Cambodia Issues Environmental Code and Guidelines Benefiting Rooftop Solar Projects

Cambodia has the potential to be one of the top countries in the world for generating renewable energy through solar, based on the average amount of sunlight hours available per day and the consistent sunshine throughout the year.

The Cambodian government has recognized this potential and has made major updates to its energy policies in recent years. Solar power is now taking over a much larger portion of the total energy mix in Cambodia, especially as a number of utility-scale solar power plants have come online in recent years.

The long-term Power Development Master Plan 2022–2040 sets out the long-term energy policy for Cambodia and requires a bigger role for renewables. The use of solar power will play a key role in this aim to increase the role of renewables, with the plan foreseeing almost 30% of all national power generated through solar technologies by 2040.

Two of the latest legislative and regulatory steps by the government are the Ministry of Mines and Energy’s guidelines for rooftop solar systems, and most recently the long-awaited Environment and Natural Resources Code, which was enacted on June 29, 2023.

Rooftop Solar Projects

Many companies, from small startups to multinationals, are exploring the potential for rooftop solar in Cambodia. However, despite the favorable natural factors, the regulatory framework was not always clear or friendly to rooftop solar, hampering investment.

This started slowly changing with the adoption of the first solar energy regulation in 2018, which provided the country’s first official guidance on both solar power plants and rooftop solar. It provided some much-needed clarity, but the 2018 solar energy regulation—and especially the subsequent electricity tariff schemes—often kept rooftop projects from being financially viable.

Many players in the industry voiced their doubts about the regulations and tariffs, focusing especially on the capacity charge—a monthly electricity charge based on the total capacity of the rooftop solar project, not on consumption. Another point of contention was capacity restrictions, which limit projects in scale and therefore in profitability.

The restrictions and the capacity charge made rooftop solar much less competitive when compared to other energy sources. In many cases, rooftop solar would make the price of electricity even more expensive than purchasing it from the national grid without having rooftop solar. These factors put a serious damper on investment into rooftop solar in Cambodia.

The 2023 Solar Guidelines and the Environmental Code

Noticing the lack of investment in rooftop solar, Cambodia’s Ministry of Mines and Energy recently issued new guidelines (the “2023 Solar Guidelines”) in a bid to change this.

The 2023 Solar Guidelines (formally the “Principles for Permitting the Use of Rooftop Solar Power in Cambodia”) are the result of a study by an interinstitutional committee formed specifically for this purpose, working in close cooperation with the United Nations Development Programme.

In addition to the 2023 Solar Guidelines, the government has included references to solar, rooftop solar, and renewable energy in the Environment and Natural Resources Code (the “Environmental Code”), which was adopted on June 29, 2023.

The Environmental Code was years in the making, and after going through various drafting stages the adopted version consists of 865 articles addressing a range of topics, including environmental impact assessments, environmental management and conservation, energy management, waste and pollution management, disaster risk reduction management, and many others. The section on renewable energy specifically addresses the management of rooftop solar systems, tax incentives, and other important issues.

Some of the solar and rooftop solar provisions from the 2023 Solar Guidelines and the Environmental Code are discussed below.

Feeding Excess Power into the National Grid

The 2023 Solar Guidelines, in contrast to the 2018 Solar Regulations, allow for approved rooftop solar projects to feed excess power into the national grid.

This may help companies with their offset goals and commitments to reduce their carbon footprint, and is therefore a favorable and much-needed development. Feeding-in is subject to an approval quota, permitting, and a technical assessment by authorities prior to approval.

No feed-in tariff or net-metering has yet been set, so although feed-in approval may be granted, there is not yet a clear financial benefit to feeding excess power into the national grid.

However, this is very likely to change in the near future, as the Environmental Code provides that the relevant government authorities must establish a pilot project for a preferential tariff system for renewable energy. The system must include a fixed rate for the purchase of power coming from solar or other renewables, and a cost reduction mechanism.

This wording will likely lead to a feed-in tariff, and possibly a net-metering approach, to ensure that excess power fed into the grid leads to either fixed financial compensation or a reduction in electricity costs through net metering.

It appears the 2023 Solar Guidelines are laying the groundwork for this pilot project proscribed for in the Environmental Code, so related developments on this are expected soon.

Compensation Tariff for Variable Energy from Rooftop Solar

Removing the much-debated capacity charge, the 2023 Solar Guidelines require the tariff regulator to set a new tariff for rooftop solar based on a prescribed formula. The new tariff must be based on actual consumption of electricity, not on the total capacity of the project.

Regardless of the formula and numbers that the regulator will use to calculate the new tariff, consumers with rooftop solar will not have to pay a higher rate when compared to the general tariff applicable to users without solar, as per the 2023 Solar Guidelines.

Initial responses by the local solar industry welcomed the removal of the capacity charge and the introduction of the tariff limit for solar. However, businesses are hesitant about whether the new tariff scheme will spur immediate investment in rooftop solar, as the hard numbers for the new tariff have not been issued.

The formula for the “Compensation Tariff for Variable Energy from Rooftop Solar” provided under the 2023 Solar Guidelines is designed to be fair to “all parties”—including existing utility companies and investments that are impacted by solar and thus require compensation. As stated above, the 2023 Solar Guidelines have not set the tariff price; they merely set a formula following guidelines and principles. The actual tariff is for the regulator to determine, and to do so it will include calculations on the leveled cost of electricity (LCOE) and grid loss to compensate parties that may be impacted by solar.

Potential Tax Incentives

The Environmental Code provides that “all materials used for the installation of renewable technologies” are to be given tax incentives.

Although the article does not further clarify the specifics of such incentives, the clear obligation to provide a tax incentive should be warmly welcomed by businesses. We expect the tax regulator to further clarify these tax incentives in the near future.

A Bright Future

The 2023 Solar Guidelines provide the solar industry and government institutions with principles and guidelines related to rooftop solar. We expect that these principles and guidelines will eventually lead to clear rights and obligations as they are implemented through legislation and official policy in the coming years. The basis for incentivizing and promoting solar is clearly provided under the 2023 Solar Guidelines.

The Environmental Code sets clear rights and obligations, applying both directly to citizens, companies, and to government institutions that have to implement and honor them. Addressing solar in such a major piece of legislation marks a great step forward for the country. Providing clear and direct obligations for government institutions to promote and incentivize renewables such as solar will surely have a positive effect on industry and the environment.

By Tilleke & Gibbins, Cambodia, a Transatlantic Law International Affiliated Firm.

For more information on this topic, please contact cambodia@transatlanticlaw.com

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