The economic effects of renewable energy expansion in the electricity sector: A CGE analysis for Malaysia

Abstract

Electricity is a critical factor in developing a robust and modern economy and for improving the quality of life. In Malaysia, the electricity sector benefits from heavy subsidies to its gas inputs. Such economic interventions disrupt price mechanisms and result in inefficient resource allocations, over-consumption of electricity, CO2 emissions, and government budget deficits. Under the Tenth Malaysia Plan price controls and subsidies have been rationalized to achieve complete market pricing. In addition, in consideration of climate change issues, environmental concerns, and strengthening energy supply security through diversification, the government encourages the use of renewable energy for electricity production through the Feed-in-Tariff (FiT) strategy. This study employs a Computable General Equilibrium (CGE) model to examine the potential impacts of gas subsidy reform in the power sector and on the Malaysian economy. The model evaluates and compares the impacts of two methods of providing funds for encouraging the development of renewable energy production, reallocating revenues from gas subsidy removal, and remunerating the FiT mechanism. The simulation results show that reducing gas subsidies without recycling the revenues gained decreases electricity demand and emissions significantly while having only minimal negative effects on macroeconomic variables. The results indicate that utilizing a recycling plan in which additional revenues from subsidy reforms are re-allocated to finance the FiT framework contributes significantly to the production of renewable energies within the power generation sector in Malaysia.