Following the issuance of Decision No. 11/2017/QD-TTg of the Prime Minister on mechanism for encouragement of development of solar power in Vietnam (Decision 11), on 12 September 2017, the Ministry of Industry and Trade officially released Circular No. 16/2017/TT-BCT guiding Decision 11 (Circular 16). Circular 16 is aimed at providing regulations on formulation, approval and amendment of the national as well as provincial power master plan. In addition, the solar Power Purchase Agreement (Solar PPA), which is of great interest for many foreign investors, is also provided in Circular 16 as a mandatory template for future on-grid and rooftop solar power projects with only minor changes expected to be permitted during the contract negotiations.
In essence, the Solar PPA is almost the same as current applicable PPAs for renewable projects. This creates bankable issues for solar projects and a hindrance to foreign investors planning an investment in the sector.
Feed-in-Tariff (FiT)
Circular 16 repeats the solar FiT for power output from on-grid projects and excessive power output generated from rooftop projects specified in Decision 11 to be VND2,086/kWh or US 9.35 cents/kWh. This FiT only applies to on-grid projects and rooftop projects coming into commercial operation before 30 June 2019 and will remain within 20 years from the commercial operation date. We note that while the FiT for power output from on-grid projects is adjusted according to the fluctuation in the VND/USD exchange rate, meaning at any time during the year, it is not the same for rooftop projects. Instead, the mentioned FiT for excessive power output generated from rooftop projects remains the same throughout the first year of operation, and the new FiT for the next year will be adjusted based on the announced VND/ USD exchange rate of the last working day of the previous year.
EVN’s rights and obligations as the sole off-taker
EVN is delegated to purchase all power output generated from solar power projects pursuant to terms and conditions of the Solar PPA within 20 years.
It is noteworthy that the Circular 16 and the Solar PPA list out certain circumstances where EVN is not obliged to purchase power as negotiated with the seller, for example:
- when EVN is in the process of installing equipment, or making repairs, replacement, inspection or examination of the grid connection of the seller’s power plant;
- when the transmission grid or the distribution grid connected to EVN’s grid has a problem or grid equipment directly connected to EVN’s transmission grid or the distribution grid has a problem; and
- when EVN’s grid needs support to recover after the incident in accordance with the provisions of operation of the national power system and the standards, technical regulations of the electric industry.
Unfortunately, the current Solar PPA does not include provisions protecting the interests of the seller in the abovementioned circumstances. It is quite risky for the producer if the output is ready to be fed to the grid but the connection is not available to do so. Absent a clear indication of whether the Solar PPA is a ‘take or pay” agreement, investors will find it difficult to secure and ensure the profits and revenue of their projects.
Dispute resolution
The Solar PPA allows either party to the agreement to bring the dispute to local courts for litigation and other energy-related state bodies of Vietnam (General Directorate of Energy and the Electricity Regulatory Authority of Vietnam) for mediation and resolution.
The Solar PPA does not provide for international arbitration to be an option to resolve the dispute. This could be a great concern for foreign investors, especially those of large utility scale projects.
Other key issues of concern
- No Government guarantee to enhance the credit of EVN as the sole off-taker;
- No provision addressing the risks of changes in applicable laws; and
- The Solar PPA is required to follow a specific template, which is not bankable.
Conclusion
Although these abovementioned bankability issues remain in the Solar PPA as the same for other renewable energy PPAs, we have assisted our clients on different large scale power projects, also in the Renewable Energy sector and managed to win bankable PPAs with EVN. We strongly believe that our track record experience will help investors and the same will be done for the Solar PPA.
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Please do not hesitate to contact Dr. Oliver Massmann under omassmann@duanemorris.com if you have any questions or want to know more details on the above. Dr. Oliver Massmann is the General Director of Duane Morris Vietnam LLC.