s p tudy on rivate-initiative … project involves power production business conducted by private...

STUDY ON PRIVATE-INITIATIVE INFRASTRUCTURE PROJECTS

IN DEVELOPING COUNTRIES IN FY2011

Study on the Solar Photovoltaic Power Generation Projects

in the Federation of Malaysia

SUMMARY

February 2012

Prepared for:

The Ministry of Economy, Trade and Industry

Prepared by:

Nippon Koei Co., Ltd

ORIX Corporation

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(1) Background of the Project

1) Renewable Energy Policy

The development of electricity supply industry is guided by the National Energy Policy (1979), the

Four Fuel Diversification Policy (1981), and the Fifth Fuel Policy (2001).

In the Eighth Malaysian Plan (2001-2005), renewable energy (RE) was announced as the fifth fuel in

the new Fifth Fuel Policy. It is targeted that RE will contribute 5% (500 MW)of the country's total

electricity generation by 2005, which is the end of the Eighth Malaysia Plan period. However, the

electricity generated by RE to the national grid was only 0.12% (12 MW) at the end of 2005.

Due to the unfulfilled target, the Malaysian government proposed the Fifth Fuel Policy to be

continued to the Ninth Malaysian Plan from 2006 to 2010, and made policies to promote further

development of RE sector in the country. By 2010 in the Ninth Malaysian Plan, RE was expected to

contribute 350 MW to the total energy supply in Malaysia. However, at the end of 2010, the

electricity generated by RE to the national grid was still short at 62.3 MW.

In April 2010, the Malaysian government approved the National Renewable Energy Policy and

Action Plan (NREPAP) that would serve as the cornerstone for a more aggressive RE development

in Malaysia.

The Tenth Malaysian Plan (2011-2015) contains goals for the enhancement of the incentive for RE

investment, and for introducing RE by generating 985 MW power until 2015.

Table S-1 Target Generated Power by RE

Year Total RE

(MW)

Share of

RE Capacity

Annual RE

Generation

(GWh)

Share of RE

Generation

Annual CO2

Avoidance

(t-CO2)

2015 985 6% 5,385 5% 3,715,415

2020 2,080 11% 11,246 9% 7,759,474

2030 4,000 17% 17,232 12% 11,889,887

2050 21,370 73% 44,208 24% 30,503,589

Source : Made by Study Team based on “The National Renewable Energy Policy and Action

Plan”

Additionally, the Renewable Energy Act 2011 which incorporated the feed-in tariff (FiT) mechanism

was adopted by the government in April 2011. The FiT mechanism and governmental RE fund were

then introduced in December 2011.

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2) Scope of the Project

The project involves power production business conducted by private entities under FiT mechanism.

The power producer constructs, operates and maintains the solar photovoltaic (PV) power system

and supplies the generated power by the solar PV power system to the Distribution Licensees (DLs).

A Special Purpose Company (SPC) as power producer is formed for the project. The SPC must do

the following tasks for the project:

Preparation of the project site (issue letter of intent to the site owner)

Preparation of working plan, financing plan and technical design

Conduct of power system study for the relevant DLs

Checking of the local governmental requirements and reporting to the local government

Application to Sustainable Energy Development Authority (SEDA) for approval of FiT

holder

Signing of Renewable Energy Power Purchase Agreement (REPPA) with the relevant DLs

Application to Energy Commission (EC) for the approval of public generation license

Financing arrangements

Procurement, construction and commissioning of the solar PV power system

Operation, maintenance and management of the power station

3) Analysis of the Present State and Future Forecast

Solar PV power system seldom fails compared to other power generating systems, and is almost

maintenance free. The risk of the power producer is also limited than in other power generating

systems, as stable amount of solar radiation can be relatively secured throughout the year in

Malaysia. It is noted that the FiT rate for solar PV power system is not sufficient for business.

However, when the construction of the whole project is ensured to be less costly, the business for the

system is expected to sufficiently sustain the project needs.

On the other hand, in the application process to SEDA for the approval of FiT holder, which

commenced in December 2011, it was realized that the requirements will exceed 90% of the general

amount of project capacity applied to solar PV, which is 140 MW.

The quota for the solar PV until the first half of 2014 was closed for several hours after the process

of accepting applications. The examination of the application has been carried out, and the other

applicants, which were not approved, shall be considered in the future.

The initial target amount of the solar PV generation, which is planned under the FiT mechanism in

Malaysia, is 190 MW in 2020.

SEDA issued a notice on a 5 MW limit for each solar PV application.

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4) Impact of the Project Implementation

The following effects are expected in the implementation of the project:

a. Environmental Improvement Effects (Carbon Emission Reduction)

The power generation amount of 1,300 MWh shall be generated by a solar PV power system of 1

MW at the planned site. An annual carbon emission reduction of 873.6 ton CO2 is expected from the

solar PV power system of 1 MW, since the grid emission factor in Peninsular Malaysia is 0.672

t-CO2/MWh.

b. Japanese Manufacturers‟ Entry Into the FiT Market

The project leads to investment promotion for Japan through direct participation of a Japanese

company. Japanese solar PV power system-related manufacturers who have expressed interest in the

project are also willing to directly participate in the project, aside from supplying equipment.

Especially manufacturers of PV modules are suffering price decreasing of modules in the market,

and they are considering that it will be difficult to continue their business by present business model

to just selling modules in future. In case a PV module manufacturer participates in the project,

method of participation to invest the cost of PV modules is clear and the method has high possibility.

Generally, around 60% of the total project cost is the cost of PV modules. Ratio of investment by

Japanese manufacturer will be high and ratio of Japanese product also will be high if Japanese

manufacturer of PV module participates to the project.

(2) Study Concept

The basic policy for deciding the contents of the project is to start with a small scale project. This

will confirm the business circumstance prior to implementing a large scale project. In this Study, the

capacity of the small scale project is set at 1 MW, and thus, the planning and design were conducted

for a 1 MW PV system. The capacity of the large scale project to be implemented afterward shall be

10 MW.

The main features of the concept design and specification for 1 MW PV system are shown below:

System capacity: 1.0 MW

Mode of grid connection: Distribution line, 11 kV, 1 circuit

Power conditioner: Plural number (in case of Japanese make)

Foundation of support structure: Galvanized steel pipes (scaffold pipes) as

pile with concrete reinforcement

Support structure: Galvanized steel pipes(scaffold pipes)

Step-up transformer: 0.4/11 kV, 3 phase, 2 x 500 kVA

Control house: Single-story, reinforced concrete

construction

Meteorological observation system: Solar insolation, ambient temperature,

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and module temperature

Data collection and communication system: Collect meteorological and power data,

and communicate with cell phone

network

The main features of concept design and specification for 10 MW PV system are shown below:

System capacity: 10.0 MW

Mode of grid connection: Distribution line, 33 kV, 2 circuits

Power conditioner: 10 x 1 MW

Foundation of support structure: Galvanized steel pipes (Scaffold pipes)

as pile with concrete reinforcement, or

water floating type

Support structure: Galvanized steel pipes (Scaffold pipes)

Step-up transformer: 0.4/33 kV, 3 phase, 2 x 5 MVA

Control house: Double-stories, reinforced concrete

construction

Meteorological observation system: Solar insolation, ambient temperature,

and module temperature

Data collection and communication system: Collect meteorological and power data,

and communicate with cell phone

network

(3) Outline of the Project

1) Total Cost

The estimated project cost for the 1 MW PV system is JPY 263 million (RM 10.8 million or USD

3.38 million) , for the 10 MW PV system is JPY 2.31 billion.

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Details of the project cost for the 1 MW system are shown in following table.

Table S-2 Details of the Project Cost (1 MW System)

Quoted/Estimated

Unit Price

For 1 MW System

(Unit: RM)

Unit Price Sub Total %

<< Cost of Equipment and Works >>

A PV Module RM/W 4.84 4,840,000 45.01%

B Power Conditioner RM/kW 1,030 1,030,000 9.58%

C Mounting Structure RM/kW 2,122 2,122,000 19.74%

D Other Equipment RM/kW 866 866,000 8.05%

E Civil/Building/Installation Works RM/kW 586 586,000 5.45%

F *1 944,000 8.78%

G Contingency Cost *2 153,000 1.42%

H Technical Services Cost *3 211,000 1.96%

Total RM 10,752,000

( in JPY 263,323,000 )

( in USD 3,382,000 )

<< Yearly Cost of Operation and Maintenance >>

I 30,000

J *4 70,000

Total RM 100,000 /year

( in JPY 2,449,000 )

( in USD 31,000 )

Note:

Each subtotal is rounded up or down to the nearest RM 1,000.

*1: 10% of total of items A to E above

*2: 10% of total of items E and F above

*3: 2% of total of items A to G above

*4: 0.5% of items A, C, D and 3% of item B

Other Works and Cost for Procedures

"in JPY" and in "USD" are rounded up or down to the nearest JPY 1,000 and USD 1,000

respectively.

Source: Study Team based on collected Price Quotation/Information and Analysis

Check and Inspection Cost

Equipment Repair and Replacement Cost

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Meanwhile, the details of the project cost for the 10 MW system are shown in the following table.

Table S-3 Cost Estimation for Future 10 MW System

Quoted/Estimated

Unit Price

For 10 MW System

(Unit: RM)

Unit Price Sub Total %

<< Cost of Equipment and Works >>

A PV Module RM/W 4.60 46,000,000 48.81%

B Power Conditioner RM/kW 979 9,790,000 10.39%

C Mounting Structure RM/kW 1,910 19,100,000 20.27%

D Other Equipment RM/kW 779 7,790,000 8.27%

E Civil/Building/Installation Works RM/kW 527 5,270,000 5.59%

F *1 4,398,000 4.67%

G Contingency Cost *2 967,000 1.03%

H Technical Services Cost *3 933,000 0.99%

Total RM 94,248,000

( in JPY 2,308,190,000 )

( in USD 29,647,000 )

<< Yearly Cost of Operation and Maintenance >>

I 150,000

J *4 658,000

K 128,852

Total RM 936,852 /year

( in JPY 22,944,000 )

( in USD 295,000 )

Note:

Each subtotal is rounded up or down to the nearest RM 1,000.

*1: 5% of total of items A to E above

*2: 10% of total of items E and F above

*3: 1% of total of items A to G above

*4: 0.5% of items A, C, D and 3% of item B

Other Works and Cost for Procedures

"in JPY" and in "USD" are rounded up or down to the nearest JPY 1,000 and USD 1,000

respectively.

Salary of Maintenance Personnel

Source: Study Team based on collected Price Quotation/Information and Analysis

Check and Inspection Cost

Equipment Repair and Replacement Cost

2) Results of the Preparatory Financial and Economic Evaluation

a. Implementation Structure

Nippon Koei Co., Ltd. and ORIX Corporation determined that 49% investment shall be shared by

SPC. The remaining 51% shall be financed by Malaysian capital companies. Referring to the

analysis of financial and economic feasibility discussed below, a trial calculation has been conducted

based on the implementation structure.

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Figure S-1 Implementation Structure（SPC）

SPC

Land or Building

Owner

Land Lease

or/and

Equity

・Equity

・Project

Management

SEDA

Feed-in tariff

Malaysian Partner

Source : Made by Study Team

b. FiT Rate

Based on the unit rate mentioned under the FiT, a value of RM 1.14/kWh is calculated for an electric

generating capacity of 1 MW, and RM 0.95 /kWh for 10 MW capacity.

c. Interest and Duration

Regarding the terms of financing, considering the result of hearing survey with banks and the

availability of the interest subsidy system by the Malaysian government, a provisional calculated

interest rate is determined as 5% per annum for a term of 15 years.

d. Result of the Evaluation

Table S-4 Financial IRR Sensitivity Analysis-1 (1 MW)

IRR (15 years)

Debt Ratio

0% 50% 70%

FIT Rate

(RM/kWh)

0.9649 3.5% 3.3% 3.1%

1.0488 4.9% 5.9% 7.1%

1.1400 6.3% 8.6% 11.2%


i. By increasing the rate of borrowing of SPC, a financial leverage effect was determined,

boosting profitability.

ii. Though the unit price of FiT is RM 1.14/kWh for the first year, the applicable unit price

from the beginning of next year shall gradually decrease by 8%. In terms of profitability, the

project is expected to be executed by the second year.

iii. The case of internal rate of return (IRR) with 0% of borrowing is so called project IRR.

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IRR (15 years)

Generated (kWh/year)

1,175,504 1,306,116 1,436,728

System Cost

(RM/W)

9.0 10.7% 16.3% 21.6%

10.0 6.0% 11.2% 16.2%

1.10 2.0% 6.9% 11.6%


i. For the installation cost of RM 10/W, IRR with an increase and decrease of 10% is

provisionally calculated.

ii. Under similar conditions, annual energy production is also provisionally calculated. Changes

in energy production have a big influence on the IRR.

In case of 10 MW, profitability is reduced since the applicable FiT rates are lower than 1 MW.


IRR (15 years)

Debt Ratio

0% 50% 70%

FIT Rate

(RM/kWh)

0.8041 0.9% -2.4% -6.9%

0.8740 2.0% 0.5% -1.7%

0.9500 3.3% 2.9% 2.4%



IRR (15 years)

Generated (kWh/year)

11,755,044 13,061,160 14,367,276

System Cost

(RM/W)

9.0 1.9% 6.9% 11.7%

10.0 -3.0% 2.4% 6.9%

11.0 -8.5% -1.8% 2.8%


3) Evaluation of Environment and Social Impacts

Generally, solar PV power system is assumed to cause limited environmental effects. With operating

facilities, solar PV power system would not emit effluent or atmospheric pollutant or odour around

the site. Also, solar PV power system would not cause noise or vibration. Environmental effect

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during construction is small because equipment which consists PV power generation is so light that

there is no need for large construction machines and large foundation.

In spite of the small environmental risk to residential areas in implementing the project, there is a

need to confirm legal consistency and to take necessary procedures.

This solar PV power generation project is not included among the projects prescribed under the

Environmental Quality Act. It became clear from documents or hearing with DOE that EIA is not

necessary for this project as long as it does not necessitate land reclamation of over 50 ha.

Consultation with relevant agencies about SSE, and obtaining permission for conducting SSE is

required for the project. The details of SSE are discussed in the following section. The procedure on

SSE is required when constructing a new factory, even if the project does not require EIA. This

application is submitted to the DOE state office.

(4) Implementation Schedule

The project is implemented as a perfect private enterprise. The economic evaluation of the project is

estimated continuously from the result of this Study. Considering that the project will be

implemented by concerned firms and judging from the method of project implementation, an SPC

acting as the responsible business organization will be established. Consequently, the SPC makes an

application as power producer and starts construction work after approval of the application. Power

generation business will start after October 2013 since the construction period of the solar PV power

system of 1 MW is assumed to be about 10 months.

Initial start of business shall be planned for solar PV power system of about 1 MW. However,

increase in capacity and addition of a new project will also be considered while ascertaining the cost

performance and the market situation.

Figure S-2 Planned Project Schedule

1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12

1 Outline Study

2Business Scheme Consideration and

SPC Establishment

3 Detail Design

4Preparation Study for Application to

SEDA

5 Application for FiT Approved Holder

6 Construction and Installation

7 Commissioning

8 Starting Power Supply

Environmental and Social Consideration related laws and regulations

Site Suitability Evaluation

2012 2013 2014


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(5) Feasibility of the Project

1) Economic Potential

In order to achieve the level of profitability for a 10 MW power system, which is normally required

when a private company executes a project, it is necessary to reduce the installation cost to a

minimum of RM 9/W. In comparison with 1 MW, this allows taking advantage of economies of scale,

and hence is considered to be a feasible level, which is achieved by properly selecting the required

equipment.

On the other hand, even if the installation cost of RM 9/W is achieved, 10% reduction in the amount

of solar radiation has a profound effect on profitability. This is because there is a need to carefully

select a site that will secure sufficient amount of solar radiation.

2) Scheme

Many local companies are expressed interested in this business. During the Study stage, where

discussion with two or more companies in the Study has been carried out, and it is considering the

business scheme proposed.

3) Marketability

The advance of the third nation company to power generation business in FiT mechanism including

South Korean companies having already announced the plan of the mega solar power station

becomes active.

(6) Technical Advantage of Japanese Company

The advantages of engaging Japanese companies for the project are examined below, from both

economic and technical aspects, corresponding to the forms of their participation mentioned above.

1) Economic Aspect

a. Investment and Finance

Because Japanese yen is strong, and its procurement interest rate is relatively low compared with

Malaysian Ringgit, there is advantage of engaging Japanese companies in terms of both investing in

and financing the project. On the other hand, the exchange rate fluctuations pose a large risk in case

of investing and financing with Japanese yen.

b. Equipment Supply

Japanese equipment, which has high-performance but was originally expensive, has decreased its

price competitiveness because of strong yen at a level of JPY 70 to USD 1. Judging from the

economic aspect, it may be said that there is limited superiority of Japanese companies in equipment

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supply.

Superiority of Japanese product is high reliability and high efficiency. Such superiority is

understandable after long duration from the commencement of operation. It is necessary to arrange

to compete under the same condition of high reliability and high efficiency for long term if the

product price has less price competitiveness. Suppose a project utilizes cheap PV modules as a

product for high profitability. However the modules might not be able to generate in nominal

efficiency, might break down after a few year, or the efficiency of the modules might be extremely

sagged after around 10 years. Such event can be found only many years after the commencement of

power generation. It is ideal that the implementation body of the project and investors decide to

utilize Japanese product to avoid such future risks even Japanese product is expensive, however it is

actually not easy. The implementation body of the project and investors calculate profitability of the

project to decide whether the project is implemented or not. If profitability is not high as result of

calculation, the project cost is needed to be reduced and utilize cheap product to realize the project.

It has a tendency not to consider un-visible risk at the time e.g. breaking down of the cheap product

and extreme deceasing of efficiency.

As the above, it is a solution to make decision to utilize Japanese product that manufacturers of

equipments participate to the side of decision maker of the project and they decide to utilize

Japanese product to reduce the un-visible risks in future. In solar PV power generation business,

manufacturers compete not in their equipment as product but in generated power as final product of

the manufacturers.

As a method to reduce the product price, it is the most realistic to heighten the local production ratio.

In case of PV modules, assembling cells to module can be done in local.

c. Operational Management

Because of expensive manpower cost and strong yen, it may be said that there is limited superiority

of Japanese companies in terms of operational management similar to equipment supply mentioned

above.

2) Technical Aspect

The examination from a technical aspect was performed for equipment supply and operational

management. The examination of investment and finance was as performed from economic aspect.

a. Equipment Supply

Japanese companies are highly superior in terms of efficiency and reliability of all kinds of

equipment. Equipment supply by Japanese company is possible if the technical superiority of

equipment can overcome their inferiority in the economic aspect, by evaluating their life cycle.

However it is difficult to prove it and to convince the project implementation body and investors.

The current status can be evaluated as shown below.

・ Materials and equipments supplied by Japanese companies are considerably expensive

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than ones supplied by companies of other countries.

・ A multitude of materials and equipments supplied by third countries are utilized for other

project and the efficiency and reliability of the materials/equipments are not low to disturb

the implementation of the project.

There are not enough premises to show technical advantage of product supplied by Japanese

company overcomes economical disadvantage of price difference and to induce the implementation

body and investors to introduce Japanese product for decision making to utilize product supplied by

Japanese companies.

b. Operational Management

For "the operational management at the time of the project setup" and "the operational management

after completion of PV system”, Japanese companies are superior in the technical aspect. On the

other hand, as mentioned above, there is less superiority of Japanese companies in economic aspect

because of the high manpower cost. However, it is assumed that participation of Japanese companies

is essential for operational management because at present, there are no Malaysian companies which

have experience in introducing and operating grid-connected PV system.

(7) Risk on the Execution of the Project

1) Approval and license for implementation of the Project

Approval and license for implementation of the project must be required before implement of power

supply business as follows. And an SPC acting as the responsible business organization will be

established to apply for the approval of a feed-in approval holder (FiA).

To apply for FiA from SADA

To make contract of Renewable Energy Power Purchase Agreement (REPPA) with relevant

Distribution Licensee (DL).

To apply for public generation license from the Energy Commission.

The SPC must prepare permission of the use of the project site, basic design of the system, result of

power system study (PSS) by DL, confirmation to relevant local authority, financing plan and work

plan before application to SEDA for approval.

In order for a foreign company to become a FiT-approved holder, it is necessary to establish a joint

corporation with local companies. The foreign equity shareholder is capped maximum at 49%. Many

local companies expressed interest in this business.

2) Challenges for implementation of the Project

In order for implementation of the project, the biggest challenge is to increase economy of the

project. The efforts and solutions for the challenge are as follows.

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a. Realization below the total investment cost of USD 2,500/kW for 10 MW system

It can be judged that it is sufficiently feasible to execute the project if construction cost does not

exceed USD 2,500/kW, which is approximated from a local system integrator. Since a FiT rate for

solar PV becomes less costly when installed capacity exceeds 1 MW, the project‟s economic

efficiency becomes low. Consequently, the project will not be considered as a profitable business. In

the future, it is preferable to consider less costly construction methods in the design and estimates.

b. Realization of long project financing with low interest rates

If financing will be by a Malaysian bank, long-term finance of 10-15 years is possible. Financing

with interest rates of as low as around 5% is possible if green technology financing scheme of the

Malaysian government can be applied.

c. Securing less costly project site, which can be used for long periods

The landowner of the proposed site in Ipoh is a local government, while the local private company

has the right to use the land, being the land holder. Compared with unused land of other private

companies, such land can be used at a low cost and for a long term. This is based on the rights of the

land holder depending on the method adopted in the site for the project implementation.

3) Risk of reviewing FiT mechanism in future

Because the project is carried out based on FiT mechanism, it may be affected by the review of the

mechanism. The quotas for solar PV after from late in 2014 have yet to be decided. Because many

applicants and projects were applied for the quota of solar PV until first in 2014, SEDA issued a

notice on a 5 MW limit for each application. The schedule and design of the project may be affected

by such reviewing FiT mechanism.

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(8) Map Showing Implementation Area

Project Site Project Site

Map Source: Made by Study Team based on

CIA World Factbook / Department of Surveyand Mapping, Malaysia

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