This article first appeared in InternationalInvestor.com.
What are the key non-regulatory factors that can stimulate Malaysian business leaders to adopt energy efficiency practices?
The take-up of energy efficiency practices among business leaders depends on three main factors: raising awareness about its impact on the bottom line, addressing prevailing misconceptions, and increasing access to financing.
The key factor from our customer’s perspective is the impact of energy efficiency on a company’s bottom line. Much of the official focus on energy efficiency in Malaysia has been framed in the context of reducing carbon emissions rather than to decrease operational costs. For that reason, Cenergi SEA (Cenergi) takes great care to discuss both these aspects with our customers to bridge existing knowledge gaps.
It is also necessary to address the common perception in Southeast Asia that energy efficiency pertains solely to electricity. This is a misnomer since it also directly relates to the usage of petrol, diesel, gas and other combustibles.
The third factor to encourage energy efficiency is to increase access to financing, and this requires a number of steps to be implemented. Accordingly, Cenergi is strengthening efforts to provide capital expenditure financing to customers by devising a business model that appeals to both customers and the banks. Once this business model has gained traction in Malaysia, our objective is to roll out the model across Southeast Asia.
You mentioned access to financing. How can the main financing challenges be overcome in the energy efficiency sector?
The traditional process to access financing requires applicant companies to have both scale and a proven track record, but this approach limits opportunities for smaller and newer enterprises. Thus, it is important to have a champion ESCO and a champion bank that are committed to assisting these players gain access to funding. Both Cenergi and Malaysia Debt Ventures (MDV) have played these champion-like roles towards that end, via our commitment to energy efficiency and MDV’s commitment to provide financing to start-ups and smaller ventures. For example, the 2017 launch of MDV’s Energy Performance Contracting (EPC) Fund has laid the groundwork for financing in the ESCO segment and I expect more banks to provide funding in the future as a result. In turn, this increase in financing will lead to rising numbers of players entering the market.
It is also important to gauge feedback from customers and lenders. On the marketing side, many lenders are hesitant due, in part, to banks operating with single customer limits for financing. Generally, many financial institutions have limits on Tenaga Nasional Berhad (TNB) as the off-taker or counterparty for power purchase agreements and general internal structural challenges related to risk exposure. This issue of banks interpreting projects according to TNB risk limits is a fundamental challenge in terms of achieving the financing volume required. Energy efficiency projects, contrarily, can be a seen as form of financial de-risking as banks are not exposed to TNB risk, which is instead credited to the end user.
These kinds of challenges are why Cenergi has forged such an important working relationship with MDV. As an organisation, they have the flexibility to understand the problems and risks and attempt to resolve complex situations by establishing appropriate risk exposure limits. I urge other financial institutions to take similar steps to enable the ESCO sector to roll out energy efficiency projects to new customers.
Another way in which access to financing can be enhanced is to provide project developers with alternative funding options. For example, green bonds have significant potential to open up the market and Cenergi is taking active steps in this direction. We have entered into a partnership with the investment advisory firm, Clarmondial, and the Shariah investment experts, Amanie Advisors, to introduce a scheme called the Green Sukuk Programme (GSP). The GSP will mobilise new sources of capital to fund the low carbon energy transition in Southeast Asia, with an initial focus on Malaysia. Through this partnership, we are formalising a working relationship with the Green Climate Fund (GCF), which is part of the global Carbon Trust and is the world’s largest fund dedicated to combatting climate change, to fund energy efficiency initiatives. The objective of these moves is to open up the field in energy efficiency project financing, regardless of whether Cenergi is a proponent of that particular initiative.
Inevitably, certain future projects will still require local commercial solutions to attain funding while others will be more suited to the green bond and sukuk approach. Thus, the move into the bond and sukuk markets is not being undertaken to displace commercial lenders. Rather, it is to expand the field of alternatives and make commercial lenders more competitive, helping to add more dynamism to the overall financing space.
What is the role of Cenergi within the broader development of the ESCO space, and how can the sector as a whole be driven to the next level?
We see Cenergi’s role in energy services as critical to our overall business growth plan and we are firmly committed to this area. Furthermore one of the company’s core objectives is to ensure that any new action plan implemented by Cenergi creates a viable roadmap for others to follow.
In terms of ensuring that the broader ESCO sector reaches the next level, we recognise that one of the constraints in the existing business model seems to be the amount of investment required. Generally, the majority of the players in the industry are comprised of small and medium sized enterprises (SMEs) that tend to structure EPCs with contract value of below MYR5 million whereby all parties, including the lender, feel comfortable. In order to encourage growth and avoid crowding out the space, Cenergi can provide investment and execution capacity for EPCs with larger contract values of beyond MYR8 million. While this increase would involve additional responsibilities and greater risks, it would also bring greater rewards. Cenergi, with the support of financiers such as MDV, are happy to take this step.
Beyond investment, the ESCO business model must be made more sophisticated by incorporating technology that monitors, analyses and responds to a range of human behaviour into its modus operandi. This should include steps like embracing the Internet of Things to track and predict human movement around a certain building, campus or town in order to produce a real time efficiency-based response.
How is Cenergi and the wider sector contributing to the national energy efficiency and renewable energy targets that seek to advance Malaysia towards a low-carbon future?
In addition to Cenergi’s expertise in energy services, the company also develops, invests and operates distinct renewable energy projects, particularly those related to biogas and biomass. Malaysia has huge bioenergy potential and we are keen to foster the development of this burgeoning segment, especially in relation to waste to wealth power plants in which waste is converted into a valuable commodity. This requires resolving a number of technological and commercial issues, in addition to the decentralisation of the electricity supply market, and we are providing solutions to these challenges.
One such solution is our commitment to construct 100 megawatts of electricity generated from a mix of renewable energy sources by the year 2021. Approximately 60 to 70 per cent of that mix will stem from bioenergy, with the remainder from hydro and wind. At present, 5.5 megawatts are operational and a further 1.5 megawatts are under construction, all of which is generated from biogas.
Cenergi’s biogas is utilised to generate electricity under the Feed-in-Tariff mechanism (FiT) administered by the Sustainable Energy Development Authority Malaysia (SEDA). We have five FiT projects underway and we will continue to apply for additional FiT programmes for as long as SEDA allows. Our ambition is based on the tremendous market potential in this area and we have identified an opportunity to provide waste to wealth solutions via the FiT to about 20 of over 400 palm oil mills operating in the segment.
A final but crucial step that must be embraced by all players is to ensure the presence of a trained and educated workforce that is capable of meeting the growing demands of the clean energy sector. Indeed, Cenergi is currently working with approximately 50 homegrown Malaysian talents in relation to the development, design, construction and operation of biogas plants and this number must increase in order to scale-up the wider industry.
Consequently, this is an area in which Cenergi can act as an industry champion by demonstrating to other players how to train and employ a set number of specialist workers. If a significant number of ESCOs replicate our example of training 50 homegrown individuals, the impact will be significant. First, there will be a number of new jobs created and the sector will grow as a result. Second, the industry will be better placed to contribute towards Malaysia’s national and international carbon emission reduction targets and facilitate its march towards a low-carbon future.