Recent developments and the importance of the power and energy sectors in Vietnam
Vietnam’s GDP grew by 8.02% in 2022 as opposed to merely 2.58% due to COVID-19 in 2021, which is the fastest yearly growth rate since 1997. Vietnam’s GDP growth for 2021-2030 is forecasted to reach an average of 6.6%/year and an average of 5.7% for 2031-2045. Considering the unpredictability and instability of the global situation, this is a remarkable result and anticipation. And, to cement the steady growth of Vietnam, it is important to speed up the energy transition to match the global trend.
The rapid economic expansion, urbanization, and industrialization of Vietnam are all related to the energy transformation. The strong desire of the leaders of Vietnam has been recognized in terms of the acceleration of the energy transition while also achieving the needs of economic growth and the target of becoming a high-income nation by 2045. In order to increase support for renewable energy, the energy transition is increasingly viewed as a possible engine of employment. Regarding this mater, currently, fossil energy sources remain the primary sources of energy but they are slowly replaced by green energy sources. And, when it comes to green energy, Vietnam is one of the first nations to renew its nationally determined contribution to the UNFCCC in 2020, pledging to cut greenhouse gas emissions. Vietnam requires energy security that is cheap for the general populace and sustainable for its social and economic development, with a goal of going carbon-free by 2050.
Moreover, according to the World Economic Forum’s Energy Transition Index in 2021, Vietnam ranked 65th out of 115 nations in terms of its preparation for the energy transition, with a score of 54, which is at the worldwide average. This demonstrates the chances for Vietnam’s energy transformation that should be taken. Energy security as well as the socioeconomic development objectives of the master plans across industries and sectors will need to be guaranteed by the roadmap for the nation’s transition process towards green and sustainable development. It is believed that more developed countries are of help by providing both financial and technical help.
To accelerate the transition, Vietnam has established the four goals focused on the reduction of coal-fired power and the increment of renewable energy for the energy transition by the year 2030, and the Power and Energy Working Group is prepared to cooperate with the Government to support this effort. Vietnam’s ambitious climate ambitions and a significant increase in renewable energies by 2030 are supported by the signature of the Just Energy Transition Partnership (JETP) between International Partners Group and Vietnam in December 2022, building on the promises made at COP26. This further underlined the consensus among governments, multilaterals, the private sector, banks, and all other significant institutions with an interest in the energy sector that the short-term economic benefits of energy production are far outweighed by its detrimental effects on the environment, and that there are sufficient, more sustainable alternatives to pursue. These JETP targets can be found in the draft Power Development Plan VIII (PDP VIII), a recent draft of which was released in December 2022 and estimates an investment cost of US$142 billion for the years 2021– 2030 (US$126 billion for power generation/sources and US$16 billion for the power transmission grid), the vast majority of which must come from the private sector. With the reform of the Law on Electricity, a framework for enticing greater private investment to aid in the transition will be established.
Until now, the finalization of PDP VIII remains slow-going, especially when it comes to the handling of newly emerging and difficult issues in the energy transition process. According to the leaders of the Ministry of Industry and Trade (MOIT), the MOIT will finalize the PDP VIII to be in line with the socio-economic development of Vietnam and to address the transition of renewable energy properly. Also, it is anticipated that the finalized PDP VIII will not be issued until the MOIT can settle the price dispute with the current investors on the Feed-In Tariffs (FIT) for solar and wind energy.
Renewable under the EVFTA, the EVIPA and the CPTPP
Both the Comprehensive and Progressive Trans Pacific Partnership Agreement (CPTPP) (Chapter 20) and the European Union—Vietnam Free Trade Agreement (EVFTA) (Chapter 13), whereby Vietnam is a member, impose obligations on its members to reduce any environmental harm caused by their business activities. Accordingly, under the CTPPP and the EVFTA, Vietnam must replace its existing coal-fired power stations with cleaner or renewable energy sources because it and the other signatories to the EVFTA and CPTPP are also signatories to the 2015 Paris Climate Agreement. Renewable energy is clearly alluded to as the preferable option in the EVFTA and CPTPP, and all parties undertake to encourage trade in that direction. 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. Vietnam also agrees to promote, develop, and increase the generation of energy from renewable and sustainable sources, including via facilitating trade and investment, under Chapter 7 on Non-tariff barriers to trade and investment in renewable energy generation of the EVFTA. According to Chapter 7, Vietnam committed to a) refrain from adopting measures providing for local content requirements or any other offset affecting the other Party’s products, service suppliers, investors or enterprises; (b) refrain from adopting measures requiring to form a partnership with local companies, unless those partnerships are deemed necessary for technical reasons and that Vietnam can demonstrate those reasons upon request of the other Party; (c) ensure that any measures concerning the authorization, certification and licensing procedures that are applied, in particular, to equipment, plants and associated transmission network infrastructures, are objective, transparent, non-arbitrary and do not discriminate among applicants from the Parties; (d) ensure that administrative fees and charges are transparent and non-discriminating. Moreover, at least 20% of managers, executives, and experts for all service and non-service energy lines must be Vietnamese nationals, unless Vietnamese nationals cannot fill those jobs. However, each enterprise is only permitted to employ a maximum of three non-Vietnamese managers, executives, and specialists.
The bankability of power and energy projects in Vietnam
While the corporate sector generally supports the mentioned initiatives on the increment of renewable energy, more might be done to attract the money required to shift away from coal. In other words, to facilitate the shift to renewable energy, Vietnam will require financially sound and commercially viable energy projects. However, at the same time, Vietnam must also secure a baseload adequate to replace coal in order to sustain grid strength and development. This indicates that in order to transition to renewable energy, hydrogen, wind, and solar with storage, there will need to be a flexible gas/LNG and eventually a large amount of hydrogen as a baseload, scalable behind-the-meter renewables solutions, and significant energy efficiency initiatives. Additionally, it is reasonable to expect Vietnamese government’s consideration of a bankable legal framework, as committed in the EVFTA and the CPTPP, for high-quality energy projects to get finance from the global financial market advance.
Evidence has demonstrated how regulations, such as the subsidized FIT, might boost investment in renewables. However, a number of GWs of these projects that miss the requirements for the Commercial Operation Date are awaiting a price structure that, given the existing legal landscape, makes sense for both investors and purchasers. It still takes time for EVN and investors to reach an agreement on a specific rate for each power plant, even though the MOIT just released the maximum prices for these transitional projects. The sector has been dealing with delays and extension of rooftop solar system and wind and solar power plant development due to the worldwide pandemic and its effects. As a result, investors may have little influence over delays in commercial operations and commissioning. In light of the current situation, a prompt resolution is more important than ever to take care of this problem as we wait for new tariff regulations for renewable energy projects.
It will be necessary to change present laws in order to address the finance issues mentioned by EVN. There is still green financing available that provides private investors with advantageous rates to decrease CO2, but it is crucial to enhance the legislative environment around green financing operations to provide more clarity on the requirements for issuing green finance. In the context where off-grid power projects are expanding, particularly rooftop solar systems with onsite corporate PPAs and private sector self-investment. These should be examined to enable EVN to work out price for accessing the national grid because off-grid models have demonstrated that producers and consumers are capable of creating long-term, sustainable arrangements.
In the context of the JETP which provides important finance to operationalize Vietnam’s net-zero targets, the early approval of the pilot program for the offsite corporate direct PPA (DPPA) would be much welcomed. Such a pilot program is an important mechanism to attract investors and private investments, not only in the energy sector but also in other sectors where companies are looking for clarity in the ability to source affordable green energy when making investment decisions. The clock is ticking for a lot of critical commitments in the space of renewable energy that our members have made. In order to ultimately establish and operate the offsite corporate DPPA pilot program in the first quarter of 2023, we expect to have the government’s cooperation.
Recently, investors have expressed that offshore wind has a high potential in Vietnam and in the future contributing as a baseload for the national grid. Recently, many foreign investors are interested in developing large offshore wind farms in Vietnam. However, to develop a large offshore infrastructure project such as offshore wind farms, Vietnam must address the current legal uncertainties. One of the significant issues to be addressed is the new draft Decree amending Decree No. 11/2021/ND-CP on assignment of certain sea areas to organizations and individuals for exploitation and use marine resources (Decree 11) and the Sea Law. Since the project developer might not be able to mortgage the sea area (as part of the security package) to the project lenders if there is no property right over the designated sea area, the amendment of Decree 11 should resolve this issue. If the conditions are right, Vietnam can draw in billions of dollars in funding for projects and the supply chain, generate thousands of employment, and establish offshore wind as a reliable engine of economic growth. Additionally, there is potential for locally produced iron/saltwater batteries and competitively priced, environmentally safe rare earths for batteries and energy generation, both of which is believed to be advantageous for Vietnam over the long term.
Another crucial component of the long-term fix is hydrogen. Although it is now too expensive for use in power plants, it is cost-effective for industrial and agricultural application. Development, research, and international funding should eventually lower prices. Vietnam should make sure that initiatives like offshore wind and LNG to power are developed with hydrogen in mind. From the economic perspective of developing the Vietnamese private sector, the Government must ensure that new power projects are helping to drive up Vietnamese private sector capacity. Such large-scale foreign investments have enormous potential for expanding the tax base and supplying the vitality required for economic growth, as well as for preparing entire Vietnamese generations of future Vietnamese businesses with the requisite technical and management leaders.
Summary
With the signings of the EVFTA, the EVIPA and the CPTPP, investors from more developed countries now can bring their technology and know-how, especially those from countries with high level of development in renewable sectors to Vietnam with less market access barriers and being more secured. This can bring a great deal of help for Vietnam to facilitate the transition to renewable energy from 2023 to 2030, given that Vietnam itself adopts the initiatives of the mentioned international instruments into its legal system. Moreover, under the CPTPP and the EVFTA, it is possible for foreign investors to sue Vietnam’s Government for its investment related decisions according to the dispute settlement by arbitration rules. The final arbitral award is binding and enforceable without any question from the local courts regarding its validity. This is an advantage for investors considering the fact that the percentage of annulled foreign arbitral awards in Vietnam remains relatively high for different reasons.
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 the draft PDP VIII and the revised FIT and DPPA. However, works are expected to be done from 2023 regarding the finalization of the PDP VIII, the settlement of the FIT with the investors and new regulations for Vietnam to achieve its goal in energy and power sector. 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.