Slow and steady to decarbonisation

Malaysia targets to become a net zero GHG emissions nation as early as 2050. Following this, various supporting measures, such as the implementation of carbon pricing and the commitment to stop building new coal power plants were also highlighted. However, to enable this pathway, action is needed across all stakeholders on the green agenda along with strong government leadership to implement coherent, progressive, and effective green policies and enablers in collaboration with the private sector including civil society. Multilateral support on climate finance and funding, capability and capacity development, and technology transfer from developed countries also represent key enablers to achieve Net Zero.

According to WWF Malaysia, there are 10 large-scale priorities which are crucial for Malaysia. These priorities will need to be acted on in a timely and coherent manner in order to unlock socioeconomic benefits associated with the Net Zero pathway. As highlighted, accelerate low carbon transportation is the third priority for the country – this includes scaling up public transport infrastructure and shared mobility solutions, facilitate EV penetration with a vibrant local EV manufacturing and supply chain industry and timely charging infrastructure roll-out.

Apart from that, enhancing fuel economy standards, adopt sustainable biofuels and other emerging zero carbon fuels in heavy transport, aviation, and maritime sectors are also key to establishing a low carbon transportation sector. As US army general the late John J. Pershing once said “Infantry wins battles, logistics wins wars” – which reflects the importance and crucial role of logistics. Indeed, improving the performance and efficiency of logistics are the key factors to help the country and economy in further engaging in local and international trade.

In this report, we are focusing on the transport sector in the green transition pathways – as well as initiatives across the air, maritime, road and logistics verticals of the industry. As shown in Figure 12, fuel combustion in transport currently accounts for c.21% of national GHG emissions (second largest industry). These emissions are primarily derived from road transport, and to a significantly lesser extent from railways, domestic aviation, and domestic maritime or water-borne navigation. International aviation and maritime are not included in the country's national GHG inventory.

Marine transport

In the marine transport sector, only domestic marine transport activities are accounted for in the national GHG emissions inventory. Nevertheless, international maritime requirements, such as IMO targets of near-term sulphur content reduction and longer-term decarbonisation are likely to have positive spillover effects in greening the domestic marine sector.

Decarbonisation of the marine transport sector presents an opportunity for Malaysia to position itself as a green fuel bunkering hub since Malaysia’s ports account for 24-26% of annual container throughput within ASEAN. This sector currently employs a combination of two primary fuel categories—diesel and fuel oil. Fuel oil can be additionally categorised into variants such as high sulphur fuel oil (HSFO), low sulphur fuel oil (LSFO), and other distillates including marine gas oil (MGO). Nevertheless, the progression of Malaysia’s marine transport towards green mobility has encountered several challenges concerning the availability of more sustainable fuel alternatives.

Aviation

In the medium to long term, fuel switching to cleaner energy sources will likely gain momentum. This includes next generation biofuels or synthetic fuels, and potentially to even more nascent technologies, such as electric or hydrogen planes. Selected airports globally have started to blend biofuels into jet fuels supplied through the airport, encompassing both domestic and international flights, in order to enhance the scale of operations. Given Malaysiaspecific advantages in biofuels production, demand from a combination of domestic and international aviation can support the scale-up of sustainable jet fuel production, including from emerging sources such as algae, to spur commercially-viable new green growth and to decarbonise the aviation sector.

The aviation sector in Malaysia faces several key challenges in its transition towards green mobility including a lack of clarity and guidance on the implementation of aviation decarbonisation levers despite its commitment towards long-term global targets. Additionally, there is limited demand to effectively catalyse the domestic production of SAF. Compounding these issues is the argument surrounding the suitability of palm oil as a SAF feedstock due to concerns related to indirect emissions and other sustainability criteria

Light road transport

Fuel combustion in transport currently accounts for around 21% of national GHG emissions. These emissions primarily derive from road transport, and to a significantly lesser extent, from railways, domestic aviation, and domestic maritime or water-borne navigation. Strong growth of on-the-road vehicles has led to growth in fuel demand and transport emissions over the years. Relative to regional peers, Malaysia has one of the highest car ownership penetration when adjusted for nominal GDP per capita, whilst the modal share of public transport hovers around 20-25%.

Few forward-looking plans for the light vehicle segment would be primarily through: i) Next generation vehicle (NxGV) penetration, ii) enhanced fuel economy, and iii) increased public transport modal share. Shifting from internal combustion engine (ICE) vehicles to EVs which offtake power from clean energy sources represents one of the most important decarbonisation levers to achieve the country's Net Zero ambitions. The transition to green mobility in land transport, specifically in light vehicles, is met with several challenges. These include inadequate public transport infrastructure and connectivity, slow adoption of sustainable public transportation and the need to comply with the ASEAN fuel economy standards. Additionally, the lack of affordable EV models and slow expansion of charging infrastructure as well as disparity in upfront costs between electric two-wheeler (E2W) and ICE two-wheeler (2W) hinders the transition.

Heavy road transport

The heavy vehicle sector can be segmented into three sub-categories: i) Light commercial vehicles (LCV) weighing below six tonnes, ii) medium-duty trucks (MDT) weighing 6-15 tonnes, and iii) heavy-duty trucks (HDT) exceeding 15 tonnes. In contrast to light vehicles, the feasibility of alternative fuels for heavy vehicles remains limited. Within this context, MDTs and HDTs are currently in the respective pilot phase of adopting alternative fuels. For MDTs and HDTs, there exists uncertainty regarding the potential alternative fuels of the future.

Addressing the challenges of energy transition in heavy vehicle sector require emphasis in four key areas, namely transport modal shift, fuel economy, biodiesel blending and fuel switching. The potential for greater fuel efficiency improvement exists for heavy vehicles, as advancement in technology can lead to substantial emissions reduction. However, it is hampered by potential cost impact of increasing mandated biodiesel blend rates that could affect industry player uptake abilities, limited visibility into optimal heavy vehicle powertrain and lack of available infrastructure to support new fuels of the future.

Bursa Malaysia-listed companies in action

Malaysia Airports (MAHB MK, BUY, TP: MYR9.67)

The group has established a 3-year strategic plan (2024-2026), which commitment to ESG features as one of the strategic themes. This comes with an ambitious target to reduce the airports’ operator carbon emission of 14-40% over three years. MAHB has pledged to achieve net zero carbon by 2050 – in line with the 12th Malaysia Plan and Paris Agreement targets. The group has embarked the plan towards net zero carbon via the Environmental Master Plan 2.0 (2023-2030), which is split into two phases – Phase 1 is from 2023 till 2026 and Phase 2 is from 2027 till 2030. There are eight performance areas targeted for the Environmental Master Plan 2.0 – carbon emissions, energy, air quality, noise, waste, water, wildlife, and land & water contamination.

The Environmental Masterplan 2.0 approach will be adopted to reduce the group’s carbon emissions, with its priority to reduce Scope 1 and 2 emissions, since these are within the airports operator’s direct control and influence. Among the initiatives are:

i. Establishment of asset replacement and upgrades to build more energy efficient systems;

ii. Actively increasing exposure on RE via Energy Performance Contracts;

iii. Increasing employee communication and engagement to raise awareness of energy reduction measures;

Westports (WPRTS MK, BUY, TP: MYR4.52)

Westports is committed to achieving net-zero carbon emissions by 2050 by reducing emissions intensity and decarbonisation. The decarbonisation plan relied on the national grid also achieving net-zero emissions by 2050. Electrifying terminal equipment will increase. However, with the net-zero emissions status, the target would be to achieve zero Scope 2 emissions. In Nov 2023, Westports received its largest ship, a 24,000 TEU capacity green technology vessel. This vessel utilises LNG, exemplifying the maritime industry’s shift towards cleaner and sustainable practices. These larger, newer ships depart from traditional fuel sources like methanol, opting for dual-fuel systems, which are cleaner and more environmentally conscious.

Preliminary results of electric truck trails. Westports has started its electrification journey, which is part of its decarbonisation efforts. The current proposed plan involves the gradual electrification of all 607 terminal tractors (TT) and 218 rubber-tyred gantry cranes (RTGC) when they have reached the end of their operational lifespan. With the parameters evaluated, their significance and impact on the variables considered, and new findings from the Proof-OfConcept trial testing have been valuable to the equipment vendor and Westports. The company also measured the electricity usage per truck based on kWh per km and hour of operation under various loads. The final evaluated outcome was that, terminal trucks were not contributing to a reduced CO2e unless the electricity derived from the national grid was much greener, with a much lower emissions factor.

TASCO (TASCO MK, BUY, TP: MYR1.15)

TASCO has been moving towards increasing the usage of alternative fuel such as biodiesel for its fleet since 2012 through a fleet replacement plan with the aim of increasing energy security, improving air quality and the environment, and providing safety benefits. Besides, it is converting the diesel carbon-based material handling equipment (MHE) inside its warehouses to gas based on the MHE. During the financial year under review, TASCO has achieved 90% usage of electrical-based MHE in its operations.

FM Global (FM MK, NEUTRAL, TP: MYR0.68)

In FY23, the group’s recorded 22.6% (447,356 kWh) energy savings and 277.4 tCO2e in GHG emissions savings over a 7-month period from Dec 2022 to Jun 2023. This could be attributable to the rooftop solar project at FM’s headquarters and warehouse in Port Klang, which was commenced operations in Nov 2022, as well as its effort in purchasing and replacing existing prime movers and trucks with more fuel-efficient and lower GHG-emitting models that can cut down nitrogen oxide emissions.

Airlines in Malaysia

Sustainable aviation fuel (SAF)

SAF is produced from sustainable biological and non-biological feedstock such as waste and residue and has the same chemical composition as traditional jet fuel. It can be a direct replacement or blended with traditional jet fuel in varying degrees without requiring any modifications to engines or airport infrastructure, with the benefit of lowering emissions. Over its lifecycle, SAF is able to reduce GHG emissions by up to 80% compared with fossil jet fuel.

The SAF market is relatively new and still evolving, and the pace of uptake will depend on a variety of factors, including the availability of SAF, the price of conventional jet fuel, and government policies.

In May 2023, Petronas Dagangan (PETD MK, NEUTRAL, TP: MYR20.82) signed an SAF offtake agreement with Malaysia Aviation Group (MAG), parent company of Malaysia Airlines, to undertake the effort to develop the green fuel on a commercial scale in Malaysia. Under the agreement with MAG, Petronas Dagangan will supply over 230,000 tonnes of SAF to MAG's airlines – national carrier Malaysia Airlines, and Firefly and MASwings – with the first delivery expected from 2027 at the Kuala Lumpur International Airport.

Meanwhile, International Air Transport Association (IATA) has pointed that the development of SAF mandate in Asia-Pacific is not progressing as fast as in the other regions. While Japan and Singapore are taking a lead, a wide range of countries in the region were also at different levels of awareness. In its NTER 2023, the country has established an SAF blending starting at 1%, which is expected to increase to 47% by 2050. As demand for the jet fuel alternative continues to increase, Air New Zealand and Airbus have voiced their confidence in Malaysia in playing a major role, and having the potential to become a leading supplier of feedstock for SAF in the Asia-Pacific region given the country’s diverse range of feedback and biomass available.

Capital A (CAPA MK, NR) and AirAsia X (AAX MK, NR)

Following the opening of Malaysia’s border to international travel in Apr 2022, AirAsia X has seen a sharp increase in passenger traffic, effectively lowering its carbon footprint per passenger. This trend continued in 2023, whereby AirAsia X gradually resumed flights; and grew its fleet to 18 aircraft by the end of the year in anticipation of the increased load factor.

The group has outlined four aviation pathways towards this end: i) Operational efficiency, ii) new aircraft technologies, iii) adoption of SAF, and iv) market-based measures including carbon offsetting. Capital A’s and AAX’s climate change strategy is built on an established track record of efficiency that sees AirAsia ranked among the airlines with the lowest carbon intensities in the world. Between 2017 and 2019, it exceeded IATA's recommendation of 1.5% annual reduction in carbon intensity measures.

Malaysia Aviation Group (Not Listed)

MAG is committed to decarbonisation, setting a target to progress to net zero GHG emissions by 2050, in line with the global aspiration. As highlighted in its Sustainability Report 2022, one large step towards this goal is changing the airline’s fuel source. SAF currently comprises less than 0.1% of all jet fuel used in the aviation industry. The IATA estimates that SAF could support up to 65% of emissions reduction, but this can only be achieved by reducing production costs for SAF and accelerating its adoption.

In 2022, MAG began modernising its fleet to align with the group’s environmental targets, starting with the acquisition of the 20 Airbus A330neo and 25 Boeing 737-800. These new aircrafts are expected to consume 11-14% less fuel than the current fleet, significantly reducing carbon emissions and improving fuel efficiency.

Malaysia Airlines’ first SAF passenger flight operated on 5 Jun 2022, from Kuala Lumpur to Singapore, coinciding with World Environment Day. Overall, in 2022, MAG conducted 17 domestic and international passenger SAF flights across the group of aviation companies, effectively reducing its emissions by 66%.
 

Source: RHB Securities Research - 9 Jul 2024