Thailand: Seven things to look for in a private power purchase deal

Thailand: Seven things to look for in a private power purchase deal

As the costs of solar photovoltaic (PV) panels decrease, new business
opportunities are emerging. In addition to the traditional model of
independent power producers establishing large-scale generating facilities
to sell electricity directly to public utilities, a new dynamic model of
direct electricity selling is beginning to take shape.

Solar PV panels can be installed on roofs to supply electricity directly to
a building's occupants, bypassing the need for a local electricity utility.
Under a contract between private parties, the customer and power producer
negotiate directly on the cost of the electricity supplied. The resulting
increase in competition has the potential to reduce energy costs across the
market.

Typically, the electricity seller will remain the owner of the solar panels,
the inverter and other components of the generating system. As the seller
will be financing the installation of the system, the purchaser can sign up
with minimal initial costs.

The principal contractual document governing the relationship between the
seller and purchaser is the power purchase agreement (PPA). These are
traditionally executed between independent power producers (IPP) and a
utility such as the Provincial Electricity Authority (PEA), the Metropolitan
Electricity Authority (MEA) or the Electricity Generating Authority of
Thailand (Egat).

The PPAs with public utilities generally do not allow for much negotiation
on the part of an IPP. But with rooftop solar installations, both the seller
and the purchaser are private parties, meaning there is greater room for
flexibility.

Here are seven issues that both parties should be aware of from the outset:

1. Ownership of the facilities: Ideally, the purchaser will be the owner of
both the building and the land. However, if the purchaser is leasing the
property, it is important to ensure that installation of the system will not
violate the lease agreement, or will not result in the system becoming
attached to the building as a permanent fixture. If the building and/or land
are being leased, the term of the lease should also be confirmed in order to
ensure that installation of the system will be economical for the seller.

2. Minimum purchase requirements: The purchaser should ideally be required
to purchase a minimum amount of electricity each month, failing which, it
will still be required to compensate the seller. This "take or pay" model is
optimal for ensuring financial predictability for the seller and its
financiers. The purchaser should ensure that its minimum commitments are not
excessive and can easily be managed in light of anticipated future use.

3. Clear lines between force majeure and events of default: A key issue to
consider is how to address changes to the environment that are beyond the
control of the purchaser. For example, if the purchaser's neighbour to the
south erects a tall building, trees or other obstructions, the solar PV
system may be rendered worthless. The PPA should clearly outline whether the
purchaser is entitled to terminate the agreement in such circumstances.

4. Ownership of the system: Since the seller will retain ownership of the
system, it will want to affix conspicuous markings on all equipment to
ensure that its ownership interests are clear. The PPA should contain a
clause that requires the purchaser to assist the seller in the event the
seller wishes to register its ownership interests at any government
agencies. Furthermore, the PPA should contain covenants on the part of the
purchaser that it will take no actions that will result in the system being
deemed a fixture.

5. Mortgages and encumbrances: The seller must be aware if the land and/or
building on which the panels will be placed has been mortgaged.
Additionally, the PPA may contain a negative covenant on the part of the
purchaser not to mortgage the building, or an undertaking to notify the
seller in the event it does so. The seller's lenders may consider securing
their loans to the seller by taking the solar PV system as collateral.

6. Regulatory environment: As this is a new area of business, the regulatory
framework is still evolving. The purchaser and seller must stay apprised of
new rules and regulations promulgated by the Energy Regulatory Commission,
and the PPA must envision how new rules affecting the transaction will be
addressed.

7. Payment terms: Delayed payment by the purchaser should ideally result in
automatic interest payments being levied. It will not be in the seller's
best interests to terminate the agreement immediately in the event of
non-payment; however, the purchaser must have a clear disincentive to delay
making its regular payments.

Private PPAs for solar PV systems are still in their infancy in Thailand,
and best practices will continue to develop. It is important that both
purchasers and sellers of electricity are aware of the legal risks involved
when negotiating PPAs and have taken all appropriate steps to maximise their
bargaining position.

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Link to Original Article:
http://www.bangkokpost.com/business/news/1240150/seven-things-to-look-for-in
-a-private-power-purchase-deal

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John Diecker
APT Consulting Group Co., Ltd.

www.aptthailand.com