A Deep Dive into PPAs and VPPAs in East Asia
In today's ever-evolving global business landscape, companies are proactively exploring sustainable solutions to reduce their carbon footprint and actively participate in environmental conservation. An integral aspect of these endeavors is the deliberate pursuit of higher-impact opportunities for renewable energy sourcing within Asian markets, including Power Purchase Agreements (PPAs) and Virtual Power Purchase Agreements (VPPAs).
Evolution of Renewable Energy Procurement in Asia
Historically, Asian companies were accustomed to a procurement model that primarily involved the acquisition of unbundled energy attribute certificates (EACs). This practice was especially prevalent in Asian countries adopting the I-REC standard, which significantly lowered the threshold for multinational corporations to engage in green power procurement.
However, as the market for unbundled EACs becomes increasingly scrutinized, Asian nations are introducing a more diverse array of renewable energy procurement options, moving away from relying solely on EACs as the exclusive means of securing renewable electricity.
Now, companies can explore an array of green energy procurement avenues, such as green premium programs in countries like Korea and Japan and engage with renewable energy retailers in Taiwan to sign Power Purchase Agreements (PPAs). Among these myriad options, PPAs have captured the most attention in the market. This article aims to expand upon our previous piece, “Opportunities and Challenges for Renewables Procurement in Asia,” by providing an in-depth analysis of the current landscape and market dynamics surrounding PPAs and VPPAs in three prominent East Asian markets.
Japan: A Pioneering Market
Of the three markets under discussion, Japan stands out for having fully liberalized its electricity sector, providing consumers the freedom to choose their electricity suppliers. This liberalization has created an environment conducive to the implementation of PPAs, setting it apart from others.
In a noteworthy development, Japan replaced its original Feed-In Tariff (FIT) program with the Feed-in Premium (FIP) program in April 2022. The aim was to alleviate the financial burden of renewable energy subsidies on society. Under this fresh market mechanism, renewable energy generators are now tasked with the responsibility of selling both electricity and EACs, as the government subsidy has transitioned from covering the full rate to encompassing the difference between the fixed price and the market price. The shift to the FIP has notably increased the inclination toward adopting PPAs, enhancing the potential for securing stable income for renewable energy projects.
Diverse PPA Options
Japan offers a range of flexible PPA options, accommodating both on-site and off-site needs, including physical PPA and virtual PPA arrangements. Off-site physical PPAs are prevalent, requiring a three-party contract or bilateral agreements involving the power generator, the electricity retailer, and the end customer.
Between August 2022 and July 2023, Japan saw a significant increase in physical PPAs, totaling over 135 MW across 16 agreements exceeding 1 MW. The Renewable Energy Institute (REI) estimates that 20-year physical PPA prices range from 14¢ to 17¢ per kWh, making them a cost-effective choice compared to the national regular tariffs, set at 18¢ per kWh in 2022.
Figure 1. Physical PPA Mechanism in Japan
VPPAs in Japan
In 2022, Japan introduced Virtual Power Purchase Agreements (VPPAs), allowing customers to access renewable energy without changing their electricity contracts. Customers enter VPPA agreements with renewable energy generators, securing renewable energy certificates. These certificates' cost depends on the price difference between a fixed rate and the market rate, adding to the standard tariff. Notably, Japan saw a substantial increase in VPPAs from August 2022 to July 2023, including a 115 MW VPPA between Murata Manufacturing and Renova set to begin in March 2024.
Figure 2. Virtual PPA Mechanism in Japan
South Korea: Trilateral and Direct PPAs
In South Korea, two primary PPA types exist: Trilateral PPAs and Direct PPAs, differing in intermediary involvement. Trilateral PPAs include the Korean Electric Power Corporation (KEPCO) as an intermediary, with contract pricing negotiated privately, often combining the System Marginal Price (SMP) and the EAC Price.
Trilateral PPAs impose additional costs on buyers, including transmission, distribution fees, and miscellaneous charges, totaling around 3.7¢ per kWh or approximately 45% of the regular tariff. Double-counting of network usage charges remains an issue, and the use of SMP as a benchmark keeps prices influenced by higher-cost power sources.
Figure 3. Trilateral PPA Mechanism in S. Korea
In 2022, South Korea introduced Direct PPAs, allowing direct contracts between buyers and sellers without KEPCO's involvement, reducing intermediary fees. As of April 2023, seven PPAs (Trilateral and Direct) have been executed. Notably, in the Korean PPA process, buyers do not access EACs, and surplus electricity can be certified and sold to external parties, per the Electric Utility Act of 2023.
Taiwan: The Changing Landscape
After the passage of an amendment to Taiwan's Electricity Act in 2017, the government introduced a significant change by allowing the retail of renewable electricity. Prior to this, Taipower held a monopoly over the transmission, distribution, wholesale, and retail of electricity, but now, it's no longer the exclusive option for green power transactions. Interestingly, Taipower has yet to become involved in green power trading in Taiwan.
PPAs have become the preferred way to achieve renewable energy goals, with over 81% of green power traded through them in 2022. Buyers can sign a PPA directly with a power generator or opt for an agreement with a renewable energy retailer, both providing access to renewable electricity and bundled T-RECs (Taiwan Renewable Energy Certificates). The advantage of signing a PPA directly with the generator is the absence of additional brokerage fees.
Nevertheless, major engineering, procurement, and construction (EPCs) often have their power retail businesses dedicated to renewable energy, whereas smaller EPCs typically have smaller and fragmented sites, making it challenging for them to dispatch power. Consequently, many customers prefer to engage in solar PPAs with renewable energy retailers, while on-shore and off-shore wind PPAs, due to volume and corporate rating restrictions, continue to be associated with signing agreements with developers. As of October 12, 2023 there are 52 government-approved electricity retailers in Taiwan.
Figure 4. Physical PPA Mechanism in Taiwan
Despite decreasing LCOE for renewable energy, Taiwan still operates under a FiT system with an implicit floor price. In 2023, the average FiT for solar farms is USD 16¢ per kWh. Buyers must offer more than this price for generators to sell electricity to them instead of through the FIT. Fluctuating prices and uncertainty about future trends lead both buyers and sellers to prefer shorter-term contracts, with current average durations of 3 to 5 years.
Assessing Potential PPA Opportunities with Apala Group
Apala Group are your partners in reducing carbon across your operations, supply chains, and investment portfolios in Asia. Asia is on the cusp of a new era in renewable energy procurement. Japan, South Korea, and Taiwan are taking their first steps into the world of PPAs, and the excitement is palpable. Buyers, sellers, and regulators alike are in the process of sculpting a path that best suits their PPA needs. In this dynamic environment, change is the name of the game. Policies and strategies evolve swiftly, reflecting the market's pulse.
It's precisely this adaptability that leaves many companies on the fence when considering a PPA in East Asia. The pace of change, coupled with revisions, fuels a degree of uncertainty.This hesitation is not unique and extends to many Asian nations, with some still catching up with the trailblazing three East Asian markets.
But in this landscape of opportunity and transition, Apala Group can be your resource and trusted guide. From ongoing market intelligence and strategy to PPA sourcing, our mission is clear: to accelerate the clean energy transformation and facilitate high-impact renewable energy transactions across Asia and Latin America.
For those interested in the potential of renewable energy in Asia, we're here, ready to connect and share our insights. Join us at VERGE23 on October 26th, where we'll delve into market insights and sourcing strategies. The renewable energy journey in Asia is poised for growth, and we're here to help you seize the possibilities.