This article first appeared in The Edge Malaysia Weekly on December 7, 2020 - December 13, 2020

MALAYSIA’S energy choices may become a critical issue for investors quite soon, as seen from recent signals by the world’s largest investment groups.

Early this year, BlackRock — the world’s biggest asset manager, controlling more than US$7.3 trillion in investments — joined Climate Action 100+, a group of investors putting pressure on the worst polluters to change their ways.

The issue has high stakes for Malaysia as it plans the next phase of its energy policy, according to the Institute for Democracy and Economic Affairs (Ideas) in a recent research paper, “The Future of Malaysia’s Energy Mix”.

As a share of the country’s electrical energy generation, coal supplied 46% of the 150,442 GWh (gigawatt hours) produced in 2016, say the authors of the paper, Prof Renato Lima-de-Oliveira and Mathias Stroh Varming, quoting the Energy Commission. “This high use of coal, despite domestically available natural gas and commitments to increase renewables, presents a paradox at the heart of Malaysia’s current energy mix,” they note.

A more critical issue is the risks facing carbon-based economies as the world transitions to a low-carbon pathway. “As the government plans for the next phase of energy policy in Malaysia, it should consider the widest range of factors, including environmental and economic externalities,” the authors recommend.

These risks crystallised for the Korea Electric Power Corporation (Kepco) earlier this year, when its green bond failed to attract leading sustainable investors, according to the Institute for Energy Economics and Financial Analysis (IEEFA). Although the bond raised US$500 million and was 10 times oversubscribed, the institute’s analysis reveals that many of the noted environmental, social and governance (ESG) investors shunned the offering, IEEFA said in a statement last month.

Moreover, Kepco came under pressure from major investors over its funding of overseas coal projects. In May, notable Kepco shareholders — including BlackRock and the Church of England — publicly urged the utility to cancel its new coal-fired power projects and demanded that it establish a clearer strategic direction, the institute said.

Only weeks after the green bond was issued, Kepco confirmed it would be investing in new coal-fired power plants, Jawa 9 and 10 in Indonesia and Vung Ang 2 in Vietnam, it reported.

Malaysia’s inclination towards coal is a recent development, the Ideas report notes, with consumption of the fuel rising 17-fold from 767 kilotonne of oil equivalent (ktoe) in 1998 to 1,701 ktoe in 2016. “This growth in the use of coal presents a challenge when considering Malaysia’s efforts to decarbonise its energy matrix, specifically in the context of ambitious domestic and international commitments,” say the authors of the report.

Lima-de-Oliveira is an assistant professor of business and society at the Asia School of Business, a research affiliate of the Massachusetts Institute of Technology and a senior fellow of Ideas. Varming is CEO of Evenergy Sdn Bhd, a platform for the registration and trade of renewable energy certificates. He is a climate change mitigation and corporate sustainability adviser to the plantation, power generation, hospitality and telecommunications sectors.

In gist, the Ideas report states that:

•    Malaysia must increase its share of sustainable energy as it plans the next phase of its energy policy.

•    The country has made progress towards its carbon-emission commitments under the 2015 Paris Agreement to fight climate change.

•     Current policies are not on track to achieve the country’s ambitious targets of reducing greenhouse gas emissions.

•    Malaysia’s options for dispatchable renewables are hampered by the lack of infrastructure.

•    Therefore, conventional energy will still play a significant role in Malaysia’s energy supply for the coming decades.

•    The choice is essentially between coal and natural gas. Being locally available, natural gas comes with significant economic benefits compared with coal, which is mostly imported.

“The substitution of coal by natural gas alone will not be sufficient to ensure that Malaysia mitigates the risks and capitalises on the opportunities of the global energy transition,” states the report.

This view is underscored by a new report, titled “Southeast Asia’s Green Economy: Pathway to Full Potential”, by global management consulting firm Bain & Co.

The region is waking up to a US$1 trillion annual economic opportunity if it pursues the economic and societal potential of the green economy, the consultancy said in a statement at end-November. “Where excessive resource extraction and energy consumption followed by waste mismanagement were the norm, the region could benefit from a US$270 billion opportunity as it embarks on decarbonisation and electrification, a sustainable energy transition, responsible consumption and embedded circularity.”

Speaking to The Edge in an online interview, the authors of the Ideas report cite the indications of risks for the conventional energy sector and opportunities for climate-friendly energy in reports such as the World Energy Outlook (WEO) and Renewables 2020.

Commenting on the impact of Covid-19 on energy demand, the WEO notes that while demand for fossil fuels had dropped since the outbreak, use of renewables showed an opposite trend. “The estimated falls of 8% in oil demand and 7% in coal use stand in sharp contrast to a slight rise in the contribution of renewables. The reduction in natural gas demand is around 3%, while global electricity demand looks set to be down by a relatively modest 2% for the year.”

This is confirmed by the recently released Renewables 2020 report, which forecasts, “In sharp contrast to all other fuels, renewables used for generating electricity will grow by almost 7% in 2020. Global energy demand is set to decline 5% but long-term contracts, priority access to the grid and continuous installation of new plants are all underpinning strong growth in renewable electricity.”

Considering these trends, the authors of the Ideas report tell The Edge that it was fortunate that the tabling of the 12th Malaysia Plan in parliament was postponed due to the pandemic, as it gives the plan’s drafters time to weigh the implications of the country’s energy choices.

As this article goes to print, Prime Minister Tan Sri Muhyiddin Yassin has announced that Malaysia is preparing to transition to low-carbon energy sources and that natural gas will play a pivotal role in this shift. To this end, the government is drafting a Natural Gas Roadmap as part of the National Energy Policy that will be announced in the first quarter of 2021. He said this at the 7th International Energy Forum-International Gas Union Ministerial Gas Forum Virtual Roundtable.

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