Sustainable Energy Technology Asia (SETA) is an annual conference and expo organized by the Thai Ministry of Energy to discuss trends in sustainable energy and technology in ASEAN countries, with participants from around the region, particularly CLMV countries (Cambodia, Laos, Myanmar, Vietnam). This year, USAID Clean Power Asia—where I work—hosted an event called “Innovative Renewable Energy Policies and Procurement.” Summarized here are some of the highlights from the day:
The cost of renewable energy (RE) has fallen drastically in recent years, particularly in wind and solar photovoltaics (PV). According to a 2017 report by the International Renewable Energy Agency, the cost of electricity produced by utility-scale solar PV has fallen 73% since 2010, to 10 USDcents per kilowatt hour (kWh) in 2017. For onshore wind generation, the cost has fallen by around 25% over the same period, to about 6 USDcents per kWh.
In my previous post on electricity, I mentioned the phasing out of feed-in-tariffs (FITs), which guarantee a fixed price to be paid to RE producers for the duration of the power purchase agreement (PPA). This is a trend across markets now that RE can be procured more cheaply; FITs are being passed over for more market-based competitive methods of RE procurement. One popular option is auctions. But unlike typical auctions, where multiple buyers bid for an item and the highest bidder wins, RE auctions occur in a context where there is a single buyer. Whether it is the utility that wishes to buy RE power for distribution or a private corporation that wants RE for its own consumption, sellers compete by bidding down the price of energy. Hence, RE auctions are also often referred to as reverse auctions.
The criteria for evaluating bids, however, doesn’t always depend solely on price. When the buyer is a state-owned utility, consideration is often given to the value of economic activity the project could generate. For instance, if a bidding project developer plans to employ a lot of local labor to build the facility, then that may boost their chances of winning the contract. Furthermore, by basing the evaluation criteria on price alone, there is always the risk that a developer won’t be able to deliver the project as promised. As a result, some RE auctions are designed to have two rounds: a pre-qualifying round, where potential developers submit a feasibility study to demonstrate the technical and economical soundness of the project before they can advance to the bidding round.
During a panel discussion on auctions in Thailand, a representative from the Energy Regulatory Commission of Thailand took heat on the issue of fairness. The latest round of auctions (SPP hybrid firm/VSPP semi-firm, which I won’t get into but you can read more about here) did not distinguish by RE technology. Panelists from the developer side expressed concern that biomass cogeneration plants that utilize agricultural byproducts have lower production costs than other RE technologies, making it difficult for solar or wind developers to compete in the auction. Private sector stakeholders urged the government to separate auction quotas for cogeneration from other RE production quotas going forward.
Case Study: Singapore’s SolarNova Program
One of our guest speakers, Dr. Stephen Tay of the Solar Energy Research Institute of Singapore, gave a presentation on the SolarNova program: a government-funded program that includes R&D grants; a carbon tax of S$5 per tonne for five years from 2019 with a plan to escalate eventually to S$15 by 2030; net metering—a policy which allows installers of rooftop PV to offset their electricity bills by selling the excess solar energy they produce back to the grid; and 350MW of PV installed on government building rooftops by 2020.
Another interesting aspect of the Singapore case is their level of public engagement. The Singaporean government is moving towards a liberalized energy market and is expected to achieve full liberalization by the second half of this year. Similar to purchasable renewable energy credits in some countries, Singaporean households are now able to purchase RE as a percentage of their electricity bill (note, however, that this purchase is virtual, since it is impossible to distinguish electricity units once they enter the grid).
Corporate Procurement of RE
For all four Lower Mekong countries (Thailand, Laos, Cambodia, Vietnam), the state-owned utility is the sole buyer and distributor of power, including power produced from renewable sources. There are exceptions in which private-to-private sale of electricity is allowed; for instance, industrial parks often have their own power generating facility, or an entity that buys wholesale electricity from the utility and resells it to the industrial park tenants. This facility, coupled with its own distribution network comprise a sort of microgrid. Another exception is onsite RE systems financed by a third party; for example, rooftop PV systems (more on this below). However, there is no broad policy that allows for direct power purchase agreements (DPPAs) between private-sector entities and there is increasing pressure on governments to allow RE producers to sell to a wider group of end-consumers.
Direct Power Purchase Agreements (DPPAs)
DPPA is a broad term encompassing all direct sales of electricity from a private producer to the end-consumer. While in the example above, the industrial park power producer would sell electricity to its tenants under a DPPA, its market is limited to the industrial park; it wouldn’t, for instance, be able to transmit its power to customers outside of the industrial park. The latter is what many private power producers would like to do. A broad DPPA policy may allow producers to transmit (or “wheel”) electricity via the utility’s existing transmission infrastructure to the end-consumer, and in return pay a wheeling charge to the utility.
DPPAs are also relevant for rooftop PV because the main interest of most rooftop PV consumers is saving money, not producing electricity. Take a factory that runs 6 days a week: it wants to install solar PV on its roof so it can reduce the amount of electricity it has to buy from the utility. However, installing rooftop PV requires significant upfront investment (reinforcing the roof, buying the solar modules, inverter, etc.) which the factory may be unwilling or unable to put up the money for. As a result, it may turn to an investor who can install the system on the factory’s roof and sell power to the factory at a rate discounted from the utility’s price.
Leasing Model for Rooftop PV
Rooftop systems financed by a third party are technically not (yet) allowed under the existing legal frameworks in Thailand or Vietnam, but many projects have gotten around this by adopting a leasing model. Instead of a power purchase, the factory owner could instead lease the services of an energy services company (ESCO). The ESCO provides energy solutions that increase efficiency and reduce energy costs using any number of measures such as remodeling, switching to LED lightbulbs, or installing equipment such as (you guess it) rooftop PV modules. In practice, the ESCO leasing and PPA models look basically the same, but instead of an electricity tariff paid per unit of electricity, the ESCO is paid a leasing fee.
Policy, Regulation, and Other Government Support
Notwithstanding the absence of a broad DPPA policy, existing DPPAs in Thailand have a term of 15-20 years. Since producers cannot distribute power via the grid, off-taker risk—that is, the risk that the buyer will default—is concentrated. For example, what happens if the factory that is buying power closes down or relocates unexpectedly? Here is where the regulatory environment can play a role in derisking. Liberalization of the wholesale market and allowing producers to wheel power could bring down the cost to consumers even further, since producers can take advantage of economies of scale.
As mentioned previously, net metering is a policy that allows consumers to offset their electricity consumption with solar electricity they generate themselves. At the end of the billing period, consumers are charged for net consumption. For example, if they consumed 100 units from the grid and exported 25 units from their PV system, they would pay for just 75 units in that period. This differs from net billing, where the units flowing to and from the grid are priced at different rates, with the sell-back price typically lower than the retail electricity tariff.
Nevertheless, under either policy, the factory in our example would benefit from the ability to sell excess solar power. Since it only runs 6 days a week, the solar electricity generated on the seventh day would otherwise go unused. Because exporting solar to the grid is not allowed yet in Thailand (the net metering policy has been in limbo since the appointment of a new energy minister), owners of PV systems are also required to install reverse power relays that block electricity from flowing back to the grid, posing an additional cost of installation.
One of the existing supports in Thailand are incentives granted by the Board of Investment (BOI), a government agency. Under current BOI policy, producers of electricity from renewable resources (solar, wind, biomass, biogas), as well as ESCOs can qualify for the following:
- 8-year corporate tax exemption
- Exemption of import duties on machinery
- Exemption of import duties on raw or essential materials used in manufacturing export products for 1 year (extension is possible)
- Other non-tax incentives
Investors of self-financed rooftop PV (“machinery replacement or upgrade to save energy, to introduce alternative energy into the project, or to reduce environment impacts”) can enjoy:
- 3-year corporate tax exemption not exceeding 50% of investment capital
- Exemption of import duties on machinery
But applications for the incentives must be submitted before December 30, 2020 and the project must be implemented within 3 years from the date of approval.
For more information on USAID Clean Power Asia, go to http://usaidcleanpowerasia.aseanenergy.org/
BOI documents can be found here.