Background
The mandatory Energy Efficiency Obligation Scheme (EEOS) in European Union countries is a policy mechanism where obligated parties, usually utility companies, are set to deliver energy efficiency improvements for consumers in exchange for energy credit towards their target. EEOS generally internalize costs through consumers’ bill payments, thus, can continue delivering energy savings without government fiscal support. For an EEOS to be successful, four main components are needed: 1) quantitative energy efficiency improvements targets, 2) parties obligated to meet these targets, 3) a system to define energy credit values of various efficiency improvement activities, 4) and a mechanism to verify and monitor tangible outcomes delivered [1]. Increasing evidence has affirmed that well-designed EEOS will not only enable cost-effective long-term energy savings but also create social and economic benefits [2]. Due to its high customizability, 46 variations of EEOS have already been adopted in jurisdictions worldwide [3]. The high adoption rate highlights EEOS’ potential to be legitimized and adopted in Southeast Asian countries where improving energy efficiency represents a critical pillar to meet their decarbonization targets under the Paris Climate Agreement.
As the sixth most populated country among the eleven members in Southeast Asia and having an average performance in delivering energy security, affordability, and sustainability, Malaysia serves as a perfect case study to examine the potential of the above-mentioned energy policy transfer to the region [4], [5]. The country’s energy consumption will likely increase in the short-to-medium term as the economy progresses and living standards improve. Specifically, the building sector, which currently represents 49.5% of the country’s total electricity consumption [6], is expected to experience the most significant growth due to the continued increase in building stocks caused by rapid urbanization [7].
The need for a new energy efficiency policy to facilitate building retrofits in Malaysia
Malaysia – which currently produces 83.4% of its electricity from imported coal, has recently planned to introduce more renewables into its energy mix as part of its Paris Agreement commitments [8],[9]. However, its target of increasing the share of renewable generated electricity from 8% to 20% by 2025 could be challenging if demand growth continues to be neglected [10], [11]. Current building stock must be made more efficient to facilitate the government in achieving its climate ambitions. In response to its commitment to the Paris Agreement, the Malaysian Government has, for the first time, included environmental objectives like improved energy efficiency in its national 5-year plan for 2021 – 2025 [12] – committing to reducing the building sector’s energy consumption in 2050 by 40% compared to 2005 level.
Most buildings in Malaysia constructed before the building energy efficiency standards were introduced could reduce their cooling demand by approximately 40% using retrofit technologies currently available in the market [13]. Reducing the building sector’s cooling energy demand can decrease the electricity baseload requirement, which is mostly powered by imported coal currently. Notably, over 90% of Malaysia’s coal consumption is supported by imports from only three countries, South Africa, Australia, and Indonesia [14]. This means that EEOS can reduce Malaysia’s coal import dependency to improve its energy security, which is currently vulnerable to the fluctuation of international coal prices and any unforeseeable events that might cause supply-side disruption [15].
Beyond reducing Malaysia’s coal consumption and enabling a cleaner energy mix, EEOS also presents a more environmentally sustainable alternative to the country’s demolition-centred strategy for improving overall building efficiency. Around 1% of old and inefficient buildings are demolished annually to make way for the construction of new buildings that meet the sustainability standards due to the growing perception that it can be cheaper to do so than maintaining the highly inefficient old buildings [16]. Besides being energy intensive, building demolition also emits particulate matter to the environment, which increases local residents’ exposure to harmful substances by 9 times on average, due to the high concentration of silica and sulphur in demolition dust [17]. Enabling building retrofits with EEOS can reduce the typical demolition waste of 10,400 tonnes/m2 in Malaysia [18], which are mostly dumped in landfills and can create long-term environmental issues [19].
The insufficiency of current policies is evident given the building sector’s energy consumption has continually increased at an average annual rate of 6% between 2010 – 2018 [20]. Moreover, while the government introduced a series of stringent energy efficiency standards for new buildings constructed after 2008, there are no measures encouraging the retrofit of pre-existing buildings [21]. This could hinder the government’s progress towards its energy efficiency target, especially since around 80% of Malaysia’s current building stock will still exist in 2050, with 95% of them not meeting national building efficiency standards [22].
The role of EEOS in Malaysia
While improving building efficiency is generally desirable by property owners, its high capital cost has been the biggest barrier to perform any energy efficiency improvement renovations, or retrofits [23]. Such challenges may be more pronounced in rural regions where the buildings are typically less efficient, twinned with rural populations having lower discretionary incomes compared to their urban counterparts [24]. This suggests that the EEOS which can enable building retrofits with minimal financial burden on consumers could be critical in facilitating the country achieving its environmental objectives.
The lack of energy efficiency improvements of Malaysia’s buildings can also be partly attributed to the principal-agent problem [25], [26]. Housing affordability has been a longstanding challenge in Malaysia as around 21.3% of households currently do not own any property – the insufficiency of affordable housing and the increasing real estate prices further suggest that low homeownership rate would unlikely be overcome anytime soon [27], [28]. Hence, a significant population may continue living in rented properties in the short-to-medium term, with no existing policies incentivizing landlords to improve these properties’ energy efficiencies. With these contextual challenges, a well-designed EEOS can fill a vital policy gap highly relevant for increasingly ageing housing stock. With no additional cost burdens to landlords, this enables for greater adoption of energy efficiency retrofits.
The success of the proposed policy is based on expectations that consumers respond rationally to economic incentives and opt-in for improving their buildings’ energy efficiency. This is especially relevant for the implementation of EEOS in Malaysia as cost considerations have been the key determinant affecting local building owners’ decisions to proceed with building retrofits [21], [29]. Consumers’ receptiveness towards economic incentives for energy efficiency measures can concurrently be observed empirically from the government’s one-off energy efficiency rebate program, the 2011 – 2012 Sustainability Achieved via Energy Efficiency (SAVE). In the SAVE program, a rebate between RM100 – RM200 (£17.5 – £35.0) was provided for consumers to replace their 15-year-old and above cooling devices with five-star energy efficiency rated counterparts. The economic incentives provided by SAVE have successfully replaced 39% of refrigerators installed in Malaysia at that time, contributing to approximately 15% energy savings from the building sector and abating 37,000 tonnes/year of carbon emissions [30]. The success of this catalytic scheme shows that Malaysians are ready to embrace energy efficiency measures, while the lack of efficiency improvement outside of SAVE’s running period highlights the lack of will to do so in the absence of appropriate capital support.
EEOS will likely receive political support as the government is acutely aware of the benefits of improving energy efficiency via building retrofits. In fact, the Minister of Energy has publicly stated that improving buildings’ energy efficiency should be a national priority as it can save the country at least 138 TWh of energy between now and 2030, and generate around RM46.9 billion savings [31]. Following this statement, the government also awarded a RM200 million contract to retrofit chillers in 50 government buildings. In fact, a collection of government buildings were also retrofitted during the previous government terms [32], indicating that EEOS can be politically sustainable across administrations.
Although alternative schemes to reduce building retrofit’s capital expenditure has been proposed in neighbouring countries, like the Building Retrofit Energy Efficiency Financing in Singapore, which aimed at providing affordable loan for building retrofit, the EEOS is likely a more suitable policy choice for Malaysia. This is because the high real-estate price in Malaysia has already put a significant proportion of the population in debt, with a report suggesting that property loans can occupy up to 56.2% of the monthly income of some households [27]. This suggests that not only will consumers in Malaysia be reluctant to take on additional loans to improve their building’s efficiency, providing these loans to some consumers, that have already committed a significant proportion of their income to housing loans, can also be risky for the financial institutes.
Recommendations to indigenize the EEOS for Malaysia
The EEOS borrowed from Europe must be indigenized to the local context so that key issues of uninformed, incomplete, and inappropriate policy transfer can be avoided [14]. Malaysia’s EEOS should learn from the experiences of successful EEOS program – for instance, the UK mitigated public resistance against increased tariffs by beginning with lower energy saving targets [15]. Conversely, Poland’s phase 1 EEOS scheme which began with an ambitious target failed due to significant public pushback [15]. Drawing from these lessons, Malaysia’s EEOS could initially begin with a low energy savings target, and iteratively evaluate its performance to determine the appropriate timeline and extent of energy savings targets over time [15]. The rationale to implement EEOS should also be reframed to fit Malaysian consumers’ priorities – as energy affordability is a more immediate concern to consumers than environmental sustainability [16]. Therefore, the engagement and policy design of EEOS in Malaysia should emphasize its economic benefits to secure consumer support.
The EEOS where the cost of energy savings is proportionally billed to consumers based on consumption units is equitable in nature, because the scheme is based on a polluter-pays principle. The progressive nature of consumption-based billing was substantiated as household’s electricity usage is positively related to Malaysians’ household income [33]. However, a case study in the UK shows that the resulting bill increases from EEOS generally constitutes a greater proportion of poorer households’ income, and can potentially exacerbate energy poverty [34]. Furthermore, while EEOS costs are socialized, wealthier households tend to receive more services as their existing housing conditions tend to be more cost-effective for obligated parties to retrofit [35]. This means that the EEOS proposed could potentially lead to the risk of obligated parties neglecting poorer communities as it is less financially viable to support them.
To mitigate this potential drawback, Malaysia’s EEOS should prioritize low-income households by assigning more energy savings credits to poorer communities’ building retrofits. This recommendation is effective in achieving Malaysia’s emissions reduction goal and can improve social wellbeing – poorer communities in Malaysia generally reside in less efficient buildings, like lower-cost public housing which has been noted to be highly inefficient [36]. In practice, prioritizing these buildings has allowed for substantial efficiency gains; cost effective installations such as thermally efficient sustainable wall systems have proven to be effective in improving the energy efficiency of Malaysia’s low cost housings [37].
Conclusion
In conclusion, a well-designed EEOS aimed at increasing the energy efficiency of existing building stock can facilitate Malaysia in achieving its climate goals, given that the building sector would likely continue to be the largest electricity consumer if unmitigated. The EEOS can fill gaps present in the current policy mix and promote building retrofit with no additional financial burden on government expenditures, incentivizing retrofits through rational economic choice. However, while EEOS is beneficial to improving Malaysia’s energy systems overall, the successful implementation of EEOS is dependent on public and political support, this means that an initially low energy saving targets should be introduced to avoid adding a significant financial burden on consumers.
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