VIETNAM—POWER, ENERGY, AND THE AFFECT OF RECENT TRADE AGREEMENTS EU VIETNAM FREE TRADE AND INVESTMENT PROTECTION AGREEMENT AND THE COMPREHENSIVE AND PROGRESSIVE TRANS PACIFIC PARTNERSHIP AGREEMENT

Vietnam has had major stressors placed upon its power and energy grid for years, and it is only accelerating. At a recent April, 2019 conference on renewable energy in Ho Chi Minh City, experts noted that annual energy consumption in [Vietnam] had risen by 10 per cent in recent years, and the country was at risk of facing power shortages in the 2020s. Several factors have had an impact on this event a 2018 Harvard University study dubbed, “a crisis of success”. The major contributing factor was inefficiencies in the utilization of energy resources and infrastructure. Over time, these inefficiencies have compounded the problem Vietnam faces now with their entry into the European Union—Vietnam Free Trade (EVFTA) and Comprehensive and Progressive Trans Pacific Partnership (CPTPP) agreements. Luckily, those challenges may be alleviated if Vietnam changes their regulatory environment and embraces a new operating paradigm based on a global trade perspective. The transition may at times be turbulent, but necessary for Vietnam to achieve robust, sustainable development to meet their future needs.

Renewable Energy under EVFTA and CPTPP

Both the CPTPP (Chapter 20) and EVFTA (Chapter 13) require the parties to mitigate any damaging effects to the environment by trade practices and to incorporate any other treaties the parties are signatories of into the agreements. As Vietnam and the other parties of both the EVFTA and CPTPP are signatories to the United Nations Paris Agreement of 2015, this means Vietnam is required to reduce its traditional coal-fired power plants in favor of cleaner or renewable energy sources. The EVFTA and CPTPP specifically mention renewable energy as the preferred alternative, and the parties all agree to promote trade to that end.

Vietnam has been making strides to address their energy utilization situation such as the Power Development Master Plan for the 2011-2020 Period with the Vision to 2030 (revised PDMP VII). PDMP VII, for example, sets out to increase energy supply from solar power from the current negligible rate to 0.5% by 2020 and 3.3% by 2030, or, 850MW solar capacity by 2020, increasing to 12GW by 2030. PDMP VII is coal-centric, which is counter to what both the EVFTA and CPTPP call for. One reason for the coal-centric approach is that it is established, known, and cheaper—it is the path of least resistance—which is one reason why Vietnam does not place tariffs on imported coal from the US, but it does place a 20 per cent tax on its own domestic offshore natural gas (which is by-far a cleaner alternative). PDMP VII also sets forth the goal of universal connectivity to the national power grid for all of Vietnam by 2030. It is a lofty goal, but it is achievable. The best chance of success for the 2030 goal is to restructure the regulatory environment to favor and exploit renewable energy sources. PDMP VIII is the next evolution for Vietnam’s energy strategy (slated for year-end 2019) and—keeping with the global investment mind-set—Vietnam should have a blend of private and public sector representation on that advisory board to ensure CPTPP and EVFTA renewable requirements and opportunities are fully integrated.

Against this backdrop, how can the EVFTA and CPTPP help Vietnam achieve sustainable energy development? Concerns from the private sector have always plagued Vietnam’s regulatory framework. Permitting, risk-allocation, land use impediments, financing, and investment protection have been major causes for project derailment in the past. The regulatory environment has been the biggest hindrance to successful exploitation and integration of renewable energy. However, Solar Power holds particular promise.

Solar Renewable Power

Solar power (according to PDMP VII) is to provide the second-largest amount of renewable energy in Vietnam by 2030—at 3.3 per cent. That figure should be adjusted higher with the incorporation of a more aggressive renewable plan in PDMP VIII. On a macro-level, solar farms are becoming more and more prevalent in Vietnam’s southern regions with most of them being developed by foreign investment. Major investors in Vietnam in the approval, construction, or completion stage include
German ASEAN Power, B.Grimm Power Public Co Ltd, Trina Solar, Schletter Group, and JA Solar, to name a few. Twenty-five solar farms have signed power purchase agreements (PPAs) with EVN, not to mention another 221 projects are awaiting approval, with a combined 13,000MW of potential output. Reuters, Inc. suggests that Vietnam’s electricity sector will be bigger than Britain’s by mid-2020s.

EVFTA and CPTPP Impacts on Solar Sector

The driving force behind this level of investment so far has been the CPTPP (notably Japan and Korea); however, with the recent enactment of the EVFTA, further investment and expansion is a realistic expectation as there are no foreign-ownership restrictions placed on investors in those agreements. Furthermore, the European Union—Vietnam Investment Protection Agreement (EVIPA) grants specific safeguards for investors regarding the free transfer of capital based on foreign exchange convertibility as well as dispute resolution governed by international arbitration rules. These have been points of contention in the past for EU investors. On a broader scale, Vietnam, the EU, and the CPTPP signatories will all benefit as reduced tariffs and duties on the machinery and hardware to produce solar facilities will make it more cost-effective to develop that sector. Large-scale investment should be noticeable in the immediate future, and should be the definitive driver after five years when Vietnam removes restrictions on local-content and domestic partnering requirements in the EVFTA. Engineering services from the EU to support renewable infrastructure will also thrive as restrictions on that service in Vietnam are relaxed, promoting technical expertise and experience exchange and cooperation. These services will be especially crucial in upgrading and enhancing Vietnam’s grid capacity to maximize renewable energy integration into it.

Vietnam is making progress on changing their regulatory framework for renewable energy utilizing input from the private sector. An example is the latest change to the Feed-In-Tariff (FIT) regulations for connectivity to EVN national grid. Up until 30 June 2019, there was a flat FIT of US $0.0935/kWh regardless of size or scope of project. The low FIT coupled with high investment costs in newer technologies has always been a point of contention for private developers. As of 01 July 2019, the FIT system was revamped and broken-down by type of solar project and zones of irradiance.

The regional scheme is determined by annual levels of irradiance and is broken-down into four regions. Regions with higher irradiance are imposed a lower FIT while remote regions with lower irradiance are imposed a higher FIT. This is a direct result of government responding to private investors’ concerns.

Rooftop Solar PV (less than 1 MWp)

The FIT schedule also applies to smaller-scale solar rooftop development. According to Vietnam Electricity (EVN), 1,800 customers, including offices, businesses and households, are installing rooftop solar systems with a total capacity of 30.12 MWp. In Ho Chi Minh City, EVN has installed rooftop solar systems with a total capacity of nearly 1,130 kWp and is continuing to deploy other systems. EVN general director indicated this amount was far below the potential of Vietnam, and directly attributed the reason to a lack of specific regulations about electricity purchases when households connect their solar power systems to the national grid. The previous flat FIT applied to rooftop solar generating less than 1 MWp as well, but was a convoluted regulatory situation on how-and-who-gets-paid-when. Now, new rooftop solar constructed or installed on or after 01 July 2019 that generates less than 1 MWp has the option of: 1) negotiating their own price between buyer and seller (as long as the project is not connected to EVN national grid) or 2) accepting the FIT schedule for the region it is located in and connecting to the EVN grid.

This is a major change and development for the solar market. The Direct Power Purchase Agreement (DPPA / PPA) allows for individuals or organizations to install rooftop solar projects and sign their own buy/sell contracts among other individuals or organizations without connecting to the EVN national grid. Any excess power generated may be sold to EVN at the established FIT for the region. This can have an enormous impact on the load capacity of the current EVN grid by reducing demand on it.

The rooftop solar sector will be a key part of the puzzle in rectifying Vietnam’s energy inefficiencies. With EVFTA and CPTPP countries enjoying reduced or no tariffs on hardware and other products to support the rooftop solar sector, coupled with the regulatory reforms, it should only be a matter of time before there is a PV panel on every residential and commercial rooftop in Vietnam.

Summary

Vietnam has been struggling with efficiently growing and sustaining its energy and power infrastructure. The regulatory environment has traditionally been one of the major hindrances to private investors in infrastructure development. Although there is always a certain amount of uncertainty in any project of this nature, both the public and private sectors would serve their communities greatly by coming to a reasoned solution that suits both. There has been notable progress by Vietnam on this regulatory-front, such as PMDP VIII and the revised FIT and DPPA. Hopefully there will be much more to come in the latter-half of 2019 and into 2020. The CPTPP and EVFTA agreements have been (and will be) a major factor in Vietnam’s infrastructure development goals. Utilizing those agreements and advice and input from the private sector, Vietnam’s power and energy situation will be poised to efficiently and effectively capitalize on its enormous potential—especially with renewables.

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Please do not hesitate to contact Dr. Oliver Massmann under omassmann@duanemorris.com or any other lawyer listed in our office list if you have any questions on the above. Dr. Oliver Massmann is the General Director of Duane Morris Vietnam LLC.
THANK YOU VERY MUCH!