Corporate investments into clean energy are rising. But isn’t relying on 100% green energy a risky business for companies? A new scheme launched by the Vietnamese government can offer businesses a smart way to power their operations with clean energy – while hedging against risk and ensuring long-term affordable electricity.
Corporate demand for green energy is growing around the world. More and more businesses are setting targets to source renewable energy as part of their commitment to tackle climate change and transition to a zero emissions future.
A proxy for this movement is the growing number of RE100 signatories – companies who have committed to sourcing 100% renewable energy – which has nearly doubled just in the span of two years. Globally, RE100 signatories consume over 285 TWh per year, which is comparable to the demand of a mid-size country like Indonesia or South Africa.
After reaching 100% renewable energy in their own operation, many of these companies will look into greening their global supply chains, which can be a real challenge. This is particularly true in heavily regulated markets in Southeast Asia with limited sourcing options. But there may be a unique window of opportunity for ambitious businesses to address that: Viet Nam has planned to launch a corporate power purchase agreement (PPA) plan that allows businesses to source renewable energy directly from sellers
PPAs and the corporate clean energy boom
One of the solutions businesses can use to reduce Scope 2 emission are corporate PPAs. A corporate PPA is an agreement between a power generator and their customer (an off-taker) – typically a large corporation – to purchase the power and the Energy Attribute Certificates (EACs) directly from the power generator at an agreed price over a fixed period of time.
Corporate PPA deals are taking off globally since they allow companies to achieve sustainability commitments and hedge against future price fluctuations.
To date, the majority of corporate PPAs are being contracted in the United States and Europe, which have more mature energy markets. But PPA markets are emerging in Australia, Brazil, India and Mexico. In 2019, the global volume of contracted PPAs was 19.7 GW, a record 40% jump from the previous year. In 2020, even with the global pandemic affecting markets, PPA volumes had already reached 8.9GW by July, hinting at yet another record year of corporate investments into clean energy.
The recent corporate PPA boom can be attributed to a few key market trends:
- Mounting pressure from investors, customers and even employees to decarbonise power supply. Corporate PPAs can reduce scope 2 greenhouse gas (GHG) emissions while providing a stronger additionality claim through the addition of new renewable energy capacity to the grid.
- Availability and price: countries are deregulating electricity markets and piloting new schemes to allow buyers to contract directly with renewable energy generators. The price of renewables (especially solar and wind) is also falling fast. Solar power is now cheaper than operating older coal plants!
- Power price hedge and cost saving potential: power markets,especially within the commercial and industrial sectors, can be extremely volatile, and electricity from conventional fossil fuels can be expensive. PPAs can hedge against volatile markets, help companies move to clean energy sources and provide more certainty over electricity procurement costs.
Viet Nam’s energy transition offers new opportunities for corporate PPAs
Viet Nam has embarked on a journey to deregulate the country’s power market, and has introduced a wholesale power market. The DPPA pilot scheme will be a key component of this endeavor.
The country has traditionally relied on coal to power its strong economic growth, with a carbon intensive power grid as a result. However, thanks to the falling costs of technology coupled with favourable government policies, Viet Nam is fast emerging as a solar and wind leader in Southeast Asia. The country has over 5 GW of solar power, the largest capacity in the region (Thailand has just under 3 GW of installed capacity) with plans to further expand the share of renewables. Solar, wind and gas-fired power plants are targeted to make up 47% share of the power system in 2030 and 60% in 2040.
As we enter a post-Covid economic recovery, Viet Nam’s power consumption is expected to grow. The DPPA scheme will offer an effective way to help decarbonise the country's power consumption by increasing corporate investment in the renewable energy sector – but also by providing large power consumers an effective tool to meet their sustainability commitments. This is particularly interesting for multinational enterprises with sustainability commitments and their own regional operations or supply chains and are looking for smart ways to power their operations with clean energy. Right now, large power consumers in Viet Nam are limited to buying renewable energy through unbundled energy attribute certificates (EACs) such as I-RECs and TIGRs or building on-site power generation systems - such as rooftop solar.
Interestingly, the name of Viet Nam’s pilot programme is somewhat misleading, as the scheme is actually for a virtual structure, a vPPA, while a “direct” structure would typically be used to refer to a physical PPA structure.
A virtual PPA (vPPA), is a purely financial contract between the seller and buyer, and completely detached from the physical electricity contract. In a vPPA, the buyer and seller will settle the difference between the agreed PPA price (strike price) and the wholesale electricity market (WEM) price. This is why vPPAs are commonly known as a contract for difference (CfD). When the strike price is higher than the WEM price, the buyer will pay the seller the difference and vice versa.
On the other hand, in a physical PPA, the seller will still sell the electricity to the (WEM) and deliver the electrons to the grid, whereas the PPA contract will be sleeved to the retail contract of the buyer.
A limited window of opportunity for global companies
Taking into consideration the size of Viet Nam’s manufacturing sector, multinationals with local operations and big sustainability ambitions have already expressed enormous interest in the pilot scheme. One of these multinationals is a food and beverage company with local operations and an ambitious, group-wide renewable energy goal. With help from the South Pole renewable energy team, this multinational has now secured a qualified seller, a shortlist of potential renewable energy projects, a risk mitigation strategy, and has successfully completed the registration process for the pilot scheme. The expected benefits? The ability to supply local facilities with renewable energy from a newly built power plant, save costs, improve financial performance, and build brand and climate leadership.
Currently, it is expected that the first phase of the pilot scheme will be limited to between 400 MW to 1,000 MW in size. Once this quota is filled it is not clear when large power consumers will be able to transact directly with RE power suppliers in the future.
The DPPA pilot scheme was planned to be launched in mid-2020.
However, the global pandemic along with other issues has prolonged the approval process, and the launch of the pilot scheme has been delayed to Q1 of 2021, opening up a rare window of opportunity for qualified power consumers. In order to qualify for the DPPA, the power buyer should already be matched with a suitable project and meet the following criteria:
- Be a manufacturing industry purchasing electricity at a voltage level of ≥22 kV
- Have made international sustainability commitments and targets a priority
- Have sufficient financial capability and technical resources (technical resources can be either internal or through advisory services)
But time is of the essence. Once the scheme is officially approved, there will be a very short, few month long period for buyers and sellers to register their applications to join the scheme. That is a remarkably short window, considering that a typical PPA tender can take over 6 months to complete. With such a short window to find projects before the launch, and the limited size of the pilot scheme, interested businesses should start preparing for the unique opportunities offered by Viet Nam’s clean energy boom, today.
With our experienced and passionate team, South Pole is proud to contribute to Viet Nam’s energy transition by helping corporates navigate the DPPA Pilot scheme. Contact us to find out how your business can unlock renewable opportunities through the DPPA scheme as well as our wide range of renewable energy advisory services in Viet Nam, Southeast-Asia and globally.
Read more about South Pole’s renewable energy advisory services here
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