Going Green: Better returns from solar investments expected

This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on December 24, 2018 - December 30, 2018.

Consumers should consider the new NEM programme as it has been improved from a net billing concept to a pure NEM scheme. This will help improve the return on investment for PV systems under the NEM and increase electricity savings per month. > Chen

I think it is attractive for the commercial and industrial market, but it is also encouraging for the residential market. > Ko

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Solar energy investments will be more affordable for Malaysians following the changes to the Net Energy Metering (NEM) programme, which was announced by the Ministry of Energy, Science, Technology, Environment and Climate Change (MESTECC) in October.

From next month, residential consumers who generate solar energy for their own use under the NEM programme can sell their excess electricity to Tenaga Nasional Bhd (TNB) at the same rate that they buy from the utility. There will no longer be a difference between the selling and buying price of electricity.

This is an improvement to the NEM programme, whereby excess solar energy is sold to TNB at a displaced cost of 31 sen/kWh, compared with the domestic electricity tariffs charged by the utility, which can range from 21.8 sen/kWh (for the first 200kWh per month) to 57.1 sen/kWh (901kWh onwards), according to TNB.

The lower selling price was said to have contributed to the low take-up rate of the previous NEM programme. Under the old scheme, some 500mw of electricity could be sold to the utility from 2016 to 2020. Participants in Peninsular Malaysia could sell up to 90mw a year to the utility while those in Sabah could sell up to 10mw. The unused quota from each year can be carried forward to the following year.

According to data from the Sustainable Energy Development Authority Malaysia (SEDA), only 0.0274mw was taken up in 2016, but this grew to 4.9892mw in 2017 and 18.5096mw in 2018. The response in the domestic sector has been weaker than in the commercial and industrial sectors.

“A true net energy metering would be based on a 1:1 basis and this would give better returns to the owners of solar photovoltaic (PV) systems. Consumers should consider the new NEM programme as it has been improved from a net billing concept to a pure NEM scheme. This will help improve the return on investment for PV systems under the NEM and increase electricity savings per month,” says SEDA acting CEO Dr Wei-nee Chen.

For the 2019/20 period, 48mw of the 50mw allocated was still available for the domestic sector as at October. The excess electricity will be sold for energy credits that can be used and stored for up to 24 months. The NEM programme is now only available in Peninsular Malaysia while the previously assigned quota for Sabah has been converted into a self-consumption scheme.

 

Shorter payback period

Chen observes that the average household could install an 8kW solar panel system that costs RM36,000. Such a system could generate 800kWh of electricity a month while the returns depend on the household’s electricity tariff band. “Taking a ballpark figure of 50 sen/kWh, [from January] the payback period for the system will be 7.5 years with no loans,” she says.

The NEM makes sense for industrial factories with large rooftop space and commercial or domestic consumers with high electricity bills, she adds.

Alan Bong, business development manager of solar installation company Solarvest Energy Sdn Bhd, estimates that the payback period will be between 6.5 and 9 years. The cost of a full turnkey solar PV system, depending on the size, could range from RM5,000 to RM6,500 per kW.

The size of a PV system for a domestic consumer can range from 4kW to 12kW (single-phase power) or 72kW (three-phase power.) The maximum cap is in line with the NEM guidelines issued by the Energy Commission. Based on Bong’s estimates, a 4kW system could cost up to RM20,000 or more.

“With the 1:1 ratio for the export tariff, it makes more financial sense for domestic consumers to participate in the NEM scheme, particularly those who are paying more than RM330 a month in electricity bills,” he says.

“For example, a household in the Klang Valley that spends about RM330 a month will see savings of up to 60%, which is about RM200 to RM250 a month with a 4kW system. A system of that size would require about 258 sq ft of roof space to fit the solar panels.”

Ko Chuan Zhen, co-founder and executive director of solar installation company Plus Solar Systems Sdn Bhd, estimates a similar payback period of 8 to 10 years, considering the purchase of a 4kW to 12kW system, which is priced between RM24,000 and RM66,000.

According to an article in Personal Wealth on the previous iteration of the NEM in September last year, SEDA’s then chief operating officer Akmal Rahimi Abu Samah estimated that the payback period would be about 10 years for a consumer who pays the highest tariff block and purchases a solar panel that costs RM6,000 to RM7,000 per kW. For context, a 12kW system is suitable for a bungalow, he said.

In his view, the previous NEM programme would make sense for those with electricity bills that exceed RM500 a month because by generating electricity themselves, they can save money that they otherwise would have to pay TNB.

Ko believes that the cost of solar panels will continue to fall, although uncertainties in the market due to changes in China’s policy for imported solar panels as well as the US-China trade war may influence prices. Regardless, the revised NEM programme is good for residential, commercial and industrial players.

“I think it is attractive for the commercial and industrial market, but it is also encouraging for the residential market. In the past, when they were not at home in the daytime and not using electricity, they were only able to sell that through the displaced cost per unit and not the [lower] tariff rate,” he says.

 

New incentives to spur renewable energy generation

In addition to the revised NEM programme announced in October, the government announced several incentives to spur solar leasing and the trading of Renewable Energy Certificates (REC) as well as to attract Malaysians to invest in renewable energy.
“Behind-the-meters solar photovoltaic (PV) business models are emerging, such as solar leasing, power purchase agreements (PPA) and a hybrid of both. All these business models can be via direct deals between a solar investor and a client or by entering into a tripartite agreement with Tenaga Nasional Bhd under the Supply Agreement for Renewable Energy (SARE) programme,” says Dr Wei-nee Chen, acting CEO of Sustainable Energy Development Authority Malaysia (SEDA).
Through solar leasing, consumers can pay for the set up and use of solar panels under a monthly plan. If they choose to work with TNB, the utility will collect the monthly payments from them and remit these to the solar investor in exchange for a fee. The solar investor refers to a company that will install and own the solar panels.
“Consumers would have to look for their own solar lessor or investor. Going with TNB reduces the risk of consumers not paying because the utility can just cut off the main electricity supply if they owe money,” says Chen.
According to her, solar leasing makes sense for companies that want to manage their cash flow over a period of time before owning a system. The solar PPA, which is based on payments for the electricity generated, is ideal for companies that do not want to own the assets.

Solarvest Energy Sdn Bhd currently has a solar leasing option called the PowerLease Programme for commercial and industrial consumers. It will negotiate a monthly payment plan for a specified period of time.

“Under the leasing agreement, the consumer would pay the lessor for the electricity produced by the solar PV system at 5% to 10% lower than the TNB tariff. The leasing period is 20 to 25 years. At the end of the period, the system will be handed over to the consumer,” says Bong.

According to Ko Chuan Zhen, co-founder and executive director of solar installation company Plus Solar Systems Sdn Bhd, companies that want to benefit from tax and cost savings can just purchase the solar panels outright and obtain financing from banks. “They will have direct ownership of the solar panels. Even though they are taking a loan to own the asset, they qualify for a tax incentive from Malaysian Investment Development Authority for investing in green technology, which only applies to companies that own the asset,” he says.

Companies that prefer not to own the solar panels or benefit from corporate tax savings could go for the PPA model, he adds. “The concept is that the asset will be owned by the solar company, which rents their roof. We will sign a private PPA with them for a number of years, depending on how we negotiate the contract.”

Solar panel installation companies will have to carefully negotiate and select their clients, however, as it could be a long-term contract that spans decades. That is why it currently makes more sense for them to serve industrial or commercial clients, says Ko. “For residential segments, I think the payback from investments is not really there yet as the collection of payments will be more uncertain compared with companies.”

Bong agrees. The solar leasing concept is still new in the country, so companies like his will have to be careful in selecting clients. But he believes that eventually, solar leasing options will be available to domestic consumers too.

By next month, SEDA will have a directory of solar lessors or investors.

 

Trading environmental attributes

The trading of RECs is currently targeted at large companies. These are issued when 1MWh of electricity is generated by a renewable source of energy and delivered to the electricity grid.

In the REC market, which is available in the US and Europe, solar PV owners can sell their environmental attributes (EA) — the electricity generated from renewable energy — to a buyer, which are usually corporates that wish to power their premises with clean energy.

Similar trades can be done locally soon. Chen says this would particularly appeal to companies that are part of the global RE100 initiative, where 100 multinational businesses have committed to source 100% of their global electricity consumption from renewable sources by a specified year. The IKEA group and AEON are among these 100 companies.

“This will bring an additional channel of revenue for the PV owners. The corporate buyers of RECs will be the companies that ascribe to the RE100 sustainability framework,” says Chen.

The way one can sell the EAs is by being verified by a third party, such as SEDA, which was appointed by US-based technology service provider for sustainable energy APX Inc as the authorised verifier of the Tradable Instrument for Global Renewables (TIGR) Registry. After verification, companies can put their EAs up for trading in the REC registry platforms. Currently, there are two global platforms for the REC market — the I-REC and the TIGR registries.

It may be more difficult for domestic or individual REC providers to sell their EAs due to their relatively smaller size, but there could exist traders in the market who can package their RECs together. “Alternatively, a trader can aggregate the RECs generated by individuals to be sold to corporates,” says Chen.

The prices in the market will be determined by the supply and demand, type of renewable energy and age of the RECs. For example, those that are more than two years old may not be as valuable, according to Chen. The distance between the buyer and the REC provider also matters because some buyers require the provider to be in the same grid jurisdiction.

“Many companies are aware of the need for compliance with environmental, social and governance principles, but they are not aware that they can tap the REC market for that purpose. Then, the supply chain needs to be there as well, which are the small and medium enterprises,” says Chen.

“It is still a new market in Malaysia. Nevertheless, with more corporates facing international obligations to be environmentally conscious, RECs will be an affordable way for them to achieve their climate goals.”