The daily traffic jams in Kuala Lumpur seem to suggest that the Malaysian economy is largely isolated from skyrocketing global oil prices. Though petrol prices increased by up to 58 per cent from mid-February to mid-April 2026, most drivers benefit from subsidy schemes that have kept petrol and diesel prices down. The subsidies mean that, without meaningful fiscal reform, Malaysia will struggle to accelerate its renewable energy transition.

Fuel subsidies are causing a fiscal crisis, with petrol and diesel subsidies comprising more than 10 per cent of Malaysia’s federal budget. While government spending prioritises fuel subsidies, private sector investment in the green energy transition is accelerating — especially in renewable energy and electric vehicles, which receive very modest tax incentives.

As a net energy exporter, fuel subsidies have long been embedded in Malaysia’s politics. Periods of high energy prices have historically led to an increase in subsidies, which were largely offset by higher income from royalties, petroleum income tax and dividends from state-owned oil company Petronas. But this logic is breaking down due to falling petroleum revenue and rising subsidy costs. Malaysia’s oil and gas production has also stagnated since the 2010s while its economy — and with it, domestic energy demand — has kept growing, narrowing the surplus between what the country produces and what it consumes at home.

Between 2022 and 2024, federal petrol and diesel subsidies were equivalent to 48–59 per cent of the income received from Petronas and the petroleum income tax. While the subsidies can be justified in light of cost-of-living concerns, Malaysians with higher incomes tend to receive a larger share due to their higher energy consumption. Fuel subsidies also undermine the government’s ability to spend elsewhere. As a result, the private sector appears to be leading investment into renewable energy alternatives.

These investments are driven in part by the Corporate Renewable Energy Supply Scheme (CRESS) launched in July 2024, which allows large energy buyers — such as data centres and manufacturers — to buy renewable energy directly from suppliers. Solar power projects with at least four hours of storage also receive lower grid access charges, mitigating the effects of fluctuations in renewable energy supply on grid stability. As of January 2026, 1.3 gigawatts in new renewable energy generation capacity has been announced under CRESS, with a further 4.2 gigawatts under negotiation.

With state-owned utility company Tenaga Nasional Berhad announcing new tenders for 2.5 gigawatts of large-scale solar and 1.25 gigawatts of battery energy storage systems, Malaysia will likely continue to surpass its renewable energy targets. Malaysia exceeded its renewable energy target in 2025, primarily driven by accelerating private investment in solar power. Local investment analysts remain optimistic about the sector’s growth and profit potential.

The success of CRESS shows the potential for private sector investment in renewable energy without subsidies. Yet the main obstacle to solar energy displacing fossil fuels lies in the design of existing power markets, which are dominated by vertically integrated, monopolistic players. Competition is mostly limited to the power generation industry, which is mostly made up of fossil fuel plants supported by long-term power purchase agreements.

This is the result of a centralised and inflexible energy system, a model still prevalent across Southeast Asia. The expansion of renewables is better supported by more flexible and competitive arrangements. While grid stability is a concern for rapid renewable energy deployment, this can be mitigated by different market-based incentives, such as a requirement to incorporate battery energy storage systems into renewable energy projects.

Consumer appetite for the energy transition is strong, but considerable potential remains untapped. Electric vehicle registrations increased fivefold in April 2026 compared to the same month a year earlier, with 9272 new electric vehicles being registered. Yet electric vehicles only accounted for one in seventeen new vehicles on Malaysian roads, showing substantial room for growth.

Similarly, Malaysia’s rooftop solar installation accounted for 40 per cent of total installed solar capacity. This still represents only a fraction of Malaysia’s total rooftop solar potential, less than 5 per cent of which is being used. Malaysia’s renewable energy deployment rates continue to lag behind several of its ASEAN peers, with new government restrictions on imported electric vehicles threatening to slow adoption even further.

Alongside policy reforms such as CRESS, scaling back fuel subsidies would enable renewable energy to compete on purely economic terms, unlocking further private sector investment. The savings delivered by subsidy reform would also give the government the fiscal space needed to effectively address cost-of-living concerns and ensure a just energy transition.

Pieter E Stek is Senior Lecturer and Faculty Director of the Center for Technology, Strategy and Sustainability at the Asia School of Business, Kuala Lumpur.

Renato Lima-de-Oliveira is Associate Professor of Business and Society at the Asia School of Business, Kuala Lumpur.

The views expressed are solely those of the authors and do not represent the official positions of the Asia School of Business or any affiliated institutions.

Originally published by East Asia Forum