Energy, finance and the future

The state of capital for sustainability

Chan Weng Fai: What do you see as the current progress of energy transition in Malaysia, and how are these energy transition projects being financed?

Nazri Omar: It’s been almost two to three years since the government started making a strong emphasis on energy transition. The biggest mover in terms of policy direction was the introduction of the NETR. That really set the benchmarks and the tone, laying out what we need to do with specific targets for 2035, 2040 and 2050. To me, that was a game changer in setting the roadmap for everyone to align with.

Following this, the interest in energy transition financing began to grow, and everyone started to pay closer attention to it. The large-scale solar (LSS) initiatives had already begun before the NETR, but they started to really kick in with more fervour afterward. We’re now seeing significant interest in smaller-scale projects as well. 

Progress toward our 2025 target looks promising, with the goal set at 31% renewable energy share by that year. The challenge, of course, will come with the 2030 target. If we want to hit that target, we need to start getting approvals for projects or at least line up potential tenders, so we know what we can target and plan for financing. Planning needs to begin now, and projects should be awarded next year, with financing lined up by the end of next year, allowing two to three years for construction. The good thing now is that with these policy targets set, people can plan ahead, which is very beneficial.

Large-scale solar projects can be financed by commercial banks and the capital markets, and some hydro projects too fall into this category. At BPMB, we want to be impactful in our financing and play a complementary role to other financial institutions. Where we see a need for support to close the deals, we may step in. If we need to fund projects entirely ourselves, we can do that as well. 

It’s important to recognise that within the NETR framework, there are different categories of projects: commercially viable, marginally viable and non-viable. Our focus is on supporting commercially and marginally viable projects.  

Nurul A’in: Who then takes on the non-viable projects?

Nazri Omar: Generally, non-bankable projects pose challenges for any institutions looking to finance them. While we wouldn’t be able to finance them directly, we could provide some guidance on how these projects can be revised such as adjusting their business models or projections to possibly become marginally viable. But if that is not possible, that is where the public sector can play a role to bridge those financing and risk gaps. 

The other part of non-viable projects is that they are still in a nascent stage. The technology to be used by those projects have not been clearly proven yet, and they have not yet scaled up sufficiently for us to determine if they are commercially viable. But, we can still provide appropriate guidance to them.

Chan Weng Fai: Let’s dig deeper on your bank’s current activities. Can you share any financing that BPMB is participating in? Perhaps within the areas of energy transition, renewables or other sustainable projects? 

Nazri Omar: One energy transition project we are currently involved in is the financing of hydrogen-autonomous rapid transit in Kuching, Sarawak. This initiative aligns with the Sarawak government’s plans to catalyse the hydrogen economy. It is important to create a user base, and integrating hydrogen-powered rapid transit is a logical step, especially as the government works to enhance public transportation for the people. It is a win-win scenario to jumpstart the hydrogen economy while meeting the people’s transportation needs. 

The project represents the start of many more opportunities to come. And I think that’s the interesting part about this deal—it is a catalyst to demonstrate that such initiatives can work. Of course, it is still in the trial phase, but we are optimistic about its future. 

Chan Weng Fai: Given the level of investments required compared to the number of investors investing today, in your view, how can we bridge that gap? Do you believe the solutions lie primarily in the private or public sector?

Nazri Omar: It takes both; and there should be some form of public-private partnership model in place. I am not talking about a typical Public Finance Initiative (PFI), where you build and the government leases. Perhaps a model that involves demand sharing to make it profitable and acceptable to all parties.  

You need a combination of approaches, especially for projects beyond solar and hydro. For instance, the non-traditional sectors like wind and biomass have yet to demonstrate their viability, so some government support may be needed to promote those areas. 

Nurul A’in: How about energy transition projects—are they something new? What adjustments has the bank made in terms of policy, rates or differential rates? Has there been any change in how you operate now that this area has gained so much attention?

Nazri Omar: If you ask me, we have been operating the same way for the last three years. Just before I came in, the one that changed was the launch of the MIND framework. That was the first significant shift when we established a standardised approach for all projects across the board moving forward. 

Energy transition projects fell nicely within the scope we created. When we assess projects, we use the MIND score; if a project receives a high score but may be of moderate credit risk, we can take the next steps to evaluate further to see whether the credit risk is within our bank’s set appetite.  

In terms of financing, the dedicated schemes from the government have been around for the last five years, but the focus is increasingly shifting toward energy transition projects. Initially, the emphasis was on broader sustainability, but now the government has carved out a Renewable Energy and Transition programme to finance companies engaged in technology sectors and energy related projects under the NETR.   

The anatomy of impact evaluation

Chan Weng Fai: You mentioned briefly the MIND framework. Could you perhaps elaborate on how it works and how has it changed the bank’s approach to financing?

Nazri Omar: At a high level, as a developmental bank with a strong emphasis on our developmental impact, it is essential that the projects we finance meet specific criteria. So, we must clearly define these criteria, and that is where the MIND framework plays a crucial role. In the past, assessments were rather subjective. For example, simply stating that we created X number of jobs or built houses; it does not provide a consistent standard for evaluating developmental success.

That was how MIND was developed. We incorporated the United Nations Development Programme (UNDP) strategic goals and created a framework with the essential questions. The scoring system was based on the responses to these questions, reflecting the project’s developmental impact. After one or two years of implementation, we realised that the framework needed adjustments, as it did not apply equally across all industries. 

We have since made revisions, identifying which elements should be mandatory for all projects while adjusting the weight of certain questions so that it is fair across different sectors. 

Chan Weng Fai: Can you share some of the metrics you use in the MIND framework, particularly for energy transition projects?

Nazri Omar: For energy transition, it specifically falls under power generation. We assess whether a project is 100% renewable, for example. The scoring mechanism includes a broad range of environmental and social considerations, divided into positive and negative impacts. In the past, we only looked at the positive outcomes but lacked a system to score negative impacts. MIND 2.0 addresses this and allows us to derive a net impact score based on the project’s overall impacts.   

This scoring mechanism facilitates informed decision-making for our boards, and it also enables comparisons against similar projects in the industry. For energy projects, we evaluate the percentage of renewable energy, any co-benefits and social elements such as whether it is led by a micro, small and medium enterprise (MSME) or if it is located in underserved areas. In terms of negative implications, we consider factors like land use changes and biodiversity impact. All these are factored into the score according to defined parameters. 

The advantage of MIND is that it is quite comprehensive. A project does not receive a good score merely because it involves renewable energy. We also need to evaluate its impacts across social, environmental and biodiversity dimensions—essentially, everything must be factored in. Ultimately, we get a net impact score, and we decide if it is still worth it for us to finance. We place great importance on our mandate; it is not sufficient to simply meet ESG goals if those goals do not align with our mandate.

Nurul A’in: After the projects pass the scoring and loans are disbursed, is there a tracking mechanism in place?

Nazri Omar: Yes, we conduct an annual review to see what has changed and whether projects have achieved their intended outcomes. During these reviews, we essentially reevaluate the entire project.

New horizons in energy—what’s next? 

As the conversation drew to a close, the topic turned to the emerging energy trends. 

Nazri Omar highlighted the potential of modular nuclear technology and the hydrogen economy although tangible progress in these areas remains in its early stages. He pointed out that public discourse often centres on safety concerns when it comes to these new energies. ‘When we look at hydrogen, for example, people immediately think of the potential risks involved. We need to assess our comfort level with those risks. We have got a steep learning curve before we get there.’

While recognising the challenges ahead, he maintained a forward-looking stance, calling himself a science geek at heart, ‘I believe that we will eventually find a way to harness these energy sources in a safer and more sustainable manner.’