The comeback of the sun: Legal and regulatory framework
Solar energy projects in Thailand as a low-risk and best-rewarded investment
Solar energy is the oldest and the newest form of energy. Investment in renewable energy is one of the country’s priorities, given its goal to reduce its energy imports. The current legal, regulatory and business environment provides great market opportunities for foreign solar companies and entrepreneurs
- to develop and engineer a solar project,
- to obtain a financing based on the power purchase agreement, either with the aim of holding assets medium to long-term and operate the power plant on their own,
- to enter into a joint venture with the major players in the Thai energy market or
- to sell it at very profitable conditions.
Currently, roughly half of the electrical power is generated by the state-owned Electricity Generating Authority of Thailand (EGAT). The other half of the generation assets are developed and owned by private companies, including Independent Power Producers (IPPs), Small Power Producers (SPPs), and Very Small Power Producers (VSPPs), and sold to the governmental electric utilities Metropolitan Electricity Authority (MEA – in Bangkok) and Provincial Electricity Authority (PEA – Upcountry). This “single buyer system” gives monopolistic power to state-owned utilities in procuring electricity, although the system has evolved from a government monopoly to a semi-unbundled structure called the “enhanced single buyer model.”
Thailand as the ASEAN solar power hub
As electricity generated by grid-connected photovoltaic (PV) power (or other types of renewable energy) is not yet fit to truly out-compete conventional energy, it is economically impossible to commercialize the solar energy without incentive pricing. Thailand was one of the first Asian countries with an incentive scheme for renewable power generation, putting in place policy incentives back in 2006.
The incentive scheme is called Feed-in-Tariff (“FiT” – measured in THB/kWh) for a long-term fixed payment guarantee for produced renewable energy. FiT’s are the most widely used national renewable energy policy worldwide, and are recognized as one of the most effective and efficient drivers of renewable energy (RE) scale-up by creating investor security. Under the Renewable Energy Adder Program (REAP), it adds additional payments (“Adders”) on top of the regular prices paid by the governmental off-takers EGAT, MEA and PEA. This ensures guaranteed long-term purchases, a secure financing of the project and attractive tariff rates to eligible grid-connected renewable power projects. However, this kick-start of the Thai renewable energy industry is in the end financed by conventional power generation and its consumers. Someone has to pay the bill.
Solar rights: The sun in Thailand and its regulatory and legal framework
The regulatory framework for photovoltaic (PV) power plants respectively alternative energy bases mainly on four pillars:
- the Thai Renewable Energy Development Plan regarding the increase of solar thermal energy and the development of municipal solid waste, biomass, and biogas,
- the Energy Conservation Program to improve energy-saving in the industrial and transport sectors and, above all, by cost-based and performance-based concessions,
- the Energy Business Act (EBA) to govern and regulate energy businesses in Thailand and allowing more participation in the power sector by the private sector, and
- the decisions of the National Energy Policy Council regarding tariff schemes for the purchase of power from renewable power energy projects.
The Ministry of Natural Resources and Environment does not require an environmental impact assessment for solar power projects. However, various license requirements have to be fulfilled before the solar power plant can be constructed and connected to the grid. It starts with an energy production permission, especially a power production permit, and controlled energy production license. Depending on the size and scope a factory license and an industrial operation license are required.
According to an announcement by the Energy Regulatory Commission (ERC) as of March 24, 2014: The generation of electricity by solar photovoltaic rooftop with a maximum size of 1 MW does not qualify as a power plant factory, and does not need to get a factory license (RO GO 4). The owner is just required to inform ERC about the construction.
Other possible legal hurdles are – even when the EIA (Environmental Impact Assessment) report is not necessary – the ONEP (Office of Natural Resources and Environmental Policy and Planning) approval. Project specific licenses depend on used technique and location. Public participation requirements had been introduced in Sections 56, 47 and 67 of the Constitution, which had been revoked by the military junta and is currently not in place. Community development programs or other local approvals are still required and a BOI certificate is needed, if an application for investment promotion has been filed.
Apart from specific energy-related laws and policies, the foreigner legislation has to be taken into consideration. The Thailand Foreign Business Act restricts foreign business activities, and the Thailand Land Code prohibits foreign land ownership. However, there are tested investment structures for business ventures of this scope and type for foreign companies. One solution is to apply for an investment promotion by the Thailand Board of Investment. The other solution is to involve a Thai majority shareholder with no dividend rights and minimal voting rights in the structure. Also, these structures are common and tested in Thailand, they require a specific structuring know-how and should be carefully analyzed.
An essential element is the option to obtain an investment promotion by the Thailand Board of Investment (Section 126.96.36.199). Such BOI promotion grants a broad scope of benefits, but no subsidized loans or other financial support. The three top benefits for a BOI promoted solar farm are (i) the permission to have a 100% foreign ownership structure (ii) the authority to acquire full legal ownership in the project land and (iii) a tax exemption (tax holidays) for eight years – certain conditions apply.
How to sell the sun: PPA – Power Purchase Agreement
Traditionally, the Power Purchase Agreement (PPA) was a vehicle for utilities to purchase energy from each other. As of today, a PPA is a long-term contract to buy the electricity generated from the power producer. These agreements are a critical part of planning a successful grid-tied solar power project because they secure a long-term stream of revenue for the project through the sale of the electricity generated by the project. The particular importance of the PPA between the operator respectively system owner of the solar power plant on the one side and MEA, PEA or EGAT as off-taker on the other hand is typically underestimated.
Before a PPA can be concluded certain requirements have to be fulfilled. This might include, as the case may be, power production license, building permit and factory license, additional licenses from the Energy Regulatory Commission and other permissions.
The Thai PPA is typically pre-defined by the government, and the off-taker is unwilling to negotiate standard clauses. However, it is essential to negotiate important elements and carefully analyze the contractual framework regarding (i) PPA duration and indexing for inflation, (ii) deposit requirements, (iii) time frames to secure financing, to commence construction and to connect the solar farm to the grid and (iv) certain hidden penalty provisions imposed for late completion, even for implications out of control of the developer.
With a capacity between 10 and 90 MW (SPP, Small Power Producer) the solar power plant is connected to PEA / MEA lines but sells electricity directly to EGAT under an EGAT power purchase agreement. Below 10 MW the private power producers are qualified as VSPP (Very Small Power Producer) and sell electricity under a power purchase agreement with MEA in Bangkok or the PEA in the respective province. PPA between the private sector and EGAT for a power plan was introduced in 2006 with, in the beginning, insufficiently defined limits to apply for those. The direct consequence is that many private people asked for it without having enough resources to build up a power plant.
One of the largest barriers to the deployment of solar energy systems is the high up-front cost. The long-term PPA payment rights can be used for the transfer of the up-front capital costs to a bank or financial institution with greater access to capital or lower cost of capital. Therefore, the PPA must add up to a predictable revenue stream that supports proposed debt plus expected operating expenses plus other obligations plus a reasonable return on equity. Since the payments are made directly by governmental agencies, they can be assigned or forfeited for finance purposes with the state credit-worthiness of Thailand. Securing a good PPA is one of the most challenging elements and negotiating and signing the PPA is a critical step in the development of the Thai solar project development.
Based on a proper power purchase agreement providing a long-term premium on top of wholesale electricity prices, local banks such as Kasikornbank and Bank of Ayudhya are comfortable in providing non-recourse financing with or without the backing from development banks, such as German Development Bank (DEG), ADB or IFC, at single-digit interest rates.
Solar power is nothing without the grid
Thailand is in need of a smarter grid and dreams of smart energy, smart life, and smart community. Reality shows, it is still in the first stage to lay the foundations for substation automation, microgrids, and distributed generation. The second stage will be the large scale integration with optimized asset management, optimized mobile workforce, and fully substation automation. Large scale renewables and urban smart microgrids will be the third stage of the smart grid roadmap, and the vision of stage 4 will be self-healing networks, full automation, and pervasive cyber security. However, whether this all is labeled smart grid, green grid or sustainable grid does not make a difference in current solar power projects.
If the project land is situated next to the existing grid, it will not require new transmission lines nor substations. This is a major factor for the profitability, but also for the project implementation speed and the reduction of legal and factual hurdles.
Since the project land is the cardinal asset for the transaction, a comprehensive due diligence is essential. This covers standard aspects as the land title quality (Chanote or else), the title search, headcount of owners, existing leases, mortgages, transferability, public law use limitations, etc. Unique aspects are the suitability of the land for a solar farm, the size and layout of the useable surface concerning the planned MW-capacity, the location of the grid, the substations, and possible feed-in points. A physical walk-through should not be replaced by a Google Earth review and a careful research for rivals competing for the grid access, and other limited resources can limit the risk that the project fails in a late stage.
Contractual structure and realization hurdles
The general project structure follows international standards with a special purpose vehicle in the legal form of a Company Limited, which applies for all licenses and approvals and enters into various contracts with the other participants.
Unlike thermal power plants, the operation of a solar power plant has a negligible environmental impact on the site during operation. There are no waste products, no requirements for cooling, no moving parts, no noise, and no impact on flora and fauna. The largest impact could be visual. The operation and maintenance requirement of solar farms are minimal and do not present significant technical challenges, unlike the operation and maintenance of conventional power projects. For grid-connected photovoltaic systems, the electrical inverter used to produce alternating current from direct current needs some maintenance support, but the photovoltaic solar panels are designed to operate without maintenance except for cleaning.
Before investing in a solar farm in Thailand, the well advised foreign investor will not limit his focus on the best case scenario with maximized profits. A risk assessment will estimate – above other aspects – the political risk in Thailand. This includes the questions whether (i) a change in the regulatory framework for renewable energy would have a negative impact on an approved and existing investment project, (ii) the permissions, licenses, power purchase agreements, etc. may be revoked and terminated, (iii) a tightening of the foreign investment legislation – caused by political developments – may jeopardize the feasibility and profitability and (iv) Thai contracts and Thai courts provide sufficient legal certainty and efficient legal protection for foreigners in the land of smile. There is for sure no general answer, and while some projects have been structured risk-unaware and aggressive, other projects provide the full scope of investment protection mechanism possible.