Economic Update

The construction of a geothermal power plant in Sabah has massive potential to boost the Malaysian state’s economy, while paving the way for other major developments in renewable energy.

Located at Apas Kiri, Tawau, the plant – to be developed by Tawau Green Energy (TGE) – will be the first geothermal facility in Malaysia. Phase one of the project was launched in May and is set to finish by 2014. At the end of this first stage, the plant will have a generation capacity of 30 MW, though it is expected to generate more than 10 MW when fully completed.

Hailed as an example of a successful public-private partnership, the project, worth RM480m ($152m), will benefit from RM35m ($11m) in federal grants to cover the costs of developing infrastructure. The funds, which will come from the Private-Public Partnership Unit of the Prime Ministry, will be used for the access road and water treatment plant.

The remainder of the financing will be obtained through a 75:25 debt equity scheme, and TGE is currently in talks with two Malaysian banks to procure the rest of the funding. Earlier in May Continental Energy Corporation, a Canada-based international energy company operating in South-east Asia, purchased a 10% stake in TGE.

TGE already has a buyer for the plant’s production: In November of last year, the company signed a Renewable Energy Power Purchase Agreement (REPPA) with Sabah Electricity (SESB) to supply 30 MW to SESB’s grid at a fixed rate of RM0.21 ($0.07) per kWh. The 21-year agreement should cover the payback of the debt equity financing and the cost of operations through electricity sales, with TGE anticipating more then RM1bn ($316m) in revenues at the REPPA price.

Indeed, the project is a boon to Sabah’s energy and utilities sectors, which have struggled to meet the state’s electricity demand. At present SESB has enough supply for its consumers, but would not be able to cope in the event of a major breakdown. SESB’s general manager of system operation, Addie Ahmad, told local press that while total generating capacity of 726 MW in the state’s west coast is sufficient to meet current demand of 510 MW, the east coast’s maximum capacity of 292 MW is not adequate to meet demand of 270 MW.

In addition to meeting increasing energy demand, another major draw of geothermal power is that it is less damaging to the environment when compared to other energy sources. It emits little carbon dioxide, very low quantities of sulphur dioxide and no nitrogen dioxide. Its carbon footprint is 65 times smaller than that of coal, 49 times smaller than fossil fuels and 40 times smaller than natural gas.

While the initial costs of developing the steamfield are high, geothermal facilities have low operational costs. Additionally, the project would qualify to receive carbon credits under the Clean Development Mechanism of the UN Framework Convention on Climate Change.

However, despite its apparent benefits, geothermal power does present a number of drawbacks. For instance, the initial stages of development – which include exploration, production and injection wells – are costly and highly capital intensive, unlike conventional power plants, which require relatively lower capital investment. Also, the payoff for geothermal will not be for another 10 to 11 years, significantly longer than the five or six years required for a conventional plant.

To overcome these hurdles and address the challenge of meeting electricity demand, government at both the state and federal levels have come up with a bevy of programmes and initiatives. According to the SESB’s managing director, Ir Abdul Razak Sallim, 142 projects to expand access to electricity and minimise service disruptions will be implemented this year. Among them are 26 projects to enhance electricity generation capacity, 14 projects for transmission, 94 for distribution and eight “major projects”. Already, the government has allocated some RM276.04m ($87.2m) to improve electricity supply.

At the federal level, for example, a “feed-in tariff” (FiT) has been launched under the Renewable Policy and Action Plan to stimulate the generation of renewable energy up to 30 MW. Firms that harness electricity from eligible indigenous renewable energy sources have the opportunity to sell that electricity to power utilities at a fixed premium price for a specific duration. TGE has applied for a FiT incentive.

Though still in the early stages, the new plant boasts much promise for Sabah’s energy sector. Apart from meeting the state’s growing demand for electricity and helping it diversify away from fossil fuels, the project and others like it should also boost the construction and industry sectors, and contribute to employment.

Going forward, there will also be significant investment opportunities in this sector as much of the technology required – for instance, geothermal drilling technology – are not presently available in Malaysia. As well, there will be opportunities for the research and development of other renewable energy sources, such as biomass – in particular from palm oil waste – and solar power.