The feed-in tariff system in Malaysia is designed with the main objective of achieving grid parity. This will happen when fossil fuel subsidies are gradually removed and/or when all external costs of fossil fuel power generation are taken into consideration and/or when the generation of renewable energy (RE) becomes cheaper.

Grid parity occurs when the cost of generating RE is equivalent (or lower) than the cost of generating electricity from conventional fossil fuels. Once grid parity is achieved, feed-in approval holders will be paid based on the prevailing displaced cost for the remaining effective period i.e. the remaining duration of their renewable energy power purchase agreements.

“Displaced cost” refers to the average cost of generating and supplying one kilowatt hour of electricity from resources other than renewable resources (i.e. fossil fuels) through the supply line up to the point of interconnection with the RE installation.

The formula for the calculating the displaced cost is as follows: