Malaysia generates significant quantities of Oil Palm Wastes (OPW) which can be potentially valorised into sustainable bioenergy as envisaged by the National Biomass Strategy (NBS-2020). Despite significant investments, policy directives and government support, the valorisation of OPW into bioenergy has remained low exacerbating waste management challenges. Therefore, the strategies and impediments to the rapid bioenergy development and bioelectricity generation from OPW require practical assessment. Therefore, this paper examines the level of development and diffusion of the biomass innovation system in Malaysia based on the Functions of Innovations Systems (FIS) approach developed by Dutch and Swedish researchers. Furthermore, the key factors hindering biomass energy technologies implementation in Malaysia and potential solutions were identified, highlighted and examined. Based on the FIS analysis the functions; entrepreneurial activities, knowledge development, and resources mobilization functions are well established in the Malaysian biomass innovation system (BIS). However, the functions of guidance of search; creation of legitimacy; knowledge diffusion and market formation are underdeveloped resulting in the low penetration of bioenergy in Malaysia. Other factors include; fossil fuel subsidies, numerous or conflicting energy policies and weak collaboration between academia and the industry. The outlined challenges can be addressed by revising fuel subsidies, Feed-in tariffs, RETs implementation, roles of supervisory agencies, and bureaucratic procedures for access to funds for research and development of bioenergy in Malaysia.