the growth of our digital economy with the development of RE and grid infrastructure, we can turn what looks like an energy constraint into a competitive advantage.
Mobilising Private Capital: Bankable Contracts, BESS Monetisation and Fiscal Frameworks
Energy infrastructure is capital intensive and the investment horizon can be very long. So, policy consistency matters. Investors need visibility on areas such as connection timelines, tariff or revenue mechanisms, long-term contracting, technical requirements and how future market rules may evolve. If these are uncertain, even technically attractive projects can be difficult to finance.
- Strengthening Bankable Long-Term Contracts: Malaysia should continue strengthening bankable long-term contracting mechanisms, including corporate renewable power arrangements under schemes such as CRESS. Long-term offtake gives renewable developers more predictable cash flows while giving large users greater certainty over their energy sourcing and cost.
- Commercialising BESS: For newer asset classes such as battery storage, we need commercial models that recognise the different services these assets provide. BESS should not necessarily depend only on buying electricity cheaply and selling it later at a higher price. It can also create value through capacity, frequency regulation, voltage support and other ancillary services. Allowing storage to access multiple revenue streams can significantly improve the business case and attract more private investment.
- Targeted Fiscal De-Risking: Targeted fiscal incentives or blended-finance mechanisms can play an important role through agencies like MIDA, especially for first-of-a-kind projects or technologies where the market is not yet mature. Public funding should be used selectively to de-risk projects, establish the market, and crowd in private capital rather than assuming the government needs to finance the transition itself.
This is also consistent with Arthur D Little’s work on hybrid renewable ecosystems, where well-structured PPAs, capacity payments or targeted support, and access to ancillary-service revenues can improve the economics of renewable and storage projects. Ultimately, capital will flow where there is a credible pathway to returns. Budget 2027 should therefore focus on creating that pathway, while making sure the overall system remains affordable for businesses and consumers.
