Economic Update

Biofueling the Economy

Malaysia | 2 Apr 2009

Malaysia is stepping up its already considerable efforts to promote the use of renewable energy, seeking to move beyond being a mere provider of raw materials and become a regional leader in biofuels through the use of advanced technology.

The country has long been a convert to the cause of renewable energy, having adopted the "five fuels" policy in 1999 to diversify its sources of energy to include renewable applications such as biomass, solar, wind, biodiesel and hydrogen to complement the more traditional fossil fuels and hydroelectricity.

One of the key planks in this policy has been to support the use of biodiesel, a mixture of 5% processed palm oil and 95% diesel. The blended biodiesel programme, also called B5, foresees all vehicles running on diesel switching to the biofuel by 2010, with much of the country's own transport pool already operating on the mix.

While this policy will serve to support the local biofuel industry, domestic demand alone will not ensure its viability, especially as the steep fall in fossil fuel prices over the past year has widened the cost gap between oil and the bio alternatives.

Of late, the government has been promoting the potential of renewable energy both as an export commodity and as a means to strengthen the domestic economy, though it has recognised the need to improve energy technology and attract higher levels of investment.

On March 21, Malaysia's international trade and industries minister, Tan Sri Muhyiddin Yassin, announced that the government was preparing a package of incentives aimed at attracting foreign direct investments of $8.1bn over the next two years.

Under the package, set to be activated by the middle of the year, eligible companies would enjoy extended periods of tax exemption, assistance in finding land on which to set up shop and state support for infrastructure, the minister said.

One of the industries Muhyiddin specifically singled out as being of interest to the government was the renewable energy sector, a theme that has been taken up by other cabinet members.

Speaking at the launch of the France-Asia Trade Forum in Kuala Lumpur on March 30, the water, energy and communications minister, Datuk Shaziman Abu Mansor, said the potential market for renewable energy and communications in developing countries such as Malaysia was enormous. "We can attract more domestic and foreign investments if appropriate incentives are provided to ensure adequate financial returns and offset higher risk perceptions," he said.

In mid-March, Najib Razak, the incoming prime minister, explained his vision for the future of the Malaysian economy in an article carried by The Wall Street Journal that outlined the government's recent $16.4bn economic stimulus package.

The government was working to counter the current global economic downturn by forging a new economic model, with renewable energy as one of the key pillars of this plan, said Najib.

"We will invest in education and technology, further strengthening the country's capacity to lead in information technologies, renewable energy and emerging sectors of the new economy," he said.

Malaysia already has a solid base from which to expand its biofuel production, with 10 active biodiesel plants: five located in Pasir Gudang, one in Kuantan, two in Lumut and a further two in Lahad Datu. Between them, they have a production capacity of around 1.67m tonnes, enough to meet the requirement of the state's B5 policy and supply the export market.

However, in order to boost export potential there is an urgent need to modernise technology at these existing processing plants, according to Malaysia's minister of plantation industries and commodities, Datuk Peter Chin Fah Kui.

In order to facilitate exports to the EU it is essential that palm-oil mills upgrade their technology, much of which dates from the 1970s and 80s, Chin told a biofuels conference in Kuala Lumpur on March 24. "The EU directive on renewable energy specifies targets for biofuels and has qualifying provisions that are burdensome to comply with," he said. These conditions impose barriers for the importation of biofuels into EU countries, particularly palm-based biodiesel, Chin added, though this can be overcome through the use of new technology that would allow mills to produce higher-quality fuel with lower greenhouse gas emissions.

With the government strengthening its commitment to the biofuel industry, having also announced it will use the Malaysian Palm Oil Board's $68m palm oil price stabilisation fund to provide support for biodiesel until at least the end of 2009, the future looks brighter for the fuel of the future.

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