Category Archives: Vietnam – Energy

Energy projects regulations

Land speculation clouds Vietnam’s renewable energy projects

Vietnam’s southern province of Ninh Thuan continues to see growth in its renewable energy resources, with Spain’s Siemens Gamesa Renewable Energy (SGRE) winning in its bid for the second phase of the existing 39MW Dam Nai wind farm.

 

According to the plan, the company will supply 12 turbines by October this year. SGRE will also handle the management and maintenance of the facility over the course of the next ten years for Dam Nai’s operator, independent power producer Blue Circle.

 

The first phase of the Dam Nai wind farm kicked off in April last year, with total investment capital of US$15 million. During the first phase SGRE installed three turbines, which are already operational. Siemens Gamesa has said it expects “significant growth” in Vietnam over the coming years as the country “begins to utilise some of the best wind resources in Southeast Asia.”

 

As of April 2018, the country had 197MW of installed wind power capacity, split between 98MW onshore and 99MW offshore.

 

On top of turbines, the province of Ninh Thuan has also been targeted by firms for solar power development, thanks to its status as one of the driest areas of the country. A number of companies have already signed up to develop projects in the province. However, despite excellent solar conditions, a growing economy and a strong manufacturing base, Vietnam’s solar ambitions have been relatively modest compared to its near-neighbors in the region.

 

Not all blue skies

 

Vietnam is among the most promising renewable energy markets in Southeast Asia, offering significant opportunities for investment in clean energy, especially wind and solar power. With a population touching 92 million and energy demand forecast to grow by 13 percent annually over the next four years, the country is eyeing an energy policy that includes a substantial mix of renewables.

 

According to the government’s revised Power Development Master Plan VII, Vietnam needs investment in the power sector amounting to US$150 billion for the period up to 2030 in order to keep pace with the nation’s projected annual growth of 10-12 percent. The renewable energy sector is considered a priority for investment with contributions set at 7 percent by 2020 and 10 percent by 2030.

 

A large number of firms have already been lured to take advantage of the market’s huge potential. A recent report by USAID (United States Agency for International Development) found that in the solar power sector, as of 2017, more than 100 new projects had been planned, including 70 in the province of Binh Thuan.

 

There are, however, issues hindering the sustainable development of the sector. These include poor administration and low transparency, leading to corruption among investors and officials. The major risks are related to programming and licensing of investors and access to land. The rosy picture of deals hides a more problematic truth.

 

Many investors registering projects don’t intend to join the market immediately, but instead are snapping up advantageous plots of land. For wind and solar power projects in particular, location is everything. Areas with strong and consistent natural wind or intense sunshine will inevitably bring better returns for firms who set up shop with their panels or turbines.

 

One expert said that nearly all land plots in advantageous positions are now occupied, though the renewable power plants remain on paper, and may never be developed. This speculation over land poses a risk of harming the market, and slowing the much-needed transformation of Vietnam’s energy sector.

 

As the top spots get booked up, real investors will have to stump up a premium for their projects, or shell out fees for intermediaries. Transparency in development programming, licensing procedures and project execution supervision is a must for the market to run effectively.

 

Coupled with relatively low feed-in tariffs (FiT) and arduous legislative hurdles to overcome, the added headache of a premium on land may cause investors to look elsewhere when considering locations for their renewable power projects.

 

A recent StoxPlus report has identified 245 renewable energy projects currently in Vietnam, including wind and solar power as well as biomass, which are being deployed at different stages. Obviously, if all planned projects begin operation the country’s targets would be met overnight. However, of the total projects, only 19 percent have reached the construction phase and 8 percent have begun operation. Most projects are still in the preparatory stages.

 

Investors are also struggling with a lack of clear information about the market. Even though information about renewable energy projects in Vietnam has been floating around, there is no clear details on the number of projects or their development status, creating confusion and uncertainty among developers and other stakeholders.

 

Joint ventures between foreign and domestic enterprises may help to address some of these bottlenecks – with local firms providing some much-needed information and international players adding the technical know-how that is lacking from the domestic market. This is, unfortunately, only a partial solution. In the long term, a stronger legislative framework will be needed to support to sustainable development of the renewable power sector in Vietnam, and help the country to meet its targets and support its booming energy needs.

 

For more information about Vietnam’s renewable energy sector, please contact Giles at GTCooper@duanemorris.com or any of the lawyers in our office listing. Giles is co-General Director of Duane Morris Vietnam LLC and branch director of Duane Morris’ HCMC office.

Hanoi has long road ahead to become a ‘smart city’

Wirelessly managing streetlights to cut the cost of energy. Sensors providing real-time alerts on water leaks and air pollution. Intelligent management of public transport and road networks to avoid congestion. These are just some of the benefits a ‘smart city’ could provide, and if authorities and investors succeed, these advancements could be coming to Hanoi in the near future.

 

Plans are already in place to turn Vietnam’s capital into a smart city by 2030, with priority areas identified as health, education, transport and tourism. Taken together, the application of technology in these areas will bring significant improvements to residents’ quality of life and boost the city’s tourism potential.

 

Hanoi has already applied smart systems to monitor car parking in some districts, and an anticipated roll-out of this technology across the whole city aims to provide information on traffic status and better manage public passenger transport.

 

Similar implementations are planned for other sectors. With input and investment from major foreign players, the city sees the deployment of modern IT infrastructure utilising the Internet of Things (IoT). Citizens will be connected to their homes and primary services, as well as traffic infrastructure and vital information about their environment. For this to happen successfully, work is needed to set up modern infrastructure in transport, healthcare and education.

 

In order for these systems to be implemented and managed effectively, foreign know-how will be needed.

 

Intelligent implementation

 

According to local authorities, the process of transforming Hanoi into a smart city will take place over three phases. The first, from 2016 to 2020, will consist of building the foundations and infrastructure needed, as well as implementing smart applications in traffic, tourism, environmental management and security.

 

The second phase, from 2020 to 2025, smart city solutions will be put into operation and a digital economy will be formed. In the third phase, from 2025 to 2030, the different parts of the project will be connected and Hanoi will become a functioning smart city.

 

The capital city is not alone. According to the Ministry of Information and Communications, the government has set a target of creating five smart cities by 2020, and is designing

criteria for such projects, making it more convenient for foreign investors to jump in.

 

The southern hub, Ho Chi Minh City, has its own plans to get ‘smart’ in the near future. Tran Vinh Tuyen, deputy chairman of the city People’s Committee and head of the smart city management board plans “a comfortable, positive, healthy and safe living environment with convenient public transportation, good healthcare, less crime and clean water and environment.”

 

In addition to these benefits, smart cities will bring sustainable economic growth, and help develop a digital, knowledge-based economy. Such moves are sure to generate interest and attract investment.

 

Not all plain sailing

 

Domestic firms like Viettel, VNPT, FPT, and CMC are keen to get involved with the development of smart cities in Vietnam. Various countries with experience in smart cities have also expressed a desire to cooperate with Hanoi in this endeavour. In particular, leaders from Singapore have shown a willingness to partner with Vietnam on hi-tech parks and software industrial zones, as well as working together on the smart city project. In addition to funding, Singapore is ready to provide training and support to implement and manage smart city technology and software.

 

With Vietnam continuing to grow rapidly, concerns over rising energy demands are high on the agenda. As a key component of a smart city, a greater focus will be needed on green and sustainable energy if the country is to successfully fuel onward growth.

 

There is clearly a lot of potential in this sector, however, energy is just one challenge standing in the way. Specifically, Hanoi faces problems in ICT infrastructure, traffic congestion, water shortages, wastewater treatment and increasing environmental pollution. A dearth of qualified human resources will also present difficulties in implementing some of the proposed solutions.

 

However, for many sites, construction has yet to begin. A lack of clear regulations is proving to be a major roadblock for the development of smart cities, with the implementation of a US$37.3 billion smart city in Hanoi’s Dong Anh district struggling to get off the ground. More than 20 large Japanese firms, including Sumitomo, Mitsubishi, Panasonic and Tokyo Metro have signed up to provide various services but are yet to begin work.

 

The 310 hectare project will be designed by Nikken Sekkei Group and is expected to be completed in 2023, if they get the green light.

 

In this case it is authorities lagging behind in the provision of clear criteria. The novelty of such projects is one issue, with city leaders unsure on how these new developments will fit into existing city-planning norms.

 

If the target of five smart cities by 2020 is to be met, the government will need to come up with some clear and detailed legislation soon, so that both investors and authorities are happy with the planned projects. Of course, updating regulations in Vietnam can prove to be a drawn-out affair and investors may be waiting some time before ground is broken on the cities of the future.

 

For more information about investment in Vietnam, please contact Giles at GTCooper@duanemorris.com or any of the lawyers in our office listing. Giles is co-General Director of Duane Morris Vietnam LLC and branch director of Duane Morris’ HCMC office.

Vietnam steps up sale of SOEs

Hopes abound that a new Decree will drag the near-moribund process of privatising large State-owned enterprises (SOEs) into a new and more efficient phase.

 

Over the past 30 years, the restructuring of SOEs has been a key component of Vietnam’s economic reforms under Doi Moi (renovation). The process has been undertaken by successive governments and is a central pillar to creating the business-friendly climate desired by the current leadership.

 

Nevertheless, it remains largely a work in progress. According to a report by the Central Institute for Economic Management (CIEM), since 1992, Vietnam has ‘equitised’ over 4,500 enterprises (‘privatized’ being considered an unsuitable term for Vietnam and not always accurate anyway given the propensity for the State to maintain controlling stakes).  The fact is that many of these took place in a short period of time and were smaller production units of large conglomerate-type corporations.  The CIEM report concluded that progress is below expectations. SOEs have struggled to attract strategic investors and sale of shares has not reduced the level of State budget in SOEs’ charter capital, as was hoped.

 

There are multiple reasons for the disappointing progress including restrictions on foreign ownership, and the State’s desire to maintain ultimate management control.  Opaque valuations and concerns over transparency also deter strategic and other investors from getting involved in the process and ultimately slow it down.

 

To continue growing, Vietnam is under increasing pressure to reform the equitisation process for its SOEs, with new efforts being made to accelerate the government’s divestment. Under plans announced earlier this year, the government will equitise a further 137 SOEs in the 2016-2020 period.  Many of those slated are large and some can be considered the cream of the crop.

 

This renewed motivation is driven in large part by the government’s need to mobilise financial resources to deal with a rising fiscal deficit and public debt. The country’s obligations under a number of free trade agreements also provide impetus to break up the big entities.

 

Determining demand

 

Recently, a significant change was announced in a bid to speed up equitisation of SOEs: the law will change to allow book building as a means of determining interest and price for IPOs of SOEs.

 

Up until now, the equitisation of Vietnam’s SOEs has been handled through public auction, direct negotiation and underwriting. Most have adopted the public auction method, but this has proved unattractive to investors, with even big assets like Vinamilk failing to generate the expected interest.

 

Under new Decree 126/2017/ND-CP, the Prime Minister has instructed the Ministry of Finance to prepare detailed guidelines on implementation of book building to facilitate efficient IPOs as part of the equitisation process.

 

This method of price discovery, used widely internationally and now approved for the first time in Vietnam in connection with equitisation purposes, is expected to make the process more efficient and attractive to strategic investors.  Decree 126 also eases restrictions on the profitability of strategic partners (from three to two years), cuts the lock-in period (from five to three years) and provides more detailed guidance on valuations of SOEs generally (notably removing reference to DCF valuation and providing more clarity around valuation of land use rights and goodwill).

 

It is hoped that this move, to take effect from 1 January 2018, will enhance transparency in SOE equitisation and hasten the hitherto slow listing on the country’s stock exchanges. The Decree will have a particular impact on the next wave of SOE IPOs, slated for 2018-19.

 

Energy giants next?

 

An area in dire need of extensive equitisation is the energy sector. In order to ease electricity shortages, attract more investment and boost economic growth the country will need to tackle inefficient State-owned power actors.

 

The issue of power shortages could come to a head in the next four years, with forecasts predicting that annual growth in electricity consumption will start to match, and possibly outpace, the installed capacity growth. If consumption continues to expand at a similar rate to the last decade (an average of 12 percent a year) the country could soon be facing a power crisis.

 

This gloomy scenario is looking increasingly likely, considering that foreign direct investment (FDI) into the manufacturing sector, which accounts for 50 percent of total electricity consumption, has doubled over the past four years to reach US$63.1 billion. Luckily for businesses, the government is keen on keeping this development trend going, and having the electricity to power it.

 

Recent reports in the media state that the government has lined up a series of sizable IPOs of major power corporations, including PV Power, EVN Generation Corporation Number 3 (Genco 3) and Binh Son Refining and Petrochemical Company Limited (BSR). If the above projections on power demand growth are anything to go by, Vietnam’s power sector holds significant potential, and may prove an irresistible offer to foreign firms. This offer, however, is contingent on the government breaking up the energy giants and levelling the playing field for investors. Official approval of the book building method for pricing IPOs is a start.

 

PV Power, the country’s second-largest electricity producer, plans to auction a 20 percent stake through its IPO scheduled for the end of this year, and 28.8 percent of shares will be sold to strategic investors. Meanwhile, the equitisation of Genco 3 is awaiting the government’s go-ahead.

 

The changes above demonstrate a willingness to step up the equitisation of SOEs, with looming budget considerations providing a timely incentive. Beginning next year, the slow process may finally gather some much needed pace and see involvement of foreign players previously put off by the state of play.

 

For more information about Vietnam’s equitisation and IPO processes, please contact Giles at GTCooper@duanemorris.com or any of the lawyers in our office listing. Giles is co-General Director of Duane Morris Vietnam LLC and branch director of Duane Morris’ HCMC office.

Vietnam’s waste-to-energy projects should be low hanging fruit

While alchemists of years past failed to turn lead into gold, technology today can turn waste into energy, and more efficiently than ever before, proving there is not only money to be made from rubbish, but also neat solutions to perennial problems.

Vietnam has long struggled with issues of waste management, with a recent study estimating that Ho Chi Minh City alone discharges 8,300 tonnes of waste each day. At the same time, power shortages and outages remain a part of daily life in parts of the city.

The country’s most popular method of solid waste treatment is still burial, with up to 76 per cent of trash ending up in landfills. Dump sites are prevalent thanks to their relatively low cost, little initial investment and ability to handle most types of solid refuse. However, the increasing amount of waste, lax management and disregard for technical protocols are rapidly making this method unsustainable. A number of environmental incidents have also raised the alarm over the pollution and contamination caused by this method of waste management.

Rapid urbanisation is partly behind the vertiginous increase in waste ­– rising urban populations are creating serious waste management problems for cities all over the world. In Vietnam in particular, with economic growth, urban residents are enjoying rising wages and living standards, in turn producing more waste.

Rising populations are also putting the strain on the country’s power-generation capabilities – a problem that will require significant investment over the coming years.

 Waste not, want not

A number of companies are working in Vietnam’s clean energy space, and while headlines are usually dominated by wind and solar power projects, the waste-to-energy sector has been enjoying some development too. The idea of converting Vietnam’s growing waste problem into a solution for its shortage of power could kill two birds with one stone.

The capital city of Hanoi inaugurated its first industrial waste-to-energy facility in April this year, supplying electricity to the national grid. With a waste treatment capacity of 75 tonnes per day and a power generation capability of 1.93MW, the facility is a pioneering project in Vietnam’s industrial waste treatment industry.

Almost all of the factory’s equipment was supplied by the Hitachi Zosen Company of Japan. With total investment capital of US$29 million, including more than US$22.5 million of non-refundable aid from Japan’s New Energy and Industrial Technology Development Organisation (NEDO) and the remainder extracted from the city’s budget.

With advanced technology from Japan, the factory demonstrates the potential in this area of clean energy and its attraction to foreign investors. If all goes well, the company has plans for another plant in the capital city and more across the country.

Australia’s Trisun Energy is another firm showing interest in this field, having set a major investment target of building up to 20 power-generating waste treatment plants in Vietnam over the next 5 to 10 years. The company, founded in 2011, is currently completing a comprehensive study of a waste-to-power plant in Ho Chi Minh City. According to Trisun, the plant will be capable of burning up to 3,000 tonnes of garbage per day, or more than 40 per cent of the city’s waste.

In addition to Japan and Australia, some leading Finnish companies are at the forefront of addressing the issues of waste and energy.

A delegation of 16 Finnish exhibitors set out some of their plans at the Vietwater 2017 expo, which recently concluded in Ho Chi Minh City. These include solutions for contaminated landfill sites and waste-to-energy projects; the development of biogas technology; and the generation of electricity from biomass and waste.

Doranova is one such firm. Since early January 2017, Doranova has been constructing a landfill gas plant in Binh Duong, north of Ho Chi Minh City. The plant will extract harmful methane emissions from a nearby landfill, generating electricity while reducing environmental pollution. According to the company, the plant will provide additional power generation options from waste materials for residents and businesses in the city.

 Not a wasted opportunity

These projects in Vietnam’s biggest cities represent small steps towards solving the country’s waste epidemic. They also help to diversify the national energy mix, which is crucial in ensuring the supply of energy meets the expected rise in consumption.

The increased focus on the clean-technology sector and particularly energy efficiency, renewable energy technologies and waste management provides business opportunities for international players who have the knowledge, expertise and technology needed in this field. The question is whether Vietnam will take full advantage of the opportunity.

Though a promising start has been made, the widespread implementation of waste-to-energy facilities will require a more concerted effort from authorities. The country’s Ministry of Natural Resources and Environment (MoNRE) has set ambitious targets for the collection, reduction, reuse and recycling of waste nationwide. By 2020, 90% of urban domestic solid waste is to be collected and treated, with 85% recycled and reused.

Indeed, Hitachi Zosen Company (behind Hanoi’s waste-to-energy plant) has expressed concerns over the incentives and investment conditions provided by the Vietnamese government. The company, as well as a number of Japanese investors, are keen on rolling out the waste-to-energy model across the country. However, a lack of favourable investment conditions for foreign investors is holding back the industry. At present, investors are waiting for Vietnam to enact new public-private partnership regulations, before deciding on next-step investments.

The waste-to-energy sector in Vietnam holds a lot of potential, and technological advances mean that win-win solutions to both an abundance of waste and shortage of power are more affordable than ever. Combined with efforts in other areas of renewable energy, and the entry of international players, significant progress can be made in green power generation. As ever, the amount of progress depends on the attractive policies set out by the government. Investors are ready, and Vietnam would be wise not to let the opportunity go to waste.

For more information about Vietnam’s energy sector, please contact Giles at GTCooper@duanemorris.com or any of the lawyers in our office listing. Giles is co-General Director of Duane Morris Vietnam LLC and branch director of Duane Morris’ HCMC office.

Public debt puts the squeeze on government guarantees, stifling project finance projects in Vietnam

Vietnam’s economic success story is evident in the rapid development of its big cities. However, while the country’s growth has outpaced its neighbours, so has its debt; a factor that threatens to de-rail growth.  Not least of all because of the impact on the government’s ability to give guarantees to underpin privately-financed infrastructure.

 

Over recent decades, the government has spent significantly. Priority has been given to roads, export zones and other critical infrastructure. This is evident across the country, where highways, tunnels, factories, airports and metro systems are being expanded, or built from scratch, at an incredible pace.

 

The biggest macroeconomic challenge facing Vietnam today is sustaining that growth. The government needs to be more rigorous about how it spends money, leveraging it better to attract and benefit from private funds rather than prop up State-owned entities.  The looming spectre of public debt will need to be tackled before the country finds itself in a precarious position.

 

Vietnam’s total public debt as of mid-July 2017 reportedly stood at US$94.6 billion, or about US$1,038 per capita. In fuelling the country’s celebrated growth, public debt has increased consistently, from 36% of GDP in 2001 to about 62.4% in 2016. According to an IMF forecast, it will hit 63.3% and 64.3% in 2017 and 2018, respectively, while the self-imposed public debt ceiling is set by the government at 65% of GDP for 2020.

 

Vietnam’s public debt compares unfavourably with the rest of the region, with Thailand coming in at 41 percent of GDP and Malaysia at 56 percent, according to the World Bank.

 

The annual growth of public debt during 2011-15 was 18.4 per cent, triple the annual GDP growth rate, which averaged about 5.9 per cent over the period.

 

A squeeze on guarantees

 

In an effort to tackle the ballooning public debt, the Ministry of Finance (MoF) announced changes to regulations on Government guarantees earlier this year. The adjustment is one of the regulations stated in the Government’s Decree 04/2017/ND-CP (Decree 04), superseding Decree 15/2011/ND-CP (Decree 15), issued on February 16, 2011.

 

Taking effect from March 1, the maximum level of Government guarantees for a programme or project was reduced from the previous level of 80 percent. Decree 04 replaces this with a three-tiered cap on the amount of guaranteed debt as a percentage of the investment capital depending on the size or importance of the project, each lower than the cap established in Decree 15.  In all cases this is far lower than the golden days of Vietnam’s early privately financed infrastructure projects like the Phu My 3 and Phu My 2.2 power projects which both enjoyed near total guarantees.

 

The current highest level of guarantee, set at 70 percent, applies to projects that must be implemented on an urgent basis, and have been approved by the National Assembly or the Prime Minister. Secondly, for projects whose total investment is at least VND2.3 trillion (US$102 million) and have been approved by the Prime Minister, the maximum proportion guaranteed by the Government is 60 percent. A cap of 50 percent will be applied to other projects.

 

In continuing to restructure of the country’s public debt with more stringent monitoring of projects, the decree aims at tightening the provision of Government guarantees and enhancing the management of public debt.

 

However, at a time when Vietnam needs to develop much infrastructure, notably in the energy sector, and requires substantial foreign investment to do so, Decree 04 makes it more difficult for private investors to obtain MoF Guarantees for projects.

 

Ticking debt time bomb

 

Taking the energy sector as an example, questions remain over EVN’s economic health. Tariffs on electricity have long been maintained at below cost levels. The policy of low subsidised tariffs to maintain the competitiveness of domestic industry and keep consumers happy is putting pressure on the government and EVN’s balance sheet.

 

The average retail electricity tariff stood at just above US$0.08/KWh as of 2016, the lowest in Southeast Asia, and only just above EVN’s average generation cost of US$0.075/KWh (excluding transmission and distribution costs). This has depressed sector cash flow and contributed to EVN’s rising debt.

 

This has raised concerns among private sector investors over EVN’s ability to pay for electricity generated as the single buyer, while the current low retail tariffs mean that investors are not confident of negotiating adequate prices for generation projects.

 

With the situation likely to continue, EVN’s financial position will surely deteriorate, leaving it with unsustainable debt and unable to finance capital expenditure. This would force private sector investors to seek increased government guarantees. Unfortunately, as mentioned above, the government is looking to rein in such largesse. As Vietnam’s economy grows, the previously abundant soft loans and ODA are beginning to dry up, meaning that the sources of support for private finance are becoming harder to find.

 

In order to reduce risk, the developers of major infrastructure projects may need to seek out private insurance groups or institutions like the World Bank’s Multilateral Investment Guarantee Agency (MIGA). However, these options obviously don’t come without their own costs. Investors, and ultimately end consumers, will have to take the hit.

 

Much of Vietnam’s current fiscal position can be blamed on poor management. The state-owned giants that have lost their repayment ability on Government-guaranteed loans are passing on the burden to the Government.

 

The sluggish privatisation of State-owned enterprises means that inefficiency will continue. The sooner this process is completed, the better for the economy as a whole. Measures like reducing government guarantees may be prudent, but if Vietnam wants to maintain its economic momentum serious action is needed to first untangle the mess of intra-State bad debt.

 

For more information about project finance matters please contact Giles at GTCooper@duanemorris.com or any of the lawyers in our office listing. Giles is co-General Director of Duane Morris Vietnam LLC and branch director of Duane Morris’ HCMC office.

Vietnam plays a calculated game of risk with new solar PPA

Vietnam appears to be betting on gung ho enthusiasm to kick start solar power development rather than taking bold steps to deliver a stable backbone to the industry.  It’s a gamble that may pay off in the short term but might also saddle the country with poorly-conceived and under-performing projects in the long term.

 

To much fanfare, Vietnam’s Ministry of Industry and Trade (MoIT) released Circular 16 in including final template power purchase agreements (PPA) for the solar energy sector. The circular and PPA templates follow a draft issued back in April this year, and are stated to be mandatory templates for utility-scale and rooftop solar projects.

 

The original draft PPA for utility scale grid projects was met with criticism, and declared non-bankable by most experts and commentators (despite hewing closely to the previously-issued standard PPA for wind projects). Unfortunately, little has changed with the final version of the PPA.  Would-be investors raised serious concerns over the amount and type of risk the PPA sought to shift to investors, and the message delivered was that unless the government was willing to address some of the most glaring problems, few reputable foreign solar players and, just as importantly, few reputable financiers would be likely to sign up.

 

Having largely ignored recommendations provided, the final text does little to inspire confidence. The final PPA does not improve upon the main critical issues highlighted in April.  Issues include a lack of measures to compensate producers for interruption in the ability to receive power, force majeure conditions, contract suspension, and settlement of disputes.

 

Tariff trouble

 

With the FiT rate of US$0.0935/kWh for grid-connected solar power projects confirmed, Circular 16 goes on to outline that the FiT is available for 20 years to projects, or parts of projects, that reach commercial operation before 30 June 2019.

 

As with the draft from April, the final PPA does not include any indexation of the FiT to the Consumer Price Index (CPI) to address inflation risks. In response to concerns over fluctuating exchange rates, the circular does state that “the FiT for the following year shall be adjusted according to the central exchange rates of the Vietnamese dong against the US dollar announced by the State Bank of Vietnam on the last working day of the preceding year.”  Annual adjustment is better than none but it wouldn’t have been difficult to spread adjustments throughout the year.

 

As a way to offset the relatively low tariff, and inflation risks, investors may be able to benefit from tax exemptions on raw materials and supplies imported for their projects, corporate income tax relief, and an exemption from land rental fees within the first three years of commencing commercial operation.

 

A risk too far?

 

Under Decision 11 (which also set the FiT) and the final version of the PPA appended to Circular 16, Electricity of Vietnam (EVN) is responsible for purchasing the entire power output from grid-connected projects at the stated FiT.

 

However, the PPA relieves EVN from payment obligations in cases where it is unable to take power due to a breakdown of the transmission or distribution grid. With many solar projects currently focused on few central locations, the capacity of existing facilities to absorb power must be a cause of some concern given the PPA’s transfer of such risk to power producers.

 

Worryingly, the PPA lacks any mechanism to compensate power producers should interruptions happen outside of their control. Not only does the PPA not provide for extension of time in case of force majeure, but if force majeure were to prevent a power producer from meeting its obligations for a year then EVN could unilaterally terminate the PPA with no compensation payable.  In such circumstances, the power producer is left alone in the dark.

 

Such arrangements might be acceptable to projects that manage to negotiate clear ‘take or pay’ terms and/or government guarantees, but it is highly questionable whether and to what extent either of these will be possible in the current climate.  As a direct consequence, it is equally questionable to what extent private finance will be prepared to bear the risk, a fact that will prompt capital to seek more favourable conditions in other markets.

 

Playing by house rules

 

If the above portends of problems in the relationship with EVN, investors may be further discouraged by the lack of specifics in terms of dispute resolution. The PPA is governed by Vietnamese law and does not itself expressly include the right to agree on international arbitration to resolve disputes, a condition that would typically be considered an important requirement.

 

As it stands, disputes can be submitted to the Electricity Renewable Energy Department (formerly the General Directorate of Energy) for mediation. If that doesn’t work, there is the option of escalating the issue to the Electricity Regulatory Authority of Vietnam (ERAV) or pursuing litigation in Vietnam’s courts.

 

The PPA does allow for “another dispute resolution body to be agreed by the parties”, which potentially opens the door for sellers to negotiate with EVN on dispute resolution, including offshore or even domestic arbitration.  But it is not clear if EVN will agree to directly amend PPAs to allow for express prior agreement on offshore arbitration or simply open the door for such a discussion at the time of a dispute.  Clearly in the latter case the deck is firmly stacked in EVN’s favour.

 

One step forward… wait and see

 

The MoIT is well aware of the deficiencies in the PPA and knows that, in its current form, it will not attract the kind of investment Vietnam needs if it is to meet both its energy demands and renewable targets. They know that investors were hoping for some of the shortfalls to have been addressed, and as such the agreement remains – for all intents and purposes – largely unbankable.

 

On the other hand however, the MoIT is also acutely aware of the significant interest in Vietnam’s solar sector. The vast potential of solar power is there for the taking, with abundant land available for the development of solar farms for first movers. With this in mind, the PPA can be considered an attempt to test the waters – asking how much risk investors are willing to bear in return for a piece of the action.

 

The MoIT is confident that smaller, nimble players will be attracted to Vietnam and make investments, regardless of the bankability of the PPA on paper. The question truly posed by Circular 16 is: exactly how much risk are investors willing to accept?  What better way to test it than in open market conditions?  If risk allocation adjustment need to be made in future, the Prime Minister, MoIT and EVN can make them relatively easily.

 

Ultimately, although the PPA is “final” on paper, the real trick is for investors to work hard and smart to agree adjustments on a project-to-project basis that re-align specific risks in acceptable ways.  Each project is a sum of many different elements and successful investors in the early days at least will be the ones that focus their energies on key issues for their projects where they can make meaningful progress.  Opportunity vs. risk: Vietnam is playing a calculated game at the dawn of the solar energy sector.  Where the chips fall remains to be seen.

 

For more information about Vietnam’s energy sector, please contact Giles at GTCooper@duanemorris.com or any of the lawyers in our office listing. Giles is co-General Director of Duane Morris Vietnam LLC and branch director of Duane Morris’ HCMC office.

Vietnam’s proposed wind power price hike – is it enough?

One of the main criticisms levelled at Vietnam’s wind power sector is the relatively low feed-in tariff (FiT) introduced by the government in 2011. With the country’s rapid growth, energy demand is expected to soar over the coming years. Coupled with international pressure to keep to its greenhouse gas commitments, Vietnam is in desperate need of large-scale and long-term investment in its renewable energy sector.

 

The buying price of VND1,614/kWh (US$0.078) was set for all land-based projects in the country, with 6.8 cents paid by State-run power monopoly Vietnam Electricity (EVN), and the rest coming from the country’s Environment Protection Fund.

 

However, the rate, intended to encourage the development of wind power projects, was considered insufficient for investors to recover their investment capital. The tariff is also much lower than in neighbouring Indonesia (US$0.11), Malaysia (US$0.1476) and Thailand (US$0.19).

 

Change of direction

 

Vietnam’s Ministry of Industry and Trade (MoIT) has recently proposed an adjustment to the rate, asking the government to raise the buying price for wind power in an effort to help investors cover high input costs. It is hoped that such a move would push foreign firms to develop new wind power projects or expand their existing farms. Accelerated development in this sector is vital if Vietnam is to meet the energy targets it has set for itself, as well as wean the country off dirty and expensive imports of coal.

 

The ministry has suggested the price be lifted to US$0.087 per kilowatt-hour (kWh) for wind energy projects on land and US$0.0995 cents per kWh for offshore farms. Such a rate would still lag behind regional competitors and the global average of US$0.196 per kWh as reported by the World Energy Commission, but may present a more feasible option to investors.

 

On top of the off-putting FiT, the number of wind power projects in Vietnam remains low as only wind turbine towers, accounting for 20 percent of production costs, can be produced locally, while investors have to import the remaining components.

 

Not winding down yet

 

There’s little doubt about the country’s potential for wind exploitation ­– according to a World Bank report, 8.6 percent of Vietnam’s land mass is suitable for the construction of wind farms, which would produce sufficient electricity to meet a lot of current and future power needs.

 

Some of the country’s currently operating wind farms, specifically in the province of Binh Thuan, work with the previously promulgated FiT of US$0.078 per kWh, and the Bac Lieu wind farm enjoys US$0.098 per kWh due to its offshore location.

 

The MoIT has highlighted these projects as part of the reasoning behind the rate hike. Concerns have been raised by the investors behind the projects over the time it would take to recover their investment capital. In fact, the investors in question had previously requested authorities raise the regulated FiT to $0.095 per kWh, but were unsuccessful.

 

According to the investor of the Phu Lac wind farm, the first phase of the project, which came into operation in November 2016, has total investment capital of VND1.1 trillion (US$48.4 million). With the existing FiT, it would take around 14 years to recover the investment of just the first phase. Considering the average lifespan of a wind farm is just 20 to 25 years, it’s no wonder that developers are hesitant about breaking ground on new projects.

 

As of now, there are 48 registered wind power projects with total capacity of 5,000MW in Vietnam, 23 of which have had their pre-feasibility reports approved by the MoIT and are patiently waiting for an increase in the FiT. It remains to be seen whether the suggested increase is enough for the projects to move ahead.

 

Incremental improvement

 

The proposal by the MoIT demonstrates an acceptance that despite a range of tax benefits offered to foreign investors including exemptions from customs duties, a preferential corporate tax rate of 10% and income tax and land use fee exemptions, the government’s initial energy strategy proved unappealing to investors. To offset any complaints, the trade ministry has calculated that the price adjustment they are proposing would raise EVN’s production costs by a slight VND0.08 per kWh this year and VND0.23 per kWh in 2019.

 

Even a light increase in the FiT, as put forward by the MoIT, could stoke some growth in the sector. The attraction of foreign investors capable of producing complicated parts could mean that the localisation ratio is bumped to more than 40 percent. For example, China has reached a localisation ratio of almost 100 percent for their wind power projects, but the selling price of the energy stands at around US$0.08 per kWh.

 

In summary, the proposed hike seems insufficient to really improve Vietnam’s position as a renewable energy leader in Southeast Asia. The sector remains riddled with problems of transparency and the perpetual presence of giants like EVN is an obstacle for smaller private players looking to enter the market. A meagre FiT does little to neutralise the risks faced by investors and power producers, especially with more promising offers in the region. The silver lining, however, is that authorities are open to change. The MoIT is echoing the concerns of the renewable energy sector, from both established and potential projects, and looking at ways to develop a more favourable climate going forward. Even if they’re not yet blown away by the increase, investors would do well to watch this space.

 

For more information about Vietnam’s energy sector, please contact Giles at GTCooper@duanemorris.com or any of the lawyers in our office listing. Giles is co-General Director of Duane Morris Vietnam LLC and branch director of Duane Morris’ HCMC office.

Vietnam looks for greener growth

As Vietnam’s big cities grow, clusters of new buildings sprout up around their peripheries. Rapid urbanisation is transforming cities like Hanoi, and the quiet streets of a few decades ago are today unrecognisable. The question remains – how green is Vietnam’s sprawl?

 

Buildings account for around 36 per cent of the country’s total energy consumption and 25 per cent of emissions, including a third of carbon dioxide emissions – the main cause of global climate change.

 

The concept of green construction was introduced for the first time in the country in 2007. Ten years later Vietnam has just 61 constructions with sustainable green certificates. This number is far too modest in a rapidly-developing country where new urban areas are booming. Neighbours like Malaysia, Thailand and Indonesia are doing much better, and Singapore alone boasts more than 2,100 green buildings with a Green Mark certification.

 

As the country shifts from a rural-agrarian society to an urban-industrial, services-based economy, Vietnam is seeing a significant increase in urbanisation, which stands at approximately 30 per cent today and is expected to increase to 45 per cent by 2020.

  Continue reading Vietnam looks for greener growth

Wind energy in Vietnam – Blowing in the right direction?

Alongside solar power, Vietnam has significant potential in wind energy and it’s hoped that wind will play a large role in turning the country away from coal and gas.

 

To encourage the development of wind power projects the government introduced a feed-in tariff (FiT) scheme way back in 2011. The FiT rate of VND1,614/kWh (excluding VAT, equivalent to US$0.078) was seen at the time as an important step towards realising the country’s renewable ambitions.

 

The low rate, however, has proved unappealing to investors. Despite a range of tax benefits offered to developers, including exemptions from customs duties, a preferential corporate tax rate of 10% and income tax and land use fee exemptions, Vietnam has just four operational wind farms. The original plan to have 1 GW of wind power capacity by 2020 was fanciful, with current projects generating just 138 MW. In fact, three of the four farms are only in existence because they were able to negotiate power purchase agreements (PPA) at better rates than the FiT.

 

The poor take up led to an inevitable rethink, with the revised Power Development Plan 7 (PDP 7) targeting a 6.5% share of electricity generated from renewables by 2020 and 10.7% by 2030. On wind specifically, installed wind power capacity was forecast downwards to 800 MW by 2020, 2000 MW by 2025 and 6000 MW by 2030. These figures would account for 0.8% of total electricity production in 2020, 1% in 2025 and 2.1% in 2030.

Continue reading Wind energy in Vietnam – Blowing in the right direction?

The price of power in Vietnam: not all dollars and cents

It’s clear that meeting Vietnam’s substantial energy demands over the coming years is a tall order even in the best of circumstances. It is hoped that renewable energy sources will play a large part in the country’s energy generation landscape, however, the dominance of large SOEs is blocking the entry of more efficient private operations and slowing down the pace of change.

 

Looking at recent trends in Vietnam’s energy sector, it seems that these state owned projects, backed by overseas development assistance, provide a costly and sluggish source of electricity.

 

Such projects can be up to 40% more expensive to build and take 5 years longer to power up than privately-developed plants. With demand surging, these kind of timescales will prove problematic if supply is to keep abreast of demand.

Continue reading The price of power in Vietnam: not all dollars and cents