From tenaga to tindakan: sparking Malaysia’s coal-to-clean transition

Summary

High but fluctuating coal plant utilisation in Malaysia suggests that the power system has a degree of flexibility, which is key for integrating more renewable energy such as utility-scale solar power.

Reliability issues in Malaysia’s coal plants have direct consequences for tariffs and profitability. Technical malfunctions are common, often resulting in missed performance targets under power purchase agreement (PPA) terms, lowering plant revenue and profitability.

Targeting five assets responsible for 62% of coal-related emissions through 2044 could yield the greatest impact. Abatement costs average USD 18/tCO₂, ranging from USD 10 to USD 26/tCO₂ depending on the asset, offer a benchmark for identifying priority interventions.

A 2040 coal phase-out could avoid 80 million tonnes of CO₂ at a cost of USD 1.43 billion. This scenario involves closing six units early and could be financially and technically achievable — but only if backed by clear and consistent government policy.

System-wide coordination is key to managing the coal transition. As the country’s main grid operator and largest coal asset owner, Tenaga Nasional Berhad (TNB) is uniquely positioned to lead the shift — but success depends on a holistic, integrated approach.

Introduction

Coal phase-out is an integral part of Malaysia’s energy transition strategy. The National Energy Transition Roadmap (NETR), released in July 2023, outlines three interdependent targets for power sector decarbonisation: (i) achieving 40% renewable energy penetration by 2040 and 70% by 2050; (ii) phasing out coal entirely by 2045; and (iii) using natural gas as a lower-carbon transition fuel for baseload power.

Malaysia’s coal reliance is significant — the country’s 13.3GW coal fleet is currently responsible for 42% of total electricity demand. Half of the coal fleet is set to go offline by 2035 in line with the government’s interim target. As a result, successfully scaling cleaner sources of supply in the coming years will be critical to enabling a well-coordinated coal phase-out post 2030.

Over the past two years, the government has followed through with some notable enabling policies. Two new auction rounds of large-scale solar (LSS) were launched between 2024 and January 2025, which are expected to deliver 4 gigawatts (GW) of new capacity by 2027. Another round is scheduled in the coming months and could put Malaysia on track to reach NETR’s target of 7GW of solar power by 2030. In addition, a residential rooftop leasing scheme was introduced to leverage vast rooftop space for distributed solar development in Peninsular Malaysia.

Although there is a strong climate narrative to Malaysia’s plans, this transition faces growing complexity. Emerging domestic economic priorities — such as efforts to attract energy-intensive investments — alongside global uncertainties are raising questions about Malaysia’s ability to pursue climate commitments.

Malaysia has taken a proactive stance on attracting foreign investment in data centres in the Greater Kuala Lumpur and Johor commercial hubs, moving more decisively than any other Southeast Asian government. As of December 2024, the state-backed power utility Tenaga Nasional Berhad (TNB) had signed energy supply agreements with 38 data centre projects, representing 5.9GW of demand, a third of which are already operational and the total of which is equivalent to 18% of Peninsular Malaysia’s power system today. Sustaining a coal phase-out amid such firm, round-the-clock loads will require careful system planning and accelerated investment in renewable and flexible capacity.

This blog 'From tenaga to tindakan' — drawing on the Malay words for energy and action — presents new analysis using TransitionZero’s latest Coal Asset Transition (TZ-CAT) dataset for Malaysia. Launched in 2022, TZ-CAT is an open data product supporting high-level screening of coal assets for energy transition strategies such as refinancing and replacement. The first dataset focused on Indonesia, followed by the Philippines in 2024 — two key markets where coal retirement and transition planning have been closely examined as part of national energy transition plans.

TZ-CAT Malaysia presents a holistic picture of the current operational, financial, and environmental performance of Malaysia’s coal fleet, providing a critical foundation for designing viable transition strategies at the asset level.

TZ-CAT Malaysia: coverage, approach, and methodology

TZ-CAT Malaysia maps the entire country’s fleet, covering all 25 operational coal units, with a combined capacity of 13.3GW. These assets represent 100% of the country’s on-grid coal generation capacity, and are located on two of the three grid regions: Peninsular Malaysia and Sarawak. Under the NETR, Malaysia banned the development of greenfield coal plants, and no additional coal projects are currently in the pipeline.

Like other single-buyer electricity markets, such as Indonesia and Vietnam, all coal plants in Malaysia operate under long-term power purchase agreements (PPAs) with the monopoly utilities: TNB if the plant is in Peninsular Malaysia, or Sarawak Energy Berhad (SEB) if in Sarawak. Irrespective of their ownership structures, all coal plants are classified as independent power projects (IPPs), with PPAs being the sole source of revenue. These PPAs are typically awarded for 25 years, with the possibility for extension.

The TZ-CAT Malaysia dataset draws on PPA terms, annual operating statistics, and revenue information of all coal plants in Peninsular Malaysia. This reflects more detailed disclosures by the utilities and asset owners in Malaysia compared to those in other regulated electricity markets in the region. This transparency is partly thanks to the fact that coal assets here are typically financed and/or refinanced through the domestic bond market, which requires regular reporting on operational and financial performance. For assets in Sarawak, revenue data is less available, however, TZ-CAT was able to retrieve annual operating and environmental performance data for all coal plants, as reported by SEB.

As a result, TZ-CAT Malaysia — covering the period of 2020 to 2023 — is primarily underpinned by reported PPA terms and plant statistics, particularly key metrics such as annual revenues (including capacity and energy payments), generation, and tariffs, which are crucial indicators for assessing a plant’s financial value and transition prospects.

Malaysia’s Coal PPA Structure

Coal PPAs in Malaysia follow the standard international template for project financing. They guarantee plant owners a steady revenue stream to cover initial capital expenditures, fixed annual maintenance costs, debt service, and a reasonable rate of return. The contracts are structured to shield plant owners from demand and fuel cost volatility risks, both of which are borne by the offtaker.

A coal plant’s monthly revenue typically includes two components: a capacity payment (CP), and an energy payment (EP).

The CP includes (i) a capacity rate financial (CRF) to cover debt service and a certain rate of return; and (ii) a fixed operating rate (FOR) to cover fixed operations and maintenance costs. CPs are paid in full if the plant meets availability targets and operates within unplanned outage limits (UOLs), regardless of the amount of electricity dispatched.

The EP mainly includes fuel payments and the variable operating rate (VOR), which vary by the volume of electricity generated. These costs can be fully absorbed by the offtaker if the plant operates within the allowed heat rates. In Peninsular Malaysia, an applicable coal price (ACP) is set monthly by the Energy Commission and used as a benchmark reference for the monthly EPs; a variance between the ACP and the actual coal cost might result in negative or positive fuel margins for the plant.

A major contribution of TZ-CAT is in providing a benchmark valuation of plants and the cost of early retirement, which provides a starting point for assessing the financing status of coal assets and for understanding the feasibility and structure of potential transition deals. With TZ-CAT Malaysia, we estimate the financial value of the plant based on the annual CP multiplied by the remaining years of the PPA. By extension, the cost of buying out a plant one year ahead of the scheduled expiry of its PPA would equate to one year of CP. This methodology differs from previous TZ-CAT datasets, which, due to data availability constraints, estimated the valuation and buy-out costs based on annual generation, revenue, and PPA tariffs excluding fuel costs. However, the core valuation principle remains unchanged, that is, the buy-out cost should cover CAPEX, OPEX, and a reasonable rate of return — all elements of CPs — but excludes fuel costs and related earnings.

For full details on the methodology, please refer to the Technical Annex. We also elaborate on data gaps and limitations in the Analysis Deck.

Brief overview of Malaysia’s power sector

Malaysia has the fourth-largest power system in Southeast Asia, with approximately 40GW of installed capacity as of 2022. Fossil fuels dominate the system, with gas and coal power accounting for 75% of total capacity and 79% of annual generation. Policy incentives for solar power were introduced in the early 2010s, however, adoption has been limited.

Malaysia’s power system reflects its distinctive geography, with the country divided by the South China Sea. It consists of three separate grid regions: one covering Peninsular Malaysia, and the other two, Sarawak and Sabah, supplying electricity to East Malaysia on Borneo Island. Peninsular Malaysia is the main load centre and hosts the largest power system of the three.

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Each grid’s generation mix reflects its resource endowments, with hydropower dominating in Sarawak, gas power in Sabah, and a more diversified but import-dependent technology mix in Peninsular Malaysia. At present, the three power grids operate independently from one another. However, the Sarawak-Sabah interconnection is expected to be energised in late 2025, offering new export opportunities from Sarawak to its sibling state, and potentially to the Philippines in the future. Regulatory authority varies across the regions. Peninsular Malaysia’s energy sector is primarily regulated by the Energy Commission of Malaysia, or ST. In Sarawak, the state government, via the Ministry of Utility and Telecommunication, exercises full control over its energy sector under the Malaysia Agreement 1963. Meanwhile, in Sabah, from January 2024, the Energy Commission of Sabah (ECoS) has also assumed full autonomy over its electricity and renewable energy sectors from ST.

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Malaysia’s electricity market operates under a single-buyer model and is highly regulated. Three state-owned, vertically-integrated utilities dominate — TNB in Peninsular Malaysia, SEB in Sarawak, and Sabah Electricity Sdn Bhd (SESB) in Sabah. These utilities manage the entire value chain, from power generation, system operation, to transmission, distribution, and retail.

Electricity tariffs are closely regulated across the country. In Peninsular Malaysia and Sabah, tariffs are generally subsidised by the government. In Sarawak, where the power mix is dominated by cost-competitive hydropower, subsidies are less prominent.

Key findings from TZ-CAT Malaysia

Malaysia’s coal-heavy baseload poses transition hurdles but also opportunities

Our analysis shows that coal plants in Peninsular Malaysia, which make up 91% of the country’s coal fleet, operate at exceptionally high capacity factors — averaging 74% over the observed period. By comparison, other regional coal-dependent countries such as the Philippines and Vietnam only report averages in the 50-60% range.

This bias toward high coal utilisation reflects its cost-competitiveness in the Peninsular system’s merit order under normal operating conditions. However, annual fluctuations in plant-level utilisation also suggest that the system has a degree of built-in flexibility. This was evident in the years 2021 and 2022 when coal generation took a hit from weaker demand and record-high coal prices. Utilisation rates rebounded in 2023 as fuel costs stabilised and electricity demand recovered.

These findings indicate that the Peninsular system has the operational flexibility to reduce emissions as it evolves, particularly by enabling more renewable energy, including the upcoming wave of LSS projects, to gradually replace a portion of coal power generation

In Sarawak, coal plays a less dominant role as the state shifts its focus toward increased gas generation. Between 2020 and 2023, the coal fleet operated at an average capacity factor of 42%. Although relying on indigenous coal sources and thus isolated from global coal price swings, Sarawak’s power system has prioritised dispatch from the newest and largest plant, Balingian (624MW), while consistently ramping down the old and more polluting stations such as Sejingkat (210MW) and Mukah (270MW).

Volatile coal prices inflated system costs and subsidies

The 2022 global coal price shock had a significant impact on coal power generation costs, and by extension, on overall system costs in Peninsular Malaysia, which relies entirely on imported coal from Indonesia, Australia, and Russia.

According to TNB, the price of imported coal nearly quadrupled between 2020 and 2022, reaching USD 213 per tonne. Average tariff rates paid by TNB to local coal plants swelled by 1.5x to 2.7x in 2022 compared to the levels registered in previous years. Plants such as Malakoff-owned Sultan Aziz (KEV) and Tanjung Bin Power (TBP); and TNB-owned Janamanjung Generating Facility 1 (TNBJ123) and Jimah Power Station (JEV) charged tariffs ranging between USD 124-138 per MWh over the course of 2022, pushing them down the system’s merit order.

Though coal prices stabilised from 2023, they continued to remain above pre-2022 levels, a trend that was mirrored in coal power tariffs.

Fluctuations in fuel costs, and consequently in coal power tariffs, are generally absorbed by TNB, which may or may not fully pass them on to Malaysian consumers via the country’s Imbalance Cost Pass-Through (ICPT) mechanism. In 2022, in response to fuel cost pressures, TNB increased retail electricity tariffs for non-domestic consumers, but kept them unchanged for households for most of the year. The Malaysian government covered the shortfall, paying TNB a sum of MYR5.8 billion (USD 1.3 billion) to keep retail tariffs stable for the general public in the latter half of 2022.

Malaysian coal plants have reliability issues, risking tariffs and profits

Coal plants in Peninsular Malaysia have exhibited recurring performance issues, which raise questions about their reliability and dispatchability.

Company reports indicate many plants routinely forgo a portion of the CPs provided under the PPAs. This is because the payments are availability-based, but many units regularly fail to meet unplanned outage limits (UOLs) and contracted average availability targets (CAATs), both key conditions stipulated in the PPAs. UOL thresholds are typically 6% and 8%, with steeper penalties if breaching the latter; CAATs are set for five-year blocks, with penalties incurred at the end of the period. Similarly, full pass-through of EPs depends on meeting heat rate requirements, which has become increasingly difficult due to poor, inconsistent coal quality

For example, the 1010MW Janamanjung Generating Facility 2 (TNBM4), commissioned in 2015, exceeded the prescribed annual UOL of 6% every year between 2020-2023. As a result, its CAAT stood at just 88%, below the required CAAT of 91% set for the period.

This underperformance has important implications for plant valuations. Failure to meet technical performance targets typically results in financial penalties, with reduced CPs and EPs translating into lower revenue. Moreover, EPs can also be impacted by negative fuel margins, which occur when the cost of coal procured is higher than ST’s monthly benchmark price due to the time lagging effect.

In 2023, all plants with reported financials registered pre-tax losses, which were mostly attributed to negative fuel variance. This trend will reverse itself in a rising coal price environment, but the structural risk remains, being shared equally by the plant owners and offtakers.

These performance-related revenue losses may also explain the different tariff rates charged by plants to TNB, as estimated in TZ-CAT using reported annual revenues and unit sales. Variations in tariffs may reflect operational deficiencies rather than the underlying competitiveness of individual PPAs or of coal power generation in general.

For instance, the average tariff rate of Manjung Five power station (TNBM5) would have been 21% higher in 2020 if the plant had qualified for full CP that year. However, the plant was subject to a 48% deduction in CP due to “recurring operational issues,” which had a material impact on its revenue.

In short, despite favourable PPA structures that shield owners from key risks such as demand and fuel cost fluctuations, coal plants in Peninsular Malaysia may still incur operating losses due to persistent performance shortcomings.

Largest emissions reduction potential lies with the youngest and largest assets

From a practical standpoint, transition strategies are likely to be most cost-effective when directed toward assets with sufficient scale and remaining operational life.

Malaysia’s policy toward coal phase-out by 2045 is based on the principle of allowing existing PPAs to expire naturally, with no extension permitted. Under this scenario — where coal plants will keep operating at the current rate until their PPAs expire — the largest prospective emitters are Tuanku Muhriz (JEP) Units 1 and 2, TNBM5, Tanjung Bin Energy (TBE), and TNBM4. These are large plants with the longest remaining lifetimes, ranging between 15 to 19 years. Collectively, they are projected to contribute 62% of cumulative emissions from Malaysia’s coal fleet between now and 2044.

Given their dispatch records and the absence of abatement measures, these assets make good targets for emissions reduction strategies.

To test alternative emissions scenarios, we also investigated the potential cost and benefit of a 2040 phase-out scenario that aligns with recommendations from the International Energy Agency for developing economies. This scenario would involve the pre-term closure of four coal units in Peninsular Malaysia (JEP Units 1 and 2, TBE, TNBM5) and two coal units in Sarawak (Balingian Units 1 and 2), whose existing PPAs extend past 2040.

TZ-CAT estimates that a buy-out of these assets would amount to USD 1.43 billion, in exchange for avoiding 80 million tonnes of CO2. This equates to an average abatement cost of USD 19 per tonne, with asset-level values ranging from USD 10 to USD 24 per tonne.

Given the 2040 timeline, the relatively modest capacity involved — 5,010MW in Peninsular Malaysia, and 624MW in Sarawak — and the fact that most buy-out periods would not exceed four years, this scenario appears technically and economically feasible. The manageable scale and timeframe suggest that an orderly phase-out could be achieved without compromising system stability or imposing excessive financial burdens.

However, the realisation of this scenario will hinge on a clear and consistent policy signal from the government. Strong political will and early commitment are critical to incentivising deal negotiations, securing financing for early retirements, and accelerating the deployment of cleaner alternatives to replace the phased-out capacity. This includes not only renewable energy investments, but also system-level upgrades such as grid reinforcement, storage solutions, and enhanced market mechanisms to ensure reliability and cost-effectiveness during the transition. The earlier the commitment is made, the more achievable this scenario will be.

For case studies on how to leverage TZ-CAT data to screen and shortlist potential assets for coal transition strategies, please refer to the Analysis Deck. Further due diligence that builds on TZ-CAT data will be necessary to assess system-level transition options and initiate potential deal structures including valuations.

Things to watch

TZ-CAT can support a range of use cases that shed light on the complexity of power system design choices by balancing multiple social, economic, environmental, and technical factors. At the moment, Malaysia appears to be experimenting with multiple pathways to manage its coal transition without compromising future grid stability.

For example, a noteworthy coal-to-clean transition has been initiated in Sarawak where, on the premise of the Sejingkat coal power station that is to retire by 2028, SEB recently commissioned a 60MW/82MWh Battery Energy Storage System (BESS). This facility will provide grid services and support the integration of intermittent renewable energy. It is the first utility-scale BESS in Malaysia.

Meanwhile, in Peninsular Malaysia, TNB is exploring retrofit solutions for existing plants with technical support from Japanese partners. A pilot project for CCS integration is currently underway at JEP, supported by Toshiba. In parallel, Mitsui & Co. and Chugoku are conducting biomass and ammonia co-firing demonstrations at the same facility, with blending ratios limited so far to 1% ammonia and 99% coal

TNB is also considering “repowering” coal plants with hydrogen-ready gas power generation on existing sites, a pathway that is being pursued by TNB at other decommissioned gas power stations. To some extent, these efforts align with NETR’s positioning of gas as the transitional baseload supply replacing coal.

The developments highlight the strategies that the Malaysian power utilities are exploring to navigate transition challenges. Progress on these pilot projects is worth monitoring, as the trajectory of Malaysia’s energy transition will depend on their ability to deliver in terms of cost and feasibility, and how they compare with the pace and scalability of renewable energy solutions. Across the region, the technical and economic viability of retrofitting ageing coal infrastructure remains highly uncertain and context-dependent.

Given the asset-level operational, financial, and environmental metrics, TZ-CAT can be used to stress test more established transition strategies, such as coal repurposing and coal-to-clean replacement.

Finally, TZ-CAT Malaysia forms part of TransitionZero’s broader suite of tools designed to assess system-level impacts and will support more dynamic modelling efforts. Over the next 12 months, we will be publishing new research that integrates TZ-CAT insights with grid dispatch modelling to help examine the flexibility potential and/or challenges of coal assets in Malaysia.

Experiment with TZ-CAT Malaysia now and stay tuned for further research updates.