This article first appeared in The Edge Malaysia Weekly, on November 9 - November 15, 2015.

THE renewable energy business has proved to be a lucrative one for companies that managed to jump on the feed-in tariff (FiT) bandwagon early on for solar photovoltaic (PV) power. But with the allocation for FiT quota drying up, most of these solar and renewable energy companies have not been able to grow.

However, this could change next year as the government plans to plant about 1,000mw of utility-scale solar (USS) by 2020 in order to meet the renewable energy target of 23% of total generation capacity. And that is likely to attract the bigger players.

“Starting next year, we are planning to plant up 250mw in USS per year for four years. This should be in blocks of at least 10mw each. We are working closely with Tenaga Nasional Bhd to study the impact on the grid as well as working out the structure of the PPAs (power purchase agreements),” Minister of Energy, Green Technology and Water Datuk Seri Maximus Ongkili said in his address at the 5th Malaysia-Korea Energy Cooperation Workshop last week.

To kick it off, Ongkili said 50mw would be allocated to his home state of Sabah while 200mw would be allocated to Peninsular Malaysia.

Even at this preliminary stage, 30 to 40 companies have registered strong interest in the solar projects, according to Ongkili, who said the ministry was considering awarding the projects through tender.

Industry players say the big boys stand to benefit from the USS programme, including existing power producers that currently develop conventional thermal power plants, such as TNB, YTL Power International Bhd, Genting Bhd and Malakoff Corp Bhd.

These companies have the balance sheet and landbank to undertake USS projects, but have thus far stayed away from FiT solar projects because these are simply too small for them.

USS could be a different ball game, though. For starters, these projects would be much larger. FiT projects are limited to a maximum size of 1mw per block since they are intended for small developers, not commercialised solar farms.

Secondly, USS projects will not be subsidised by consumers and tariffs will have to be much more competitive to supply to the grid. Recall that FiT rates were higher than RM1 per kilowatt hour at one point. In contrast, the “levellised” tariff for a combined cycle gas turbine plant, such as TNB’s in Prai, cost 34.7 sen per kWh. To achieve such high tariffs, FiT quotas are subsidised by a 1.6% renewable energy surcharge on all electricity bills.

Levellised tariffs take into account the variation on fuel costs, utilisation rate of the power plants plus other variables.

Without the same subsidy, the tariff for USS would have to be more competitive at the level closer to what TNB pays — less than 50 sen per kWh — for the conventional power produced by traditional independent power producers (IPPs).

Competitive tenders, as opposed to fixed tariffs used in the FiT scheme, would also drive down returns for USS players.

Hence, USS projects are unlikely to generate the same kind of handsome returns that FiT projects did.

An indicative FiT rate of 54.72 sen per kWh for one megawatt of capacity would generate revenue of RM16 million over a 21-year concession. The figure varies based on the location of the solar farm and the amount and intensity of sunlight the farm receives. The estimated cost is between RM8 million and RM10 million and does not include land cost.

Each megawatt of solar PV requires about 2.5 to 3 acres of land. Including setbacks and space for transmission infrastructure, such as transformers, the space requirement could be much more. For example, 1Malaysia Development Bhd’s subsidiary, Edra Global Energy Bhd, acquired 260 acres in Kedah for RM65 million for its 50mw solar project.

One way around this is to lease the land instead of buying it, which is what most of the smaller solar players have done. Cypark Resources Bhd (fundamental: 1.15; valuation: 1.20) and PUC Founder (MSC) Bhd (fundamental: 1.85; valuation: 1.10) have also found innovative ways to maximise land use by growing crops that have low sunlight requirements, like tongkat ali, beneath the solar panels to generate supplemental earnings.

In a nutshell, USS is meant for companies with considerable financial muscle. A 10mw system would cost around RM80 million. While the economies of scale may drive costs down, note that larger blocks of solar capacity require much more complex power system studies, which could require more investment money. Transmission infrastructure would also be much larger and more expensive.

Public-listed companies that are already involved in the solar energy business include Cypark — one of the biggest solar players in Malaysia with 34.6mw of capacity. The company, which specialises in environmental engineering and technology, has built its solar farms on landfills that also produce biomass and biogas power.

The returns on the 21-year FiT concessions are so attractive that some companies, for example VSolar Group Bhd (formerly Fast Track Solutions Holdings Bhd) and PUC Founder, have decided to make it their core business.

VSolar (fundamental: 1.65; valuation: 0.30) has said it aims to add 10mw to its existing 1mw capacity over the next three years, albeit from the FiT quota. PUC Founder is a little more ambitious, planning to plant up to 50mw after securing its first megawatt this year. To achieve this, the company was initially planning to raise over RM127.6 million.

Some companies do it to supplement their core business. For instance, property developer Amcorp Properties Bhd (fundamental: 2.30; valuation: 2.40) has invested in 10.25mw of solar capacity while EP Manufacturing Bhd (fundamental: 0.65; valuation: 3) has planted 2mw of solar capacity on the roof of its factory.

It is worth noting, however, that solar projects are not one-off costs. The inverters that convert direct current to alternating current need to be replaced every 7 to 10 years.

To top it all, solar generation is not risk free, not even in sunny Malaysia. Heavy cloud cover, particularly during the rainy season, and the annual haze from Indonesia can drastically reduce generation while poor location can be disastrous for a solar farm.

On the bright side, solar projects could become more viable if the government sticks to its plan to remove the subsidy on natural gas that is keeping electricity tariffs low. Likewise, if there is a rebound in fuel prices, which would push electricity tariffs up, USS will become much more viable in the country.

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