Impact of Covid-19 on Developments of Bioenergy in Malaysia and Digital Financing for Post Pandemic Recovery
Lim, M.T.1*, Nimellnair, S.1
1 Renewable and Green Technology, TNB Research Sdn. Bhd., No. 1, Kawasan Institusi Penyelidikan, Jalan Ayer Itam, 43000 Kajang, Selangor
*Corresponding Author: mook.tzeng@tnb.com.my
Accepted: 15 May 2021 | Published: 1 June 2021
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Abstract: Malaysia implemented a nationwide lockdown on 18th March 2020, disrupting supply chains for various economic sectors. Since 14 October and 7 Nov 2020, Malaysia has entered a second period of lockdown, but with most economic sectors still operational. This paper summarizes the impact of the lockdown measures on the development of bioenergy in Malaysia. The review shows that the demand for oil and its subsequent price dropped during the lockdown. Consequently, the government’s revenue from dividend payments by the national petroleum company reduced. The palm oil gas oil spread subsequently increased, reducing the viability of blending biofuels with fossil fuels. The review also shows that the lockdown has caused a shortage of labour, however, this did not reduce the supply of crude palm oil as was forecasted in the initial months of the lockdown. Demand for crude palm oil, higher exports and lower stockpiles, increased its price to record levels. Though the price of crude palm oil is lucrative, the palm oil gas oil spread has increased, reducing the feasibility of liquid biofuel uptake. With a lower petroleum-based tax revenue, shift of policies and disbursement of public funds to address the impact of the lockdown measures on the wider economy, causing a lower possibility of the government financing green projects. This review postulates that future financing for green projects will be based on emerging digital technology like blockchain.
Several pilot projects have been rolled out to raise investments for green bonds, thus encouraging community participation and widening the investor base.
Keywords: Bioenergy, Biofuel, Malaysia, Digital financing, Palm oil, Blockchain, Covid-19, Renewable energy, Sustainable development, Green bonds
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1. Start of lockdown measures and the impact on the economy
Measures taken to contain the spread of the coronavirus (covid-19) include national and targeted area lockdowns, with enforced social distancing guidelines and restrictions on the movement of people. The enforcement of a nationwide lockdown in Malaysia began on 18 March 2020, known as movement control order (MCO), during which interstate travel was not allowed. Only travelling for essential purposes and services, i.e. for obtaining food supplies and medical care were permitted. Gatherings of crowds were prohibited, and movements of individuals were monitored via smart phone applications. Most businesses and factory operations were halted during this MCO period, affecting the usual flow of goods and revenue streams. The country’s economic growth in terms of in gross domestic product (GDP) is expected to shrink in 2020 from -2.0% to 0.5%, compared to a positive growth of 4.3% in 2019.
In July 2020, Malaysia’s GDP growth was reported to be -16.5%. However, in the third quarter of 2020, GDP rebounded significantly to 18.2% [1]. The sharp rebound was because most
economic sectors were allowed to operate during a conditional movement control order (CMCO), as long as social distancing measures were adhered to. Akin to a partial lockdown, the CMCO was imposed after the MCO ended on 4 May 2020. On 7 June 2020, a recovery movement control order was imposed (RMCO), and interstate travel was allowed, without the need for permits or letter of authorization from employers (required during the CMCO). The CMCO was re-imposed on 7 Nov 2020 for most states of Malaysia, due to a spike in the number of confirmed covid-19 cases.
During the MCO and CMCO periods, with less traffic reducing demand for fuel, the corresponding fuel price decreased. There was a similar trend globally, prompting the Organization of Petroleum Exporting Countries (OPEC) and Russia to sign a deal to reduce production on 12 April 2020 to stabilize the price of fossil fuels. However, Saudi Arabia continued with oil production in April, reducing the price of crude oil significantly to USD20 per barrel [2]. There is a drastic drop in oil consumption in the first quadrant of 2020. RON95, RON97 petrol and diesel prices in Malaysia decreased to 1.25, 1.30 and 1.43 RM per litre on 18 April 2020 [3, 4].
On 10 June 2020, Malaysia began the recovery phase of the MCO (RMCO), in which interstate travel was allowed, most businesses resumed operations while social distancing measures were still mandatory. Traffic and economic activity began to increase, consequently increasing the demand for fuel. Economic data in the United States, Europe and Asia was positive, showing an increase in manufacturing and factory activities, thus increasing fossil fuel prices [5]. OPEC, its allies and Russia also started to increase oil production slightly, keeping oil prices from rallying higher [6]. As of 8 Aug 2020, the prices of RON95, RON97 petrol and diesel have increased to 1.63, 1.93 and 1.79 RM per litre [3].
These prices are lower than pre-lockdown levels, which were 2.08, 2.68 and 2.18 RM per litre for RON95, RON97 petrol and diesel respectively on 28 Dec 2019 [3]. The lower fossil fuel prices means a shortfall of petroleum income tax (PITA), projected to decrease the Malaysian government’s revenue by RM37.1 billion [7]. The lockdown or containment measures imposed on certain economic sectors has also resulted in unemployment rates of 4.7% (or 741,600 persons) as of August 2020 [8, 9]. The Malaysian government’s budget that was announced in November 2020 also included various tax relief schemes, skills retraining and upgrading programmes [10, 11], and it is expected that the government’s reserves is limited.
With a negative impact of the lockdowns on the country’s GDP and reserves, previous initiatives and policies that prioritized an adoption of renewable energy have been relegated.
The extent of the impact on the uptake of renewable energy is unclear because of the pandemic.
The severity of the lockdown measures’ impact on the economy is in a state of flux. Of particular interest is the impact of the lockdown measures on the supply and demand dynamics of liquid and solid biofuels (derived from palm oil), of which Malaysia is the second largest producer globally. Therefore, this short communication reviews the developments and events that have occurred during the lockdown period on the supply and demand dynamics of liquid and solid biofuels in Malaysia. The short communication also suggests alternative and emerging options for financing bioenergy projects. The collated information is based on reports, market analysis from news portals, webinars organized by various institutions during the lockdown period from March to December 2020. The reader is advised that any conclusion drawn from the collated information should be done with reservation, since other events such as the availability and efficacy of vaccines [12], or a possible and sudden mutation in the coronavirus [13] may cause developments on bioenergy (and renewable energy) to change.
2. Supply and demand dynamics of liquid biofuels
Liquid biofuels in Malaysia are mainly in the form of biodiesel produced from palm oil. In 2018, Malaysia produced an estimated 900,000 tonnes of biodiesel, and demand was expected to increase due to its lower cost competitive price compared to diesel [14]. As mentioned earlier, during the MCO period there is less demand for fuel and the corresponding price decreased. If the oil prices maintain at this level, there is less economic feasibility for deploying biofuels [15], since the cost of producing biofuels is still not competitive. The current cost estimate to produce fossil fuels is between 30 to 50 EUR/MWh, compared to biofuels which range from 50 to 160 EUR/MWh, with cellulosic ethanol being the most costly, and Fischer- Tropsch biofuels from waste range from 50 to 110 EUR/MWh [16].
The lower fossil fuel price has also affected the Malaysian government’s plan to increase the uptake of biodiesel. Pre-lockdown, Malaysia mandated the blending of 20% biodiesel with fossil fuel-based diesel in 2020 (known as the B20 mandate). The mandate was expected to utilise 1.3 million tonnes of crude palm oil. Low fossil fuel prices and the Covid-19 pandemic have affected demand, such that in April 2020 the Malaysian government delayed the implementation of the B20 mandate until further notice [17]. The increased in palm oil and gas oil (POGO) spread also decreases the economic feasibility of doing so [18]. In addition, crude palm oil prices have increased to 3,262 RM per tonne as of 7 November 2020 from 2,500 RM per tonne in July 2020 [19]. Higher crude palm oil prices increases the cost of producing biodiesel and the POGO spread [2].
Higher crude palm oil prices are due to several factors. The resulting MCO to contain the Covid-19 pandemic has also disrupted the movement of labour across borders, resulting in a future possible shortage of an estimated 62,000 harvesters, mostly from Indonesia [20]. The lack of harvesters reduces the yield of fresh fruit bunches (FFB) per hectare and the resulting crude palm oil (CPO), which is produced from the FFB. The forecasted shortage in CPO supply turned out to be untrue, when the Malaysian Palm Oil Board reported otherwise on 25 Nov 2020 [21]. The report says that CPO production actually increased by 3.5% compared to the same period the previous year, showing that the lockdown measures did not significantly impact CPO production. In fact, the exemption of CPO export duties following the Malaysian government’s National Economic Recovery Plan (Penjana) improved the amount of exports by 37.3%. This was to cater to demand from India and China [21], coupled by a reduction in available global vegetable oils [22], therefore reducing CPO stockpiles in Malaysia from 1.79 million tonnes to 1.70 million tonnes, maintaining the demand for CPO and sustaining its price [21]. In October, India was the largest importer of palm oil as traders stockpiled reserves before the Hindu festival in November, when consumption of fried food (using palm oil) increases [19]. Therefore, the price of CPO is sustained by strong demand, although unrelated to adoption for bioenergy. This is only possible if governments are committed to decarbonization policies pre-lockdown. Indonesia, the world’s largest palm oil producer, is committed to its biodiesel program, with the intention of raising export levies. Indonesia intends to use the levies for biodiesel incentives [19].
3. Supply and demand dynamics of solid biofuels
Solid fuel biomass based power generation in Malaysia amounts to 400 MW, which is only 1.5% of the total MW generated in Malaysia as of 31 Dec 2017 [23]. Of the 400 MW, 350 MW is generated for self-sufficiency in the approximately 400 palm oil mills in Malaysia, with each mill producing (and consuming) approximately 1 MW. Most of the palm oil mills utilize
mesocarp fiber (MCF, a by-product from the processing of FFB) as fuel to generate power from steam Rankine cycles. Another 50 MW is generated for the grid from solid based biofuels such as MCF, palm kernel shell (PKS), or empty fruit bunches (EFB). On the 23 Nov 2020, it was announced that a 10 MW biomass fired power plant, worth RM115.60 mil shall start construction in Terengganu, an east coast state of Malaysia. Amidst the pandemic and CMCO, this represents a positive development for solid biofuel based energy in Malaysia, though the amount of MW contribution is still miniscule compared to the total amount of power generation [24].
PKS is another by-product from the processing of FFB to produce CPO, and has a higher calorific value compared to MCF and EFB. Currently, PKS is exported to East Asia due to strong demands for solid biofuel [25]. In 2019, Japan imported approximately 2.5 million metric tonnes of PKS and other palm residues to biomass power plants, following Japan’s attractive feed-in-tariff (FiT) scheme for renewable energy [26]. During the lockdown period, PKS supply from Malaysia is sustained, since MPOB reported that the CPO production actually increased, indicating that FFB harvesting (and PKS availability) increased or sustained. Japan’s FiT scheme has also sustained the demand for PKS, increasing the spot price for east coast Sumatra Indonesian PKS price up to above 100 USD per tonne [27] [28].
Besides PKS, wood pellet factories were initially considered non-essential businesses and were not permitted to operate. The closure meant that there was a reduced supply of wood pellets to South Korea, the biggest buyer of Malaysian wood pellets (520,000 tonnes in 2019). Reduced availability of container vessels as a result of reduced shipping traffic from South Korea was another factor that contributed to the reduction in supply [27]. However, the World Bioenergy Association (WBA) through their survey reported that most producers of wood pellets are benefitting from long term offtake agreements with buyers [29].
4. Post-pandemic economic recovery
As countries strategize for a post-pandemic economic recovery, low oil prices may cause fossil fuels to supersede biofuels as mentioned by [30], despite strong demand for biofuels from certain economies as mentioned in the previous sections. However, the dependence on fossil fuels for economic recovery would renege on the commitments for decarbonisation, negating the progress that have been made to mitigate climate change related events. In the European Union, such events would require each member states to compensate with public funds [30].
Instead of depending on fossil fuels, a common narrative is emerging from various organizations to encourage stakeholders and policy makers to take advantage of the situation, and base the post pandemic economic recovery on renewables. China, Japan and South Korea have pledged to achieve net zero emissions within the next few decades. China’s target is to be carbon-neutral by 2060; Japan and South Korea by 2050 [31] [32]. Austria became the second EU country to shut-down power and heat generation from coal when the Verbund’s Mellach coal-fired district heating plant interrupted its operation on 17 April 2020 [30, 33]. World Bioenergy Association has also called on governments to dis-incentivise fossil fuels, by taking advantage of low oil prices and eliminate subsidies, implementing carbon pricing policies for fossil fuel exit strategies [15]. China, Japan and South Korea’s pledge to become carbon-neutral nations hinge on increasing carbon prices, incentivising companies to pollute and emit less.
For this to be possible, the current cost of CO2 (27 EUR/tonne of CO2) is expected to increase by a factor of three (90 EUR/tonne of CO2) [34]. Low oil prices may not continue further, as reported in 26 Nov 2020 where prices rebounded to an eight-month high of USD48.61 per barrel [35], thus maintaining the economic feasibility of the use of biodiesel in the future.
These pledges align with United Nations Sustainable Development Goals (SDG) to mitigate climate change and related events that damages economies. However, the Asian Development Bank Institute reports an annual deficit in funding for the SDG at USD 2.5 trillion per annum.
With the pandemic, lockdown measures, tax reliefs and etc. drying up funding options, and with the carbon tax/price still not implemented in Malaysia, alternative financing methods are required if the agenda of decarbonization is to proceed unhindered.
5. Alternative methods of financing bioenergy projects
With the lack of public funds and uncertainty of successful vaccination of mass populations in the near future, a scenario of financing bioenergy via digital technology maybe possible. There are examples where financial technologies (or fintech) is used to raise funds for bioenergy projects, such as the use of blockchain to manage the issuance and investment of green bonds.
Bonds are a form of loan that are issued by companies or governments (the issuer). Buyers of those bonds (investors) are essentially providing loans to the issuer to raise funds. At an agreed interval, the issuer shall payback the investors via interest payments. As the bond matures, the full-face value of the loan shall be returned to the investors. Green bonds are similar to bonds, with the difference being that the raised funds are used for environmental projects, provided that sustainable criteria are met. The world’s first green bond was issued in 2008 by the World Bank [36], and until 2018, the World Bank has raised US$13 billion through 150 green bonds in 20 currencies for institutional and retail investors all over the globe. In 2017, a technical working group in Malaysia comprising of Bank Negara Malaysia (Central Bank of Malaysia, a statutory body that promotes monetary and financial stability), World Bank Group Global Knowledge and Research Hub, and Malaysia’s Securities Commission, developed incentives and instruments for investments in green or sustainable projects. As a result, the world’s first green, Islamic bond was launched by the Securities Commission [37] [38]. From 2016 to 2019, China expanded its green bonds market, and became the lead country with the most labelled green bonds globally, with a total bond issuance of US$120 billion in that period, and a total of USD948 billion since its inception [39, 40]. The total amount of green-based bonds by China was USD69.4 billion in the third quarter of 2020 alone [41].
Further reduction of costs for the facilitating the transactions of green bonds is possible through the use of blockchain. Blockchain was first proposed in a whitepaper by ‘an unknown person or persons named Satoshi Nakamoto’ [42] and was meant for application in a cryptocurrency (bitcoin). The main feature of blockchain is its distributed ledger, which creates a distributed database (a block) which is linked (or chained) to a previous block. The distributed ledger is accessible (publicly or private), transparent, and is an irrefutable record of transactions. The result is a peer-to-peer electronic financial transaction system that eliminates the need for a trusted third party or intermediaries (such as powerful institutions) for facilitating the transactions [42-44].
When used for green bonds, HSBC and the Sustainable Digital Finance Alliance reported that blockchain is able to reduce the cost of facilitation by a factor of ten [44]. The report suggests the largest cost reduction is from the following stages of facilitating green bond transactions:
(1) structuring, price and risk rating (2) brokerage and sales (3) custodianship (4) reporting.
These reductions are possible because of the absence of established or powerful intermediaries which charge fees for handling the transactions. The conventional requirements for settlements of contract and auditing are replaced by encoded, self-executing algorithms, and transparency is provided by the distributed ledger. Embedded analytical algorithms or data science is able to
interpret large amounts of unorganized data, reducing the cost of reporting, making the bond market more efficient and accurate [44].
6. Digital financing through blockchain technology
The United Nations Environment Programme has identified the following transformational applications of blockchain : (1) pay-as-you-go resource utilities (2) flexible energy supply and demand (3) peer-to-peer renewable energy, and community distributed generation [43, 45].
Europe has seen various applications of blockchain for the energy, logistics and supply chains.
Blockchain is also used for ‘prosumers’, who consume and sell (excess) energy that are generated directly to neighbours. Such trading of energy using blockchain has occurred in Germany, with 44 firms participating in the Enerchain project [43, 46], a peer-to-peer trading project in the wholesale energy market.
With respect to green bond related applications of blockchain, the Green Assets Wallet [47] is an independent and trust-by-design built platform for green securities, provides the opportunity to issuers to transparently and efficiently communicate green bond offerings and achievements in an attractive format for investors. In another example reported by HSBC and Sustainable Digital Finance Alliance [44], Banco Bilbao Vizcaya Argentaria (BBVA), a Spanish multinational financial services company, issued the world’s first Green Bond using blockchain in February 2019 for EUR 35 millionto A Spanish insurance company, MAPFRE [48]. The platform allows the client to structure the instrument directly. As with the World Bank, BBVA used the technology for the simplification and streamlining the negotiation time frames. BBVA used a permissioned blockchain, allowing access to authorised parties only, with the transaction recorded to the public Ethereum Testnet. This allowed the records to be transparent to the public.
The People’s Bank of China (PBOC) authorised a Central Bank Digital Currency (CBDC) [49]
based on a two-layer system [44], with one being for commercial use and the other for retail.
French lender, Société Générale issued a covered bond on the public Ethereum blockchain [50].
This pilot project shows that the sales of the bonds can be performed in smaller units, widening the investor base for retail or community investors, allowing for a “larger and fragmented ownership of green assets” and conversely the “aggregation of many smaller assets into a bond”
[44].
Developments in blockchain technology in Malaysia was reported back in 2018. The Malaysian Industry-Government Group for High Technology (MIGHT) considered to use blockchain for renewable energy and utilities. Electricity producers would use the distributed ledger to declare the electricity production pathway. Consumers would then have a choice to choose from whom to purchase electricity [51]. As of November 2020, Bank Negara Malaysia is developing the regulatory framework and finalizing the Exposure Draft on Licensing Framework for Digital Banks. The institution was considering issuing five licenses issued subjected to the applicants' ability to meet the requirements of the Financial Services Act 2013 and the Islamic Financial Services Act 2013 [52].
7. Promoting socially equitable and sustainable development via blockchain
The above examples have shown that blockchain is able to promote the adoption of renewable energy. The Enerchain project involved peer-to-peer trading of energy that municipality councils or power producers could partake in. A variant to the scheme would be one that
promotes a socially equitable development by including marginal groups, such as the lower wage earners or communities living in poverty. Municipal councils or energy producers participating in the scheme pay back the investment via other forms of remuneration to marginalized groups. These could be through waivers of electricity bills or the issuance of food coupons via retail outlets. Another option would be to enhance investors’ virtual statuses, provide medical insurances or education scholarships, for investors who divert the periodic interest payments (from investing in the green bonds) to the marginal groups.
Such a financing scheme for socially equitable development is not a radical idea. The most significant community engagement which resulted in a paradigm shift in behavioural change is observed from ANT Financial Services Group’s (China) pilot project using blockchain to monitor consumers’ carbon footprint [43]. The company launched a large-scale pilot to shift consumer behaviour that aligns with sustainability. The ‘Ant Forest’ app encourages Ant’s users to reduce their carbon footprint through a three-part approach: (a) providing carbon savings data through smartphones, (b) connecting virtual identity and status to ‘green energy’
related earnings for reduced carbon missions, and (c) providing rewards for offsetting carbon emissions through a physical tree planting program. The pilot project reported a reduction of carbon emissions of an estimated 150,000 tons from August 2016 to January 2017 [53].
The blockchain platform is also envisioned to promote sustainable development. For applications in the supply chain of bioenergy, the harvesting and utilization of feedstocks is reported to investors. Improving the traceability of the feedstocks between suppliers and producers improves the reliability of bioenergy, as these are monitored in real time. The availability and transparency of the data would widen the pool of available funds, promoting transactions between the consumers (investors) and producers (bond issuers) in bioenergy sector.
8. Current barriers to digital financing
Although the aforementioned examples of green bonds are using blockchain technology for financing, the projects are still at its early stages, and its full potential or disruptive impact is not known [43]. A report has suggested the use of cryptocurrency for blockchain increases energy consumption [54]. Further analysis is also required to determine the amount of avoided emissions as a result of projects financed by blockchain related green bonds. The regulatory frameworks may not keep up with the fast-paced development and deployment of blockchain, an example is China’s ban on initial coin offerings and cryptocurrency exchanges, and unclear regulations on blockchain (the technology behind cryptocurrencies).
The proliferation of blockchain has increased risks that are previously managed by intermediaries. These include nuances that are previously not accounted for during transactions, value transfer risks, and smart contract risks [55]. The distributed ledger technology also exposes the ledger to endpoint vulnerabilities, in the form of any personal computer or mobile device. Vendor solutions for cybersecurity may contain loopholes in itself, while the pace and urgency of development may launch untested codes, causing long lasting damage to the system. Assets and information are securely signed on to a blockchain using private keys, approved using a protected process. Malicious content maybe uploaded to the blockchain if the private keys and the approval process are compromised [56].
9. Conclusions
With the coronavirus (covid-19) causing a negative impact on the economy, financing bioenergy projects require alternative methods to decarbonize and mitigate climate change.
Focusing on Malaysia, this review has shown that the supply of crude palm oil is not significantly affected by the lockdown measures to contain the spread of covid-19, due to strong external demand. However, the adoption of crude palm oil-based liquid biofuels is affected by low oil prices if governments do not pursue initiatives enacted pre-pandemic.
Increasing tax reliefs to alleviate the conditions of the unemployed, lower government revenue from tax collection of petroleum products, means that alternative or emerging financing methods for green projects is required. Blockchain facilitated green bonds have been reported to raise more than sufficient funds, and could be used in a post-pandemic period where lockdown measures are likely to be in place before a viable and efficient vaccine is produced.
However, the regulatory framework for the application of blockchain needs to be in place for business to start to participate more actively, while cybersecurity risks needs to be addressed to prevent malicious activities.
Acknowledgement
The authors wish to acknowledge funding from Tenaga Nasional Berhad.
The article are the authors’ personal opinions and do not reflect the official stance of Tenaga Nasional Berhad.
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