Incentives and Measures

In line with Malaysia’s objective to diversify energy resources and develop alternatives, the Government continues to assess and revise incentives for renewable energy projects. To encourage energy generation using biomass, hydropower and solar power, the Government offers several incentives to those that qualify:

• Pioneer status with tax exemption of 70% will be increased to 100% of statutory income and the incentive period is extended from 5 years to 10 years.

• Investment tax allowance of 60% is to be increased to 100% on qualifying capital expenditures incurred within a 5-year period, with the allowance to be set off against 100% of statutory income for each year of assessment

• The incentive package of pioneer status, investment tax allowance, and import duty and sales tax exemptions will be extended until 31 December 2010.

Companies would be wise to understand the impact of these incentives on their internal rate of return (IRR) and payback periods for implementing RE projects. Studies show that IRR can be increased up to 2% and payback periods reduced as much as three years for tax exemptions on eligible costs alone. This lowers the burden of a company’s annual taxes as well: 32% to 53% via investment tax allowance. Integration of these incentives reveals the bank-ability of RE projects to increase both the cash flow and confidence of investors.

The 2006 Budget set forth a National Biofuel Policy initiative to encourage production and utilisation of biofuel from palm oil as an environmentally friendly alternative energy resource. The programme starts with a biofuel mix of 5% of processed palm oil and 95% diesel. And three palm oil biodiesel commercial plants, with a total capacity of 180,000 tons for export, are to be built.