Vietnam’s direct power purchase agreement as an example of a growing trend
Vietnam has recently finalised its direct power purchase agreement (DPPA) mechanism, designed to allow large energy users to directly procure renewable energy. Decree 80/2024/ND-CP allows corporates to purchase energy either via a private transmission line or by wheeling over the transmission network. The schematic below describes the commercial structure of wheeling over the transmission network. Under the structure, physical power is still sold into Vietnam’s wholesale electricity market, but a contract for difference (CfD) is signed between the renewable energy generator and the end consumer, which has the effect of fixing the price paid for electricity.
Kuungana recently advised on improving the competitive procurement of renewable energy in the Philippines, Indonesia, and Vietnam. The findings from this study are published here (published before the DPPA decree was enacted) and provide a more complete analysis of the state of renewable energy procurement in each of these countries.
Corporate power procurement in other low to middle income countries
Progress on establishing similar mechanisms for the direct purchase of renewable electricity has been mixed in other low and middle income countries. Countries can be split into three broad categories:
Countries where wheeling is possible: For example, in South Africa, tariff hikes and power shortages have resulted in corporates procuring their own power. There is currently no wholesale electricity market in South Africa, but wheeling arrangements have been implemented by Eskom and by some municipal utilities. Direct procurement of power in South Africa is via a physical PPA, whereas Vietnam’s DPPA is a financial contract.
Countries where wheeling is allowed for in law and some progress has been made, but there remains a lot to do: In many low- to middle-income countries, allowing corporates to procure their own power is moving up the agenda. Several countries (e.g., Kenya, Senegal) have started laying the groundwork by allowing for third-party access in primary legislation. However, the detailed frameworks for wheeling have not been defined, blocking the wheeling of power in practice.
Countries where there is no framework or mechanism for the direct purchase of electricity by corporates: In many countries, power can only be bought from a state-owned vertically integrated utility.
Why does this matter?
Pressure on corporates to reduce emissions is growing because of:
Emissions reduction policies and regulations in the countries in which they are operating.
Pressure from customers and other stakeholders.
Trade policies, such as the EU’s carbon border adjustment mechanism (CBAM). These are especially important in low/middle income countries, where domestic emissions reduction policies are often less restrictive.
One method of reducing emissions is using renewable power, so a growing number of corporations are looking to procure their own renewable power. The figure below shows the number of corporates signed up to RE100, a voluntary initiative that requires them to procure 100% of their power from renewables by a target year.
Allowing corporates to directly procure power could accelerate the update of renewable power. In most low-income and many middle-income countries, renewable energy procurement has, to date, often been conducted by the state via a state-owned utility and backed by a sovereign guarantee. This procurement method is limited in both the scale and speed at which it has been implemented. Wheeling could allow larger pools of private capital to be accessed, via corporates keen to meet the targets they have committed to. This could increase the speed and scale at which renewable energy is taken up.
Direct procurement by corporates will, in many countries, catalyse reforms that will lay the foundations of a wholesale electricity market. As generators increasingly have options in who to sell power to and corporates have a choice in who they buy power from, a many-to-many market will form. This will, in turn, facilitate price discovery, akin to that seen in a more sophisticated wholesale electricity market, even if such a market is not formally established.
More direct procurement will result in a wide range of policy and market design questions that policymakers and regulators need to address. For example:
Ensuring power sector planning and procurement evolves to consider capacity that is procured directly.
Where tariffs have not been unbundled, establish use of system charges that allow transmission and distribution utilities to recover the costs of running centralised infrastructure open, on which all system users depend.
Ensure that rules around balance responsibility and the allocation of balancing costs evolve to reflect the establishment of a more sophisticated market.
Kuungana’s work in this area
Kuungana provides a wide range of services that are relevant to helping our clients navigate more complex energy markets. Examples of the services most relevant to the issues explored in this blog post include:
Policy and regulatory advisory. Government and regulators need to carefully design regulatory frameworks to ensure the wheeling of power benefits all sector participants. We advise governments and regulators globally, recommending policy measures tailored to the circumstances of the market in which we are working.
Market price projections. Electricity sector dispatch modelling can provide an understanding of the economic value of electricity from different generation assets, enabling off-takers and generators to evaluate a “fair” price for procuring power. Our electricity market models are relied on by developers and lenders, with our electricity price projections having been used to support a growing list of transactions.
Commercial advisory and financial modelling. Our deep understanding of how electricity markets work means that we advise on the commercial terms under which projects are contracted. We model those contracts and help offtakers to evaluate the merits of bids from competing generators.
Risk analysis. Wheeling across the network will present opportunities for generators to sell to multiple offtakers or for energy traders to broker relationships between supply and demand-side actors. We work with portfolio owners to model price and volume risk. This analysis can be critical to optimising financing arrangements.
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