Accelerating early retirement and decommissioning of fossil fuels-fired power plants in Malaysia: Lessons learnt from the region

Asia Pacific is the world’s fastest growing region, with an electricity demand reported at a whopping 15,152 TWh (terawatts per hour) in 2023 due to increasing prosperity, rapidly expanding economies and industrial activities in the region.¹ By around 2010, the emissions from Asia Pacific were on par with those of the Group of 7 (G7) countries.

Although individual countries in the Asia Pacific region have lower per capita emissions compared to G7 countries such as the United States, Canada, the United Kingdom and Japan, the cumulative effect of industrial activities worldwide has led us to this critical juncture.

Global responsibility to reduce emissions requires greater cooperation through either financial or technological support. This also presents an opportunity for Asia Pacific countries to accelerate their decarbonisation efforts by reflecting on the opportunities that come with reducing their carbon footprint.

Note

¹ BloombergNEF, 2024. Asia Pacific’s Energy Transition Outlook. https://assets.bbhub.io/professional/sites/24/Asia-Pacifics-energy-transition-outlook_FINAL.pdf 

Coal remains the dominant energy source in Asia Pacific, contributing 55% of the region’s electricity generation with a production capacity of 8.4 million gigawatts per year (GWh/yr) in 2022. 90% of the world’s new coal-fired power plants (CFPP) are in Asia, averaging just 13.5 years old. To meet climate targets, these plants should be replaced with alternative, sustainable energy sources, supported by green infrastructure such as carbon capture and sequestration, or phased out entirely where feasible.   

Malaysia’s energy mix is still largely dependent on fossil fuels, and accounts for over 80% of total energy mix and is almost split equally between coal and gas power plants respectively.

However, Malaysia and other major economies within the region are increasing initiatives to reduce greenhouse gas emissions:

• China has decommissioned 70GW of its 1108GW coal capacity in the last decade and has pledged to further retire 30GW by 2025 according to its 14th Five-Year Plan. 

• Indonesia has made commitments to phase out all CFPPs by 2050 and plans to retire the 660MW Cirebon-1 plant in 2035 – seven years ahead of schedule under the Asian Development Bank’s Energy Transition Mechanism (ETM). 

• Australia’s largest utility company, AGL Energy, is closing all of its CFPPs by 2035 and has recently finalised a deal to construct a 500MW energy storage facility on the site of the retired Liddell coal plant.

• Malaysia, as part of its National Energy Transition Roadmap (NETR), is looking to reduce its installed capacity of coal power plants by half by 2030 with a complete phase out by 2045.

The current energy transition has to balance three critical factors, often referred to as the energy trilemma.

These factors must be balanced to ensure a sustainable and resilient energy system. As economies transition towards a more sustainable future, investments in renewable energy offer a promising solution that addresses all three aspects of the energy trilemma. Renewables can support the increasing energy demand, enhance energy security by diversifying energy sources, and reduce the economic burden associated with fuel imports, paving the way for a just and equitable energy transition.

The transition to cleaner energy sources does not come without its own challenges. The decommissioning procedures for fossil fuel fired-power plants can be complicated and lengthy approaching the end of its active and useful life. 

Decommissioning is also a costly procedure. Shutting down Indonesia's entire fleet of 118 coal plants by 2040 would require an estimated US$37 billion.²  The costs of decommissioning, which includes debt, equity, workforce-related payments and other compensation for the remaining duration of useful life averages between US$26,320/MW per year and US$55,400/MW per year for plants above and below 25 years, respectively.³  To put this in perspective, 1,000MW CFPP with a 50-year life span would cost US$2.05 billion for early decommissioning. This same amount would be able to fund four large scale solar projects of the same capacity (see cost per MW in following section).  Many existing plants would need to operate at limited hours or retire before they complete their full life span, if global climate targets are to be met.  These create a potentially costly stranded asset as many power plant infrastructures may end up as a liability before the end of its anticipated economic lifetime. Furthermore, this poses an energy security risk, as the installed capacity of renewable energy would not only need to replace but also grow to keep pace to meet the growing demand for energy.  

It is estimated that the investment gap for Asia Pacific to achieve net zero emissions will require between US$26 trillion to US$37 trillion cumulatively from 2020 to 2050. However, the transition to a sustainable energy future in Malaysia is often hindered by debt sustainability, insufficient financing and uncertainties over long-term profitability. 

High upfront costs are typically required for large-scale solar projects, which deters many potential investors. Malaysia’s fifth Large-Scale Solar competitive bidding process for large scale solar farms of varying sizes would value project development cost of between RM0.5 billion to RM2.5 billion. The financing provided under the Green Technology Financing Scheme (GTFS 4.0) varies across participating financial institutions and typically covers only a fraction of the total required amount. This is similar to other green financing incentives currently available in Malaysia.

Notes

² Listiyorini, E., 2022. Southeast Asia’s Biggest Economy Needs $37 Billion to Shut Coal-Fired Plants. https://www.bloomberg.com/news/articles/2022-10-12/indonesia-needs-37b-to-shut-existing-coal-fired-plants-transitionzero-says 

³ Singh, V. P. and Sharma, N., 2021. Mapping Costs for Early Coal Decommissioning in India. https://www.ceew.in/cef/solutions-factory/publications/CEEW-CEF-mapping-costs-for-early-coal-decommissioning-in-india.pdf 

Energy transitions are reshaping how energy investment decisions are made, and by whom. The first half of 2023 saw a record US$358 billion global investment in renewables – about half of which was invested in Asia Pacific, with the majority going to China’s solar energy sector. According to the International Monetary Fund (IMF), emerging and developing economies (EMDEs) in Asia will need more than US$1.1 trillion annually for climate mitigation and adaptation investments. Closer to home, Malaysia alone will require US$4.07 billion out of its US$407 billion GDP to fund green projects for the energy transition.

Overall, corporate entities dominate investments in the energy sector, accounting for the largest share in both fossil fuels and clean energy. However, there are significant variations by country; in EMDEs, half of all energy investments are made by governments or state-owned enterprises (SOEs), compared to just 15% in advanced economies. Notably, these SOE investments are primarily driven by national oil companies.⁴ Achieving a secure and affordable transition away from fossil fuels will require more diversified and increased investments to close the climate finance gap.

1. Blended finance 

Blended finance is a financing approach that combines capital from public and private sources to fund projects, which can help bridge the financing and risk gaps to meet the growing demands for green investments. Blended finance can be a key tool in mitigating and allocating risk and in encouraging investors to engage with projects which could accelerate the transition to a low-carbon economy by providing risk guarantees and reducing investment barriers.

In the ASEAN region, blended finance plays a significant role in promoting renewable energy projects, where transactions in this sector typically involve substantial investment costs.  These high value deals are crucial for attracting significant investments from large-scale investors such as pension funds, international financial institutions and insurance companies. 

2. Dual interest rate

 Monetary policy can ‘shield’ green investments from interest rate hikes by placing bans on refinancing at preferential rates for financing clean investments in the real economy. The dual interest policy is part of a wider framework called green credit guidance.  Offering lower costs of credit has played an important role in supporting Western economic and industrial policy between 1945 and 1973, and more recently in aiding the rapid development of East Asian countries. 

For example, the Bank of Japan (BOJ) launched a climate change-related lending programme in 2021, aimed at offering zero-interest financing to support investments in green initiatives such as renewable energy projects.  These lower interest rates have been introduced in the hopes that it will encourage more investment in renewable projects, which often entail high upfront costs.  

3. Green bonds

Green bonds provide exclusive and targeted funding for green projects. They provide comparable financial returns while achieving environmental and social objectives but with increased accountability and transparency. In most countries, green bonds attract tax incentives, increasing the potential after tax yield for investors. In Malaysia, income tax exemptions are available for five years to recipients of the Sustainable and Responsible Investment (SRI) Sukuk and Bond Grant Scheme which includes green, sustainable and social bonds, starting from the year of assessment. Malaysia and Indonesia have introduced green Islamic bonds/sukuk to finance the development of solar farms.

Note

⁴ IEA, 2024. World Energy Investment 2024. https://www.iea.org/reports/world-energy-investment-2024 

The Just Energy Transition Partnership (JETP) is a financing mechanism to fund the decarbonisation of energy systems in emerging countries who are heavily dependent on coal and with high untapped renewable energy potential. Launched in 2021 at COP26 and funded by the International Partners Group (IPG), it has recently been adopted by two ASEAN member countries, Indonesia and Vietnam. The types of funding include loans, grants or investments through blended finance.

Indonesia is working to address its growing coal consumption, driven by the expansion of in-country mineral processing, efforts to enhance electrification across the islands and a rebound in industrial activity post-Covid. Indonesia’s I-JETP for example, with the ADB acting as a lead development partner, has secured a total of US$20 billion in public and private financing for the next three to five years to accelerate its energy transition. Progress has been made towards the early retirement of the 660 MW Cirebon-1 coal plant by seven years to 2035 instead of 2042, and the construction of the Java-Sumatra electricity transmission network to send surplus electricity to South and North Sumatra.

Vietnam’s JETP with the IPG was announced in December 2022. The IPG has pledged an initial investment of US$15.5 billion for the next three to five years. As part of its Resource Mobilisation Plan (RMP), the IPG will work closely with Vietnam to identify priority investment areas where these funds can be most effectively utilised to foster a just and sustainable energy transition.

Malaysia’s NETR estimates that successful implementation of energy transition projects will uplift GDP value from RM25 billion in 2023 to RM220 billion and generate 310,000 jobs in 2050. It is also projected that Malaysia’s energy transition from coal and oil to renewable energy could potentially save US$9 billion annually and US$13 billion by 2050 based on health, energy and climate costs.

While the potential outcomes are encouraging, decarbonising energy generation in Malaysia is unlikely going to be straightforward as it seeks to balance the energy trilemma. Achieving this will require a concerted effort from all stakeholders to back ambitious climate policies, along with the provision of the necessary financial and technological support to advance progress. Aligning public policy with private innovation is essential for a secure and sustainable energy future.

Public-private partnerships offer a powerful tool for effectively managing energy demand. As an example, the private sector can lead in deploying energy efficiency technologies, adopting circular business models and implementing advanced manufacturing processes which are generally more affordable. Governments can enhance this effort by focusing on energy demand reduction in revised Nationally Determined Contributions (NDCs) and investing in critical sectors like the built environment, industry and transport. Public investments, tax incentives and dynamic electricity pricing may be able to stimulate private sector investments in energy efficiency.  

In the immediate term, expanding nature-based solutions (NbS) and deploying technologies such as carbon capture may be an option as policymakers and industry come to an agreement on the best approach to decarbonise. The United Nations (UN) estimates that NbS have the potential to remove up to 12 gigatons of CO2 equivalent per year. These projects involve enhancing carbon sinks and strengthening resilience within and across forestry, agriculture, oceans and food systems through biodiversity conservation, as well as protection of wetlands and mangroves.

Achieving the 1.5°C target would require the use of every available option and resource at our disposal through strong global cooperation in pursuing an orderly and just energy transition.

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