An Introduction to Feed-in Tariffs

The Malaysian Feed-in Tariff (FiT) is certainly not the first in the world – FiT programmes which have popped up all over the world in the past few years.  The basic purpose of FiT is to provide incentives for national investment in renewable energy technology.  To do this FiT schemes allow and encourage smaller providers (single to double digit kilowatts), including households, to generate electricity from renewable energy that they can “feed-in” to the grid.  These small-scale producers are paid a fixed price per kWh produced that is over the market price for electricity and is guaranteed for a long term (16-21 years in Malaysia, depending on the energy source). This premium price makes it more enticing for potential producers to invest in the initial outlay costs for installing the energy generation technology.

The rates that small-scale providers are offered differ depending on the form of renewable energy used: typically solar rates are higher and hydropower rates are lower, to reflect the efficiency of the technology – for example currently small hydropower generates electricity at a lower cost compared to solar photovoltaic (solar-PV) and is therefore more efficient.  This evens out the playing field for the different technologies so that non-mature technologies (such as solar-PV) will continue to receive investment, instead of investors opting for mature technologies that provide a higher return for cost without subsidy.  In Malaysia, rates can also be added to when the technology used achieves some ideal goals, such as being locally manufactured or assembled, or by using certain technology (see ‘bonus rates’ on the ‘FiT dashboard’ on the SEDA website).

The rates offered are also depreciated annually to reflect that over time as technology progresses, renewable electricity should get cheaper to produce.  So for instance an installation of solar-PV in 2014 will receive a higher annual rate than an installation of hydropower in 2014, but a lower annual rate than an installation of solar-PV in 2013, as it is thought that the solar-PV installation in 2014 would use better, more efficient technology to create a higher electricity to cost ratio.  In the Malaysian FiT programme, the annual rate for hydropower doesn’t depreciate over time, as it assumes that the technology for hydropower is mature and is unlikely to become much more efficient.

The Malaysian difference

The Malaysian FiT programme follows the basic FiT structure described above but differs significantly from other programmes in that it introduces an annual quota.  The quota caps the amount of electricity generation from each source of renewable energy available for the FiT scheme each year and is based on the amount of money collected from the 1% electricity bill charge (see my previous post) from the previous year.

The quota has two main purposes: the first is to ensure there is a maximum amount of money that the government pays out annually for the scheme, and the second is to control what renewable energy technologies are invested in that year, with the purpose of focusing the growth of renewable energy on proven and mature technologies in the short-term, and, once the mature technologies have reached capacity, on technologies that are currently still developing (such as solar-PV) in the long-term.  This means that Malaysia won’t be installing the bulk of the renewable energy technologies that are still developing until later, when they are more developed, which allows them to take advantage of research that the rest of the world have done.

The renewable energy technology available for the FiT scheme in Malaysia are: biomass; biogas; mini-hydro (not exceeding 30 MW), and Solar-PV.  The Sustainable Energy Development Authority (SEDA), who is responsible for the management of the FiT is currently still investigating whether Malaysia is suited for wind power.

The National Renewable Energy Installed Capacity by source goals, from SEDA

To combat allegations of corruption, the allocation of the quota is based on a first come first serve basis. Applications are made by the SEDA website and the companies and individuals awarded are accessible on the website.

The obvious downside to the quota is that once the quota has been reached it is likely to disincentivise renewable energy installations.  It is easy to imagine a situation where, once the quota is reached, interested parties decide to wait until the next year to implement.  Once that year rolls around, the quota disappears like tickets for a popular concert but, like Glastonbury, hundreds or thousands are left without quota.  It is hard to say how likely this scenario could be, however the 2013 quota for 20MW Solar-PV disappeared within an hour of it being available[1].

On the flip side, no one can blame Malaysia for being eager to avoid the problems other nations have experienced with an unprecedented large take-up of FiT, where programmes had to be hijacked to reduce rates with little warning (see my ex-colleague’s take on the UK experience) or shut down altogether (e.g. Spain).  It could even be argued that the UK and Spanish FiT programmes had implicit quotas which, once breached, or with the threat of being breached, caused the FiT rate to be lowered (UK) or for the programme to be frozen (Spain).  Given this argument, it is unlikely that the quotas will ever disappear completely, however given time, experience and public support it is possible that the quota could rise to a level where it becomes more of a safeguard to government funds than a limit to the installation of renewable energy.