Getting the rules right is essential for keeping competitive and moving up value chains
As new regulations loom and buyers become ever more demanding, sustainability has become a matter of survival for Cambodia’s garment sector. The installation of rooftop solar panels represents a major step forward in meeting these demands – but the current regulatory environment poses significant hurdles.
While Cambodia’s extensive hydropower production means that the country’s energy mix is substantially greener than many of its neighbours in the region, the supply does not lessen demand for further green energy sources among buyers looking to decarbonize their supply chains. The installation of rooftop solar has become a frequent request among buyers in the garment industry.
“The moment they install rooftop solar, the portion of green energy that is consumed by those factories immediately jumps to 70 percent,” said Massimiliano Tropeano, a sustainability and garment expert at EuroCham Cambodia. “Therefore, it goes much higher than the 50 percent grid that they can get in Cambodia.”
However, under the current regulations, companies will have to pay a tax based on the difference between the cost of the electricity produced by their solar power array and the cost of electricity purchased from the power grid. So if they save 2 cents per kilowatt hour, they owe 2 cents in tax; if they save 4 cents, they owe 4 cents in tax.
The result, said Tropeano, is that no matter what decisions are made in the installation process, “you can rest assured that you will not save a single cent because the tax will equalise to the grid cost.”
Additionally, installing rooftop solar power in Cambodia denies companies access to the “time of use” tariff, which provides reduced electricity costs when power is consumed in off-peak hours, such as late at night. The loss of this tariff has an immense impact on more automated factories, which take advantage of the night time reduction in cost to keep energy bills low.
The cost savings currently prevented by these regulations are paramount to making the installation economically viable for factories. Increased demands for green energy use from buyers does not necessarily lead to an increase in revenue that would enable factories to offset installation cost, noted Tropean.
“The owners of the factory are actually spending quite a bit of money on [sustainability]. But the buyers are not always responding to that with new orders,” he said.
Meeting these targets on green energy usage and other sustainability criteria is becoming increasingly vital as the EU (one of the major export destinations for the Cambodia garment industry) imposes ever more stringent supply chain due-diligence rules.
Steep new punishments will be imposed upon companies that fail to effectively prevent humanitarian and environmental issues from arising in their supply chains. Minimum requirements for renewable energy usage are expected in the future. Buyers are also increasingly demanding contract manufacturers to help meet their sustainability targets in areas such as zero emissions, zero coal, and textile recycling.
If companies are unable to realise the benefits of solar panel installation, or are forced to choose between rooftop solar and the benefits of the “time of use” tariff, they may simply choose to manufacture their goods elsewhere.
In neighbouring Vietnam, where electricity consumption is subsidised by the government, increased use of rooftop solar power is encouraged, as it reduces government expenditure. The result is that Vietnam has the cheapest electricity in the region, at an average of around 8 cents per kWh. The lowest electricity tariffs in Cambodia, those for pumping in the agricultural sector, stand at 12 cents per KWh.
Access to inexpensive renewable energy plays a large role in deciding where manufacturing will flourish and where it will not. Cambodia has ample resources when it comes to renewable energy. But along with that good fortune comes a responsibility to get the regulations right.