Basics of Power Purchase Agreement (PPA)

ARC News • August 18, 2020


Basics of Power Purchase Agreement


Following the continuous efforts by the Government of Malaysia to stimulate the development of renewable energy sector in Malaysia, such as the Green Technology Financing Scheme and the Green Investment Tax Allowance, many companies begin to realise the benefits of investing in renewable energy, particularly solar photovoltaic (PV) systems. Whilst such incentives are undoubtedly interesting and beneficial to reduce the operation costs of their businesses, the main roadblock faced by these companies is the huge capital investment required for the installation of a solar PV system in which this has always been a million dollar question that puzzles most business owners – whether to fork out the investment sum now and enjoy the savings in long term, or to preserve the cash flow now but continues to suffer from high operating cost in the long term. In order to bridge this gap, the Malaysia government introduces an alternative scheme to the nation, known as the Power Purchase Agreement (“PPA”) which aims to enable business owners to enjoy cheaper, cleaner electricity while preserving their cashflows.


What is Power Purchase Agreement (PPA)?


PPA is a long-term agreement executed between an investor of the solar PV system (“Investor”) and the business owner (“Offtaker”) essentially for the sale and purchase of electricity generated from the solar PV system. In principal, the Investor will at its own cost supply, install, operate and maintain the solar PV system in the premise of the Offtaker while Offtaker will purchase the electricity generated from the solar PV system for its own consumption at an agreed tariff (“PPA Tariff”) – usually cheaper than the electricity the Offtaker purchased from the existing distribution licensee (e.g. Tenaga Nasional Berhad) (“Electricity Tariff”), for an agreed duration (“Tenure”).


To ensure the interests of both the Investor and the Offtaker are protected, the PPA becomes the single most important legal document that needs to be executed diligently as the PPA sets out the commercial terms between both parties, amongst other the Tenure, the PPA Tariff, billing arrangement, conditions for triggering a system buy-out, ownerships of green attribute, as well as other relevant legal obligations of both parties throughout the Tenure.


The success of a PPA is largely depending on two (2) major factors that are always interrelated to each other, the PPA Tariff and the Tenure. Typically the Tenure will be in the range of 15 years to 20 years while the PPA Tariff will tend to be at least 15% lower than the existing Electricity Tariff to allow both the Investor and the Offtaker to achieve a decent return of investment and energy cost savings respectively.


With regard to the billing arrangement, the billing and payment is typically done on a monthly basis. A revenue meter will be installed at the Offtaker’s premise to record the total solar energy produced by the solar PV system and in most circumstance, the Offtaker is required to purchase the total solar energy produced at the PPA Tariff. In the event the Offtaker consumes lesser energy than the solar energy produced, the Offtaker is granted with the option to sell the excess energy to the distribution licensee at an one-to-one rate against the Electricity Tariff vide the Net-Energy Metering (NEM) scheme.


To further protect the interests of the Investor and the Offtaker, the PPA also incorporates the system buy-out term in which upon default of either party, the defaulting party is required to pay the non-defaulting party the agreed system buy-out price. The system buy-out price would vary depending on the year in which the party defaulted the terms of the PPA.


In addition, the PPA would also address the ownership of green attribute whether the environmental attribute belongs to the Investor or the Offtaker. It is important to address the ownership of the green attribute because such attribute may be sold and utilise as a significant stream of revenue for the owner of such attribute.


Key Takeaways

PPA is NEVER a standard agreement for contracting parties to take it lightly without the advice of an experienced legal practitioner. Due to the huge investment sum and the tenure of the PPA, it is pertinent for the contracting parties to completely understand all the terms in the PPA before agreeing to the same. It will not only be an expensive lesson for the contracting parties should the relationship turns sour due to the ignorance of the parties, but may also be a detrimental one as unresolved disputes will cause disruptions to the business operations of the Offtaker, too.


This Article is co-written by Yeo Shu Pin (Partner) and Serene, Tee Jia Qing (Legal Executive) of Messrs. Afif Rahman & Chong

Disclaimer: Every attempt to ensure the accuracy and reliability of the information provided in this publication has been made. This publication does not constitute legal advice and is not intended to be used as a substitute for specific legal advice or opinions. Please contact the authors for a specific technical or legal advice on the information provided and related topics.