Market Series- MALAYSIA: Malaysia's Feed in Tariff kicks off September 1st, 2011

Photograph: Gettys Images

Malaysia is among the growing list of APAC countries with newly launched Feed in Tariffs (FiT) 

The FiT is a performance or yield based incentive that legally obligates the national utility to purchase solar (renewable) energy that is fed into the public grid, at a significant premium over that of energy generated by fossil fuels. FiT's put a higher value on actual electricity generated (kWh) and are a vital mechanism to stimulate domestic solar markets. Under FiT's, investors are guaranteed a fixed long-term return (via Power Purchase Contracts with the Government) on otherwise expensive and risky solar-farm projects. The establishment of FiT legislature immediately creates a new growth-market for the Solar PV Industry, making it critical to tailor strategy for individual Regional markets.

The Malaysian Feed in Tariff - Key Factors:
Below Data has been compiled from the Malaysian Feed In Tariff Handbook (June 2011), Green Purchasing Asia June Issue, Interviews with Energy Minister Peter Chin and several online Solar PV resources including Renewable Energy World, PV Magazine, SolarServer, Bloomberg and RECharge News. I have also added my insights and analysis as appropriate.

1. Quota vs. FiT Rate: 

• The limited Solar PV quota for 2011 and 2012 (at 16MW and 47MW respectively) ensures that competition for project approval will be fierce. Coupled with a FiT rate of US$ 0.32 per kilowatt-hour for installations above 1MW, these factors suggest likely project bid sizes of 1MW-2MW for mid-scale solar farms. 

• A bonus FiT rate for rooftop installations (+ $0.085) and higher FIT rates for smaller installations between 72kW to 1MW ($0.385) indicates Commercial/Industrial Rooftop to be an attractive market segment.

      2.  Degression Rate 

• The Degression Rate (DR) specifies the annual percentage reduction of FiT rates for projects deployed in following years. As the PV industry matures, module prices are falling, reflecting reductions in cost of manufacturing which arise from economies of scale, new production techniques, technology development etc. The DR is used as a mechanism that limits windfall profits for investors who develop Solar projects in the future.

• Malaysian government's set annual Degression Rate is 8%. However, the current global  oversupply of modules/PV equipment has led to Average Selling Prices (ASP's) falling by 23 -25% due to high industry inventory.(iSuppli PV Market Report, 2011). The fall in ASP's being much greater than the annual reduction of FiT rates, leads to lower profit margins for manufacturers but higher IRR's for investors. Hence, the current DR makes 1-2 MW Solar projects in Malaysian PV market very attractive for investors.

      3.   2011 & 2012

• Degression rate likely to be deferred for 2012, giving investors continued access to highest bracket of IRR's until 2013.
• Unused PV quota in 2011 to be carried forward to 2012, hence total Quota for 2011/2012 will remain constant at 63MW. ((Interview w Energy Minister Peter Chin,GPA June Issue)

Malaysian PV Market Opportunities- Key Insights:


Having compiled an extensive Malaysia Market-Entry Brief, I believe that despite Solar PV Quota being limited (in comparison to other APAC FiT structures), Malaysia offers several opportunities to both investors and PV manufacturers/ developers for mid-scale Solar-Plants and the Commercial/Industrial Rooftop segment.
I have offered several insights on key opportunities for PV Companies positioned in the Midstream/Downstream section of the Solar Value Chain as I feel the introduction of the FiT incentives will steer the market to benefit these players.
 
Investors:

• Can leverage the DR of 8% (deferred for 2012) and current fall in global module ASP's to enjoy higher IRR's on their PV investments.
• Mid-size projects of 1MW to 2MW will be more likely to be granted quota for 2011/2012 given capped PV Quota
• Look at larger Solar farms in of 3MW-6MW in 2013 as total PV quota jumps to 64MW

EPC/System Integrators:

• Target Commercial/Industrial Rooftop segment (72kW to 1MW) because high FiT rates plus Rooftop bonus make an attractive and cost-effective value proposition to commercial/industrial clients (warehouses, logistics/distribution hubs, manufacturing facilities, farms etc..)

• Also focus on Solar Plants between 1MW-2MW. Look to secure EPC contracts with Investors or Project Developers. Outsource construction to local third-party.

Manufacturers:

• Focus on providing turnkey PV systems/projects for Investors. Given the strong price-competition with local manufacturers, foreign manufacturers without local production facilities should partner with investors outside of Malaysia seeking new markets to deploy Solar investments.(eg Singapore based investors)
• Pursue module supply contracts with EPC Companies/Project Developers who have already secured project/quota approval from Government.