The Hedgehog and the Fox: The economic cost of renewable energy rush

This article first appeared in The Edge Malaysia Weekly, on April 5, 2021 - April 11, 2021.
The future looks bright for the solar industry, and it probably makes economic sense for the regulator to seize the moment and let the private sector be on a roll to drive the industry forward

The future looks bright for the solar industry, and it probably makes economic sense for the regulator to seize the moment and let the private sector be on a roll to drive the industry forward

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Given the low cost of energy generated by solar as demonstrated by the recent winning bids for the large-scale solar project, the answer seems obvious.

The latest award, participated by more than a hundred bidders, has shown that businesses have found it to be commercially viable to operate solar plants at a historical low tariff, known in the industry as the levelised cost of electricity (LCOE), of RM0.18 per kWh.

The award is the latest in a series of annual concessions given out to industry players since it was first introduced in 2017 at an average tariff of RM0.49 per kWh.

The interest in solar projects goes beyond the annual competitive tender. At the desk of the authorities, proposals for the direct award for solar quota continue to pile up despite the steep decline in tariff.

The rate of investment flow is sometimes used as an indicator of the future trajectory of industries.

So, the future looks bright for the solar industry, and it probably makes economic sense for the regulator to seize the moment and let the private sector be on a roll to drive the industry forward.

After all, the low tariff structure of solar energy could only mean more savings for the consumers of electricity.

However, there is a reason from both engineering and economic perspectives why it is unfeasible to accelerate the use of renewables to undercut hydrocarbon as a source of energy.

Over 75% of Peninsular Malaysia’s electricity is currently fired up by fossil fuels, which include 42% of natural gas, 32% of coal and a small portion of diesel.

The remaining 24% or so comes from renewable energy that comprises hydropower and a small percentage of solar power, biomass and others.

To put into perspective, for the maximum electricity demand of 18,808MW in Peninsular Malaysia in 2020, only about 4,760MW is generated by renewables, mainly hydro, and much less by solar power.

This is set to increase in 2025. The latest annual electricity generation report published by the Energy Commission has put a target of 8,531MW or 31% of installed capacity from renewable sources, 20% of which is from solar.

It is a modest target that appears to fall behind the industry readiness to invest in renewable energy capacity installation. But it is also not far off from even the most ambitious target set in the world of renewable energy.

California, a state with the most aggressive rollout of renewables for its power sector, has raised the target to 60% only in 2030, and Germany, a country with the highest share of renewable energy in its economy, is set to become 80% renewable only by 2050.

With the exception of biomass and the like, any engineers working in this sector would point to the problem of intermittency as a reason for the cautious adoption of the renewable sources.

Solar power, for example, does not generate any energy at night. Even when the sun shines, the total hours considered optimal for energy generation, especially for electricity, would come to a maximum of only about four hours. Let us not count the sun hours during the rainy season.

So, despite solar being cleaner and cheaper, the value of the power it produces is low.

To ensure a constant supply of electricity, a conventional plant must stand ready to match the demand for power where the supply from cheap and cleaner energy like solar falls short. Hence, coal, despite being “dirty”, remains the cheapest and most stable source for electricity.

Given that close to 80% of the electricity consumption in Malaysia comes from industrial and commercial sectors, there is no room for error in energy supply.

For some industries like semiconductors, the guarantee of a constant supply of electricity for their production lines is one of the key considerations in their investment decisions.

So, the LCOE alone is not sufficient to compare the different forms of power generation. It is a case of choosing the lesser evil between the intermittency of clean energy and the stability of “dirty” sources.

Until a new and cost-effective technology is developed to store the energy generated from renewable sources that would ensure a stable and secure supply, energy planners would have no choice but to rely on conventional sources like coal and natural gas in a bigger proportion than renewables to keep the economy running.

But even with new technology (like battery storage), jumping onto a renewable energy bandwagon, without proper planning, would cause our reserve margin — an industry jargon for excess in the supply of electricity — to run wild and bring a broader impact on the socio-economy.

Peninsular Malaysia’s current supply stands at about 28,628MW. The demand fluctuates, but at its peak demand of 18,808MW, we would have an excess electricity of 32%.

A reserve margin is necessary to ensure continuity of the supply, especially during maintenance periods. However, because what we pay for electricity is calculated based on the total amount of electricity supply including the reserve margin, the answer to a lower tariff for consumers lies not in more supply of solar energy but in the level of excess supply we have. At the current reserve margin, ours is above the optimal reserve of 20% to 25%.

There are many technical and economic factors to consider in determining the right level of reserve margin in electricity supply. But, to put it simply, the more capacity we install, the more supply we generate into the system.

As such the agenda for renewable energy cannot be driven by the promise of low tariff alone. It has to be guided by both the economic intelligence and technical capacity to ensure a secure, stable and affordable power system. It also needs the discipline and the political will to keep the amount of supply in check so that the socio-economic impact remains manageable.

Nazim Rahman works in private equity and is a member of the Energy Commission

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