Corporate Virtual Power Purchase Agreements in Malaysia
16 November 2022
Following the Malaysian Government’s announcement of new initiatives to support Malaysia’s transition to sustainable energy
1, including the introduction of a 600MW quota for a virtual power purchase agreement (‘
VPPA’) programme, the Energy Commission (“
Commission”) launched the Corporate Green Power Programme (“
CGP Programme”) on 7 November 2022. The CGP Programme gives corporations the option to procure green electricity via a VPPA.
This write-up sets out the key features of the CGP Programme, in particular the VPPA model, and the conditions and requirements for participation in the same.
THE VPPA MODEL IN MALAYSIA
It should first be noted that a VPPA, despite its name, is actually a commercial agreement. The procurement of electricity under a VPPA is not a physical one as the power producer does not deliver electricity directly to the consumer. The power producer instead sells the electricity generated to a wholesale market and the consumer continues to obtain its electricity from the utility company. What the VPPA does is allow the parties to hedge electricity prices.
The VPPA model in Malaysia will involve the following relationships:
- A VPPA2 between a solar power producer (‘SPP’) and a corporation participating in the CGP Programme (‘Corporate Consumer’). Pursuant to the VPPA, the Corporate Consumer will purchase energy generated by the SPP at a fixed price or pricing structure (‘VPPA Price’). The VPPA Price will take into account the value of environmental attributes resulting from the use of renewable energy, such as renewable energy certificates or credits from the reduction in greenhouse gas emissions.
- A New Enhanced Dispatch Arrangement (‘NEDA’) agreement between the SPP and the electricity utility company in Peninsular Malaysia, Tenaga Nasional Berhad (‘TNB’)3. Pursuant to the NEDA agreement, the SPP will deliver energy generated to the grid and TNB will pay for such energy based on the System Marginal Price4.
- The Corporate Consumer and TNB, whereby the Corporate Consumer is a customer of TNB. The Corporate Customer will pay TNB for electricity consumed based on the applicable tariff rate.
Under the CGP Programme, in the event the System Marginal Price received by the SPP from TNB is higher than the VPPA Price, the SPP will pay the Corporate Customer the difference between the two amounts. Conversely, if the System Marginal Price is lower than the VPPA Price, then the Corporate Consumer will pay the SPP the difference between such amounts.
KEY REQUIREMENTS AND CONDITIONS FOR PARTICIPATION IN CGP PROGRAMME
The CGP Programme is open for applications from 7 November 2022 until 6 February 2023. Applications must be made by the SPP and there is a limit of one application per applicant. The CGP Guide states that the applicant will be informed of the result of its application within three months of the closing date of 6 February 2023.
The full list of requirements and conditions for participation in the CGP Programme are set out in detail in the CGP Guide. We highlight below some key requirements and conditions for participation as a SPP or as a Corporate Consumer:
SPP
- The SPP must develop and operate a new solar power plant with export capacity between 5MW to 30MW. The use of a battery energy storage system with a capacity to support at least one hour of full export capacity (MW) of the solar power plant is strongly encouraged.
- The solar power plant must be completed by 2025.
- The SPP shall either be a local company with a minimum 51% Malaysian equity interest or a consortium with a minimum 51% Malaysian equity interest and consisting of at least one local company. Further, where the SPP is a consortium, each member must have at least 10% equity interest and the lead member must have at least 30% equity interest.
- The SPP must have assets of at least RM10 million and, where it is a consortium, each member must have a minimum paid-up capital of RM1 million.
- The SPP or a member of the consortium shall have a minimum of three years’ experience in the development and operation of a large scale solar photovoltaic plant with a capacity of at least 1MW.
- The SPP is required to provide a commitment bond, which may be forfeited in the event the SPP withdraws its application after submission or fails to respond with its acceptance of offer from the Commission. While the Commission’s “Information Guide for Corporate Green Power Programme (For Solar PV Plant)” (‘CGP Guide’)5 refers to such a commitment bond, the CGP Guide does not presently contain details on the form and value of the same.
- The SPP shall, if successful, apply for participation in NEDA.
- The SPP, if successful, is restricted from any change to the shareholders, shareholding structure (including ordinary shares and preference shares) and equity structure for a period of five years from the date of commercial operation of the solar power plant.
Corporate Consumer
- The Corporate Consumer must be an existing company operating in Peninsular Malaysia or a company planning to establish and operate in Peninsular Malaysia within the next two years. If it is the latter, then the projected annual revenue shall be at least RM10 million.
- The Corporate Consumer shall be in the manufacturing or service industries.
- The maximum demand6 shall be not less than 1MW.
CONSUMER BENEFITS OF THE CGP PROGRAMME
By participating as a Corporate Consumer in the CGP Programme, businesses will be able to reduce their carbon footprint through the use of renewable energy. They will also enjoy the environmental benefits arising from the same, including the value of any credits or financial benefits available for the reduction of greenhouse gas emissions and issuance of renewable energy certificates. Given the present corporate climate where environmental, social and governance (ESG) commitments are increasingly being focused on, these benefits will certainly be attractive to corporations.
COMMENTARY
The introduction of VPPA in Malaysia gives corporations the opportunity to achieve their sustainability goals and is an encouraging step forward in Malaysia’s energy transition. However, the window for applications to participate in the CGP Programme is only open for a short period of three months. This places the SPP in a challenging position, as it has to source for Corporate Consumers, procure the land rights, undertake the preliminary work for the development of a new solar power plant, ascertain the commercial and financial aspects of the VPPA, and familiarise itself with the NEDA requirements – all of which requires extensive effort and time. It is to be hoped that the implementation of the CGP Programme will not be hampered by the tight timeline that has been set.
For enquiries on the CGP Programme or any matter pertaining to the same, please contact Richard Khoo (Partner) or Rachel Chiah (Senior Associate) of the Energy Practice of Skrine.
1 Our earlier Alert on the proposed new initiatives announced by the Malaysian Government is available
here.
2 The VPPA is also referred to as the ‘Corporate Green Power Agreement’.
3 NEDA allows power generators to bid their variable costs in selling energy to TNB, thus allowing for cost efficiency through competition.
4 System Marginal Price is defined in the “
Guidelines for Single Buyer Market (Peninsular Malaysia)” as the price of the most expensive marginal generator scheduled to meet demand in a half-hour period
5 The Commission’s “
Information Guide for Corporate Green Power Programme (For Solar PV Plant)” is available
here.
6 “Maximum demand” means the highest level of electrical demand monitored in a particular period (typically a month).
This alert contains general information only. It does not constitute legal advice nor an expression of legal opinion and should not be relied upon as such. For further information, kindly contact skrine@skrine.com.