Understanding Supply Agreement with Renewable Energy (SARE)

ARC News • November 06, 2020

Understanding Supply Agreement with Renewable Energy (SARE)

With the growing popularity of the Solar Power Purchase Agreement (“PPA”) scheme in Malaysia as an alternative approach for business owners to embark into the green energy journey, solar photovoltaic (PV) system investors (“Investor”) begin to realise that one of the biggest pitfall in the PPA scheme is the defaulting risk that may arise in the event the premise owner cum solar energy purchaser (“Offtaker”) refuses to make payment to the Investor or intentionally delay the payment to the Investor.

Contrary to the Electricity Supply Contract executed between the distribution licensee, Tenaga Nasional Berhad (“TNB”) and the Offtaker for the supply of the regular electricity to the premise, TNB is granted with the right to disconnect such electricity supply  in the event of non-payment. Such right undoubtedly have an immediate impact on the Offtaker as their day-to-day operation will be severely interrupted without the electricity supply. However, the Investor does not have such right in a PPA arrangement under the law. Hence, in the event of non-payment, the only remedy accorded to the Investor is to initiate a legal suit against the Offtaker but such remedy may not be of the best interest of the Investor as this exercise is both time and resource consuming and it may not urge the Offtaker to take immediate remedial action to compensate the Investor as the Offtaker is still able to carry out their day-to-day operation pending the disposal of the legal suit.

What is SARE?

SARE is a tripartite agreement executed between the Investor, Tenaga Nasional Berhad (TNBX as its billing agent) and the Offtaker essentially for billing and invoicing and revenue management (“Service”). The agreement typically spells out the tenure of the contract, the tariff rate for the purchase of the solar energy from the Investor (“PPA Tariff”) as well as the covenants and obligations of each party. The SARE mechanism had received the endorsement from the Energy Commission of Malaysia as well as Sustainable Energy Development Authority (SEDA).

Key Concepts of SARE

  1. The solar PV system installed at the Offtaker’s premise is owned and operated by the Investor.
  2. The Offtaker shall purchase all solar energy generated from the solar PV system from the Investor at the PPA Tariff.
  3. The tenure of the SARE follows the tenure stipulated in the PPA.
  4. Billing of the solar energy purchased by the Offtaker from the Investor will be prepared by TNB on behalf of the Investor to the Offtaker and the payment is to be made by the Offtaker to TNB directly on monthly basis.
  5. A service fee will be imposed by TNBX for the Service. The service fee is subject to the system capacity installed on each site.
  6. TNBX will re-pay the sum collected from the Offtaker to the Investor.
  7. TNB shall be accorded with the right to disconnect the electricity supply to the premise in the event of non-payment.

Key Takeaways

Whilst SARE is a template contract provided for by TNBX and designed in such a way that the risks are borne between the Investor and the Offtaker, TNBX are open for the parties to negotiate the terms on case by case basis. In view thereof, it is pertinent to engage an experienced legal practitioner to review the terms in SARE to ensure that the parties agreed to the terms set out by TNBX.

 

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.

2020-11-06T11:40:49+00:00