Lawyer in Vietnam Oliver Massmann Renewable Energy

Vietnam’s wind power potential

In accordance with the growth of Vietnam’s economy and population, the country is thirsting for energy. Vietnam’s energy requirement increases by approx. 15% per annum. In 2008, the growth of the Gross National Product has almost doubled. It is expected that a further increase by at least 10% per annum will take place between now and 2020. It is clear that energy is an indispensable component for the reinforcement of Vietnam’s economic growth and particularly for the reliability of the economy in the production sector. The government oriented itself towards the global trend and is involved in finding alternatives to traditional energy sources. Now, it has put renewable energy at the top of the agenda.

The MOIT published the 6th Master Plan for the Development of Electricity in Vietnam. According to the target of the government to increase, from 2010 on, the production of renewable energies by 100-200 MW per annum, a further plan is drawn up. The government’s target is to satisfy, from 2020 on, 5% of the Vietnamese energy requirement via renewable energies. The latest feasibility studies make clear that 8.6% of the whole country has wind power potential (i.e. with a wind speed higher than 7 meters per second). Vietnam’s wind potential is highest in the central coastal region (including QuangBinh, Quang Tri, ThuaThien, Hue and BinhDinh) and in the south (including NinhThuan, BinhThuan, Lam Dong, TraVinh and SocTrang). Experts forecast Vietnam’s a total potential for wind power to be possibly more than 500,000 MW! It corresponds to 650 coal power plants!

Against these breathtaking forecasts, the present production of wind power is very small. Presently, it results mainly from the inadequacies in the integrated network related to the electricity prices – namely the current price paid by EVN for network-dependent electricity. It is considerably lower than that what is needed to make wind power project financially viable. Although the MOIT has issued in June last year a decision (“Decision 18”) where the presented electricity prices are based on avoidable costs, it is difficult to predict, just in the short term, how network-dependent wind power can be competitive without capitalizing funds. (The presentation of calculation of avoidable costs would go beyond the scope of this article.) A possible source of the funds could be the introduction of various taxes. These could include an income tax on electricity, a carbon emission charge or a deduction of the mineral exploitation tax. The aim of the GTZ project in Vietnam is to examine the possibility of such options in order to eventually come to a viable closing of the tariff gap.

Electricity price discovery
Although the network dependence makes it harder for wind developers to enter the competition in pricing without the use of subsidies or cross-over financing, the network independence is another story. Latest feasibility studies in several regions Vietnam’s have shown that network-independent wind projects can be cheaper than diesel alternatives. Moreover, they offer attractive profits for investors. However, network-independent developers should be aware of Vietnam’s poor network facilities. It could have big influence on the bankability of the project. Besides, network-independent operators should also remember that the Vietnamese law does not provide clear framework conditions for other parties than EVN for (i) free negotiation of an electricity tariff and (ii) entering into a network-independent contract with an independent electricity producer. It is true, even though the development of a competitive electricity market is considered. In other words, the single-buyer model with EVN as public buyer is the standard.

Financing and bankability
Apart from the abovementioned electricity prices, Vietnam’s lack of policy and legislative framework conditions contributed also to difficulties which the wind developers are confronted with. Although the current BOT (Build-Operate-Transfer) regime provides for several conveniences (including a long list of investment bonuses), a lack of “wind-specific” regulations for investors in this sector is to be reported. The introduction, incorporation and implementation of such regulations are necessary in order to ensure a comprehensive and long-term restructuring of Vietnam’s tariff system. This is absolutely crucial for the development of secure wind power projects. The bankability (i.e. the ability to ensure financing and debt service and to pay profits to investors) is one of the keys to a successful wind power project in Vietnam. Project developers looking for investments for a wind power project in Vietnam have to ensure the bankability of the legal structure and documentation of the project first.

Legal problems
Main problems in the area of law related to a wind power project may be generally subdivided into the phase of development (development and financing) and the phase after the development (construction).

Development and financing
Currently, there are a lot of activities of developers of renewable energies in Vietnam. Many of them are small to middle-sized enterprises with limited financing capital. In principle they cooperate with bigger investors or even pension institutions, many of which hold big amounts of money for wind power projects.

As contrasted with usual market conditions and the lack of clear legal framework regulation, the political support for wind power projects and the obvious opportunity in the network-independent market have aroused the interest of a large number of investors for this sector. This, on the other hand, prompted the developers to begin the work on the projects before bringing investors on board.

In practice, the developers have to reach an agreement with EVN first. (As mentioned before, ENV will usually be the buyer.) For, only after such an agreement is reached, the developer is able to apply for an investment certificate. (Such a process requires the applicant to reveal its financial and commercial possibilities.)

Unfortunately, the developers are fully dependent on the discretion of the competent authority as regards the issue of investment certificates. A less oppressive approach for wind developers would be to issue the certificates first, and then to enter into negotiations with EVN. In order to offset the risk related to discretionary powers of the decision makers by clear criteria, the investment certificates for wind projects would have to be guaranteed alternatively. In order to save unnecessary expenses (in terms of time and money), the developers should contemplate signing a declaration of intent with EVN. Afterwards they should enter into a legally binding agreement on cooperation containing project details and benchmark data. These could be later simply copied to the final version of the project documents.

Before a project can be regarded as secure for the bank, the banks and investors will usually ask for at least 12 months of local wind measurements as well as wind studies of good experts in the field.

As soon as the wind project developer has completed the first steps (feasibility study, etc.), it will be necessary to secure the investor for the project (in some cases the developer will already have an investor at its side). In this time, the developer and the investor will necessarily negotiate with each other and draw up a lot of documents. The substance of the documents will probably depend on the structure of the investment. However, it can involve a participation agreement, a general framework for the development in the future of wind power projects or a contract of participation in which the parties agree on forming a new enterprise with the intent to develop more than one single project. The documents will typically fix the roles of the parties within the project, its financing in the future and its development. If the financing factors of the project reside in coal trading, the developers have to register their projects with a competent authority according to the Kyoto Protocol. It is possible in Vietnam, though everything is still nascent. On site, there are a lot of advisers who operate in this field.

The phase of construction
Either before or after the investor is on board (but in each case before the construction) it is necessary to establish the project enterprise and to secure investment certificates issued by competent authorities. When applying for an investment certificate for a BOT project, it will be necessary to deliver the BOT agreement as a part of the application to the competent authorities. Finally, the project enterprise has to conclude negotiations with regard to a wide range of important project contracts including the land lease contract and the power purchase agreement (PPA).

In view of the renewable energy supporting policy which is also reflected in the Vietnamese laws on electricity, obtaining of the investment certificates is not as complicated as expected. Nevertheless, the investor should make sure that the investment terms are precisely stipulated in the license (preferably step by step investment against premium payments). Otherwise, time consuming adjustments will be necessary at a later stage.

The land or real estate lease contract in Vietnam should be kept rather simple, though the aspects of land sale approval and compensatory payments may be fraught with difficulties. Usually, the duration of such contracts should correspond at least to the loan repayment plan and, in addition, a considerable period for profit generation after the repayment of the loan should be agreed (as a rule 25-30 years). Furthermore, it is important to make sure that the land use rights of the project enterprise can be provided for the lender as security and are transferable.

The MOIT has introduced recently a standard Power Purchase Agreement (PPA) for small and middle-sized power plants for renewable energies. They have a capacity smaller or equal 30 MW. This Power Purchase Agreement should be signed before starting the construction. Under the Power Purchase Agreement, EVN (in case of network-dependent network) – or in rare cases also other buyers – undertake to purchase energy from a project enterprise for a definite period and at a specified rate. The PPA is probably the most important agreement to be negotiated because it determines the future income from the project. It is crucial that, according to the PPA, the project enterprise cannot be burdened with a penalty if the power supply is affected by small amounts of wind. In view of the fact that at the moment there is only one buyer (ENV) for network-dependent power projects, the negotiations may be sometimes unilateral. Moreover, the electricity producers have to consider that the consumers (according to the Electricity Law) have a statutorily regulated right to renegotiate the purchase price in the medium term. They have to take it into account in their project planning.

The construction
The construction or EPC (Engineering, Procurement and Construction) agreement for wind power projects in Vietnam should be finally reviewed. Banks prefer in principle distributors having long experience (because they pay under guarantee and/or can provide securities of parent companies).


The renewable energy supporting policy of the Vietnamese government develops gradually towards introduction of a law providing for a tariff system. Especially as the government is searching for financial solutions in order to close the network-dependent price differences between non-renewable energies and power energies, we can expect to find an onrush of interests in this area. Many wind power developers watch the Vietnamese market narrowly, according to their capabilities in this sector.

Investors who enter the market at this early stage are destined with high probability to gain advantage over new entrants. The time spent for establishing contacts and complete understanding of the Vietnamese legal and practical environment is time well spent: Especially currently, in the time in which the interested parties are given the unique opportunity to play a role in the development of the policy and legislation.

Please do not hesitate to contact Oliver Massmann under if you have any questions on the above. Oliver Massmann is the General Director of Duane Morris Vietnam LLC.



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The opinions expressed on this blog are those of the author and are not to be construed as legal advice.

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