Renewable Energy from Palm Oil Biomass in Malaysia World Renewable Energy Congress-Australia 2013 15 July 2013 Mohd Shaharin Umar*, Philip Jennings, Tania Urmee Murdoch University, Western Australia

An Overview objectives of the research methodology resource availability policy system barriers solutions in the FiT future strategies This study undertakes 2 main references to investigate the market barrier - evaluation to the present policy system and industry landscape

Objectives of the research To evaluate the sustainability of the oil palm biomass renewable energy downstream value chain components To design future strategies for a sustainable industry

Conventional Energy + Renewable Energy Downstream Value Chain Palm Oil Mills Power Grid and End User (Supply) Transmission Line (Demand) Conversion Technology Resource Supply Grid Extension System Conventional Energy + Renewable Energy Final Consumers 3 main parameters constitute downstream value chain include biomass supply, bio-energy conversion technology and grid extension system within the context of FiT main reason for selecting these variables are due to the SREP dispute

Quantitative Analysis Methodology Quantitative Analysis Literature Review Survey Focus Group Meeting Qualitative Analysis Interviews Mixed method - quantitative and qualitative approach survey (industry/palm oil millers, conducted in June-Oct 2011) 417 respondents, response rate 20% (80 returned surveys) postal and electronic mode of delivery in-depth interview (policymakers, conducted in Jan 2012) focus group meeting (combination of market and government experts, conducted in April 2012) Analysis Recommendations

Resource availability Several reasons: second largest palm oil producer after Indonesia with 17.7 million tonnes or 41.3% of the total world’s palm oil production in 2008 prime agricultural commodity constitutes 71% of the agricultural land use or 14.9% of the total land area in the country in 2010 4th largest contributor to the national economy 2009 palm oil biomass sources accounts for 85.5%, wood/forestry biomass (3.7%), rice husks (0.7%), sugarcane (0.5%) and others (rubber & cocoa) the annual production of dry biomass – at present 53 million tonnes, 80 million tonnes (2010), 100 million tonnes (2020) total production of 85.7 million tonnes of FFB in 2009. Estimated of 30 million tonnes of palm oil by-products which consist of: - traditional fuels - 18.9 million tonnes per year of EFB (estimated at 23% from FFB processed), palm kernel shells (7%), fibres (14%) - other variation of wastes – large fibre, palm frond and trunk (left on field for fertiliser) total production of world palm oil in 2008 was 43.1 million tonnes of which Malaysia stands as the second largest palm oil producer after Indonesia with 17.7 million tonnes or 41.3% of the total world’s palm oil production in 2008 total of 4.48 million hectare of palm oil plantation area in 2008 (42% in WM, 58% in PM) total of 417 palm oil mills, 246 are operating in Peninsular Malaysia and 117 in Sabah state alone (WM) 60% private entities (PLC, GLC), 40% comprise of Felda, state schemes, smallholders and independent mills Source: Ahmad et al. (2011)

Policy System 8th Malaysia Plan (2001-2005) The 5th Fuel Diversification Policy & SREP Renewable Share of 5% in Energy Mix 2005 9th Malaysia Plan (2006-2010) Renewable Share of 1.8% in Energy Mix 2010 10th Malaysia Plan (2011-2015) & Beyond RE Policy & Action Plan RE Act 2011, SEDA 2011 & FiT Renewable Share of 5.5% in Energy Mix 2015 the policies that drive growth of the industry – 2 major policies (5th Fuel & RE Policy and Action Plan) and 2 main tools (SREP & FiT) Overview: 8th MP - RE is relatively new. Begins in 2001 under the 5th Fuel Diversification Policy. SREP as a main vehicle. No specific body to monitor and coordinate the implementation – rely on ad-hoc committee SCORE Fails to achieve the target even has been reviewed in 9th Plan. The target share for energy mix has been reduced from 5% in 2001 to 1.8% in 2006 Out of targeted 350MW for grid-connected electricity, only manage to achieve 65MW (40MW biomass) Under SREP – eligible resources are biomass, biogas, mini-hydro, solar and municipal solid waste (MSW) 10th MP - a leapfrog after 10 years of existence – new policy regime & the establishment of dedicated agency to coordinate the development of RE Feed-in Tariff (FiT) regime and its related law entered into force in 2011 RE capacity target: 2015 is 985MW or 5.5% of the total installed capacity (330MW or 33.5% from biomass) 2020 is 2080MW (11%) - 800MW (biomass) a huge step from the 40MW capacity reached during the SREP period. Thus, this study investigates whether the current downstream value chain system is capable of supporting such a high capacity goal launched in Dec 2011 Market structure: total of 4.48 million hectare of palm oil plantation area in 2008 (42% in WM, 58% in PM) total of 417 palm oil mills, 246 are operating in Peninsular Malaysia and 117 in Sabah state alone (WM) 60% private entities (PLC, GLC), 40% comprise of Felda, state schemes, smallholders and independent mills Source: Compilation from the various Policy Documents (2011)

Renewable Energy Target for FiT RE capacity target: 2015 is 985MW or 5.5% of the total installed capacity (330MW or 33.5% from biomass) 2020 is 2080MW (11%) - 800MW (biomass) a huge step from the 40MW capacity reached during the SREP period. Thus, this study investigates whether the current downstream value chain system is capable of supporting such a high capacity goal Source: MEGTW (2010)

Operational complexity: remote location, high transportation cost Barriers Policy - Economic & Social Industry - Decision making, economic factors and operational complexity Economics (unattractive tariff, funding obstacles, technology limitation etc) & Social (institutional fragmentation, legal obligation to sell excess power only to utility) Most plants are controlled by major enterprises and business decision comes from head office Economic: Less interest to enter business due to long payback period & high investment cost Operational complexity: remote location, high transportation cost based on the literature review and survey results (survey has been conducted before FiT come on stream) Tariff: original tariff from RM0.17, RM0.19 and RM0.21 which is not economically viable to do RE business. Under FiT new revised tariff is RM0.32 + technology bonus Fuel supply: fuel supply constraint (11% are small producers, no long-term contract, irregular supply, unstable and low price, high transportation cost, subject to direction from holding company for mulching, pelletising, fertiliser etc) disadvantage to independent mills with no plantation as they need to buy at market price. Discourage independent/smallholders to enter RE business non intervention approach by the regulators to impose biomass price control mechanism via legal provision to ensure steady supply and stabilise the fuel price Technology: investment for new technology in most plants are subjected to direction from head office. At present, 60% are operating with CHP or co-gen technology that is less than 40% efficiency technology limitation (investment in RE technology is subjected to direction from holding company, most operating with CHP or co-gen technology that is less than 40% efficiency 68% agreed to switch to a new technology if the government provided financial assistance with attractive conditions 70% agreed they are using technology more than 8 years 51% agreed for centralising technological applications Grid extension system: high inter-connection cost (low commitment because RE investment is a secondary option & incidental as survey findings indicates 58% will focus on palm oil production instead of producing power) 59% agreed for the government to revise the Electricity Supply Act 1990 based on the industry feedbacks (survey returns) Item 1: 65% utilised waste from own plantation 80% use about 40% wastes for other purposes e.g.: animal feed, mulching etc 72% wants to sell at high price Item 2: energy business is secondary option or incidental to crude oil production Item 3 poor road conditions located far from the nearest main grid

Solutions in the FiT BUT Eliminate economic barriers - fixed price, purchase obligation, technology bonuses, long contract, RE fund Institutionalise the industry – establishment of SEDA BUT Absence of definite solution to improve downstream components due to non-intervention approach by the regulators to facilitate small producers based on literature review (analysis on the FiT) legal binding for renewable energy trading - RE Act 2011 RE fund: - adopting a “polluters pay concept” - 1% of total electricity sales (levy contributors are 41% from industry and commercial respectively & 18% domestic) - to finance RE development up to 30 years based on the aggregated fieldwork results: biomass supply: - literature analysis - theoretically reveals sufficient biomass reserve on the field - survey analysis – 61% indicates irregular supply, 90% are not interested to purchase wastes for power production - policy analysis - FiT warrants plantation owner, enterprises and feed-in approval holders to work independently in securing biomass supply if they find the investment is financially viable. Under FiT, the biomass supply impediment especially to small developers’ remains exists without definite solution. The condition reflects to non-intervention approach by the regulators whether to mediate or to overcome supply issues should it arise. The survey findings indicate 84% of respondents suggest the authorities’ interception to ensure stable supply conversion technology: - survey analysis - 69% plants are fixed with old technology (>10 years). 58% takes energy business as secondary option. 53% are not ready for technology conversion. 68% respondents are relying on financial assistance to support conversion to low carbon technology, dependency on foreign technology, lack of skill - policy analysis - extra monetary benefit for conversion to frontier technology but none upfront financial assistance (soft loan etc) unattractive grid extension scheme: - survey analysis - 85% utilize biomass energy for own consumption rather that exporting to grid, 58% willing to venture if infrastructure cost is borne by third party, 63% plants are located >10km from grid line, electricity coverage PM 99% WM <81% (potential in promoting rural electrification) - policy analysis - the law demands investor to finance all costs up (including costs for power systems studies) to the point of interconnection, FiT only eligible to community that is serviced by the utility. Those with non transmission infrastructure are generally having been denied from benefiting the new scheme.

Solutions in the FiT (continued….) The FiT system is not optimal due to lack of sustainable options Need a holistic market reform strategy

Strategies for sustainable industry to establish a fuel collection hub to explore the use of a variety of residues to enhance R&D and research budget future strategies are designed based on the final consensus of industry and regulators experts during focus group meeting – deliberate on the preliminary findings of survey and interviews. collaboration/buy-in from major enterprises such as Felda, Sime Darby etc is worth consideration for quick uptake Item 1: within a reasonable distance to the mill. This will ensure sufficient and consistent supply of renewable fuel at stable price and eliminate storage problem. 54% suggests for a one-stop centre Item 3: need further R&D to shorten life cycle to less than from 5 years and to explore cost benefit analysis to determine viability of palm oil by-products such as dry frond, palm trunk, large fibre etc for producing clean energy.

Strategies for a sustainable industry to explore the technology hub approach to establish a large-scale biomass energy plant to increase the role of local technology providers Item 1: with appropriate technology, generate power and connect to the grid from this point.The palm oil mills are to sell their wastes at market price and the plant operator is to bear the transportation cost 51% agreed for centralising technological applications Item 2: must go on a big scale and at a specific location with large amount of feedstock (economic viability). May invite large operators or any interested party. 61% agreed to establish a government-linked company (GLC) or a dedicated consortium to operate a biomass energy plant, BUT 64% agreed that the plant operator responsible for all the management costs to transport the solid and liquid biomass waste to the proposed-energy plant

Strategies for sustainable industry to explore utility- market entities cost-sharing model to improve the interconnection scheme Item 1: 85% wastes are for own consumption 58% agreed to invest if the interconnection cost to be borne by the third party (eg: government or utility company) Item 2: possible options for inter-connection scheme e.g.: network bonus, supporting incentives, tax exemption etc mills are to sell excess power to utility at a higher price but mills are to purchase conventional power at lower price. Item 3: to allow mills operating in remote areas to sell their excess power to rural communities with no power supply by amending the Electricity Supply Act 1990. rural electrification or electricity coverage in 2010 - PM (99.6%), Sabah (80.8%), Sarawak (72.6%) to promote a decentralised system

Conclusions Massive conversion of oil palm wastes into clean energy would help in turning Malaysia into a low carbon economy Future modification of the FiT system by including sustainability strategies is essential, particularly in supporting the downstream components - Stakeholders such as utility and financial institutions should participate to support the industry

Thank you…

Palm oil environmental impacts no long-term plantation expansion plan industry strategy is to replant low value crops with other export crops eg: rubber, cocoa sustainable forest management eg: international commitment during Conference of the Parties (COP) 15 in Copenhagen 2009 to keep 50% of its land as forested areas renewable energy is one approach to reduce environmental impacts by minimising the waste from the industry at present natural forest covers 20.1 million hectare or 61% while agricultural land accounts for 4.89 million hectare or 14.9% of total land area in Malaysia.