Category Archives: Vietnam – Energy

Energy projects regulations

New Draft Decree – Regulations Implementing the PPP Law 2020

Vietnam’s first uniform Public-Private Partnership Law (the “PPP Law”) was recently passed by the National Assembly, effective from 1 January 2021.

Whilst the new law provides a much needed legislative framework for the facilitation of PPP investment, it is not without criticism and several drafting uncertainties present potential concerns for developers and lenders alike.

A recently published draft decree serves to clarify such uncertainty, providing further guidance in several key regulatory areas.[1]

Eligible Project Sectors and Investment Size

The PPP Law introduced several general eligible sectors for PPP investment (e.g. Transport, Power, Water, Waste, Healthcare, Education and Training, IT) but did not provide further guidance on the specific sub-sectors or investment amounts pertaining to each.[2] The draft decree confirms the following:[3]

  • Transport: Transportation projects require a total minimum investment amount of VND 1,500 billion for projects in road, rail, inland waterway, maritime, and aviation;

 

  • Power: Power plant and grid projects require a total minimum investment amount of VND 2,300 billion;

 

  • Water: Clean water supply projects require a total minimum investment amount of VND 1,500 billion (urban areas) / VND 200 billion (rural areas) / VND 100 billion (difficult or especially difficult socio-economic areas);

 

  • Waste: Wastewater drainage and treatment projects require a total minimum investment amount of VND 1,500 billion (urban areas) / VND 200 billion (rural areas) / VND 100 billion (difficult or especially difficult socio-economic areas);

 

  • Health, Education, and Training: Minimum total investment amount of VND 100 billion; and

 

  • IT: Minimum total investment amount of VND 800 billion for concentrated IT park developments and VND 200 billion for technical IT projects (i.e. national information systems, government e-platforms and databases, information security, technical infrastructure, amongst others).

The Introduction and Role of Project Evaluation Councils

For each proposed PPP project, a State Evaluation Council (National Assembly-level investment) or Inter-Branch Evaluation Council (Prime Ministerial-level investment) or Grassroots Evaluation Council (People’s Council-level investment) will be established. [4]

Such councils are tasked with arranging an evaluation and official opinion on the submitted pre-feasibility and feasibility study reports. Councils will comprise of official representatives from the Ministry of Planning and Investment and other relevant agencies as decided by the Prime Minister.

The draft decree introduces the potential for domestic or foreign organizations to be formally hired as consultants to assist with such evaluation, as approved by the Prime Minister or relevant People’s Council. [5]

The Ability of Investors to Self-Propose Projects

Importantly, the draft decree seems to confirm that investors will be able to self-propose PPP projects. [6] Specifically, investors are required to submit formal proposals to the Department of Planning and Investment (“DPI”). The proposal must satisfy several criteria as detailed under Article 27.1 of the PPP Law. Following this, investors will be required to prepare a pre-feasibility report for submission.

Where two or more investors submit proposals for the same project, the DPI will select the most feasible project based on several factors including investor capacity and expertise, financial considerations, and potential socio-economic impacts, amongst others.[7]

Project Conversion: Public to Private

Projects currently funded by way of public capital may seek to formally convert to a PPP form as under the new law.[8] Conversion will require the current authorized agency to withdraw their public capital portion, with the investor undertaking the relevant re-capitalization.

It is unclear at this point if any limitations will apply to potential conversions. For example, a restriction on the conversion of projects which are already at a particular development phase (e.g. construction phase).

Whilst the opportunity to invest in underperforming pre-existing public projects is attractive and potentially lucrative, corporate restructuring under Vietnamese law is highly complex and requires careful further legal consideration.

 

 

 

Project Contract – Takeover Rights

The new draft decree provides that where an investor commits a serious breach of their contractual responsibilities and is unable to remedy such breach within a reasonable time, the procuring agency is granted a statutory right to temporarily takeover the management and operation of the project facility.[9] Such rights apply broadly, arising when the project is in the pre-construction, construction, and operational phases. [10]

Termination Rights – Procuring Agency

The draft decree details broad circumstances leading to the rights of a procuring agency to terminate for serious contractual breach by the project enterprise: [11]

  • Pre-construction: Failure to procure essential financing options, failure to execute the PPP project contract or to incorporate a project enterprise prior to the specific contractual deadline, failure to obtain the necessary licenses or approvals, failure to commence basic construction works or lodge formal project design documentation;

 

  • Construction: Failure to comply with building regulations or design criteria, failure to complete works within the agreed schedule; failure to comply with labor regulations and other public laws; and

 

  • Operation: Failure to supply services pursuant to quality standards prescribed by law and under contract, failure to comply with price controls, temporary interruption to the supply of services without consent, failure to maintain the facility in accordance with agreed quality standards, failure to comply with any imposed administrative sanctions or penalties.

 

Such termination rights are broad and potentially uncertain, greatly favoring the procuring agency, and will thus likely present as an unwanted contractual risk for prospective investors.

Termination Rights – Project Enterprise

Conversely, a project enterprise is provided with very limited grounds for termination should the procuring agency commit a serious contractual breach: [12]

  • Acts of corruption or bribery;

 

  • Failure to make the required payments to the project enterprise;

 

  • Failure to obtain the necessary licenses to operate the facility where such failure is not the fault of the project enterprise; and

 

  • Failure by the procuring agency to provide necessary support for the performance of the project contract.

Compensation for Contractual Termination

The draft decree confirms that compensation for termination should be included in the project’s contractual agreement as specifically negotiated between the procuring agency and the project enterprise. The draft decree also contemplates that a compensation clause should include reference to the fair value of work already performed up to the point of termination, as well as any further expense or loss, including loss of profit. [13]

Conclusion

The passing of Vietnam’s first Public-Private Partnership Law provides an exciting development in the evolution of the Vietnamese PPP market. Whilst the new law serves to protect investors via the codification of key legal rights, the drafting of the law is not without concern and numerous uncertainties exist as to statutory application.

It is anticipated that several guiding circulars and decrees will be issued to assist in the implementation of the new law. The first such decree, albeit currently in draft form, provides important further clarification on eligible PPP sectors, investment size, the role of project evaluation councils, contractual termination rights, and compensation terms.

Please do not hesitate to contact us should you have any further queries or wish to discuss how the incoming PPP Law may provide investment opportunities for you.

***

For more information, please contact Giles Cooper at GTCooper@duanemorris.com or Daniel Haberfield at DHaberfield@duanemorris.com. Giles is Chairman of Duane Morris Vietnam LLC and branch director of Duane Morris’ HCMC office. Daniel is an Australian qualified lawyer and associate in Duane Morris’ HCMC office.

[1] Draft Decree, Detailed Regulations for Implementation of Law 64 on Public-Private Partnership Investment Form, 27 August 2020, (“Draft Decree”).

[2] Article 4.1, PPP Law 2020.

[3] Article 3, Draft Decree.

[4] Articles 7-16, Draft Decree.

[5] Article 17, Draft Decree.

[6] Article 31, Draft Decree.

[7] Article 32, Draft Decree.

[8] Articles 34-35, Draft Decree.

[9] Article 38, Draft Decree.

[10] Article 40, Draft Decree.

[11] Article 40, Draft Decree.

[12] Article 41, Draft Decree.

[13] Article 42, Draft Decree.

The Good, The Bad, and The Ugly – Vietnam’s New Public-Private Partnership Law 2020

Vietnam’s first Public-Private Partnership Law 2020 (the “PPP Law”) was passed by the National Assembly of Vietnam on 18 June 2020 and will come into effect from 1 January 2021. It is anticipated that further guiding decrees and circulars will soon be introduced to assist in the implementation of the PPP Law.  Here we take a look at the good, the bad, and the ugly.

The Good

The current Vietnamese PPP legal framework consists of numerous outdated circulars, decrees, and decisions. The incoming PPP Law serves to unify the current patchwork of laws into a stand-alone legislative instrument, thereby attempting to govern the full life cycle of inbound PPP activity, providing greater legal clarity and comfort to prospective foreign investors. The availability for the first time of codified minimum revenue guarantee and viability gap mechanisms will pique the interest of international investors and financiers. Likewise, the ability to select third country international arbitration provides increased comfort should a dispute scenario arise. Finally, the inclusion of competitive bidding processes enhances transparency and is welcomed.

The Bad

Concerns exist with respect to rigid project development timelines, restrictions on the assignment of rights, limitations in the scope of eligible investment sectors, and high minimum investment thresholds. Mandatory contract performance security and potentially mandatory use of template project documents are also areas of potential concern for investors and financiers alike.

The Ugly

From a project finance perspective, broad rights in favor of the procuring entity to terminate “in the interests of the nation”, rigidity with regards to the timing of financial close, and limitations in the choice of contractual governing law are all notable concerns, resulting in unfavorable risk allocation for investors. Further, the lack of express change in law provisions, step-in rights for lenders, and the inability of international financiers to take direct security over land in Vietnam will likely further negatively impact forthcoming project bankability assessments.

The table below provides an analysis of the key features of the new law, with comparative commentary from the perspective of primary PPP participants – namely, the government, developers, and lenders:

Key Legislative Features The PPP Law 2020 Government  View Investor View – Developers / Lenders
Permitted PPP Investment Sectors –  Reduces the list of eligible PPP investment sectors to the following only: Transport; Power Grids and Plants; Irrigation, Water, and Waste; Healthcare and Education; IT Infrastructure.

 

– Current Vietnamese law under Decree 63 recognizes a broader list of PPP investment sectors, which in addition to the above, also includes public lighting systems, agricultural developments, social housing, commercial infrastructure for economic and industrial zones, water drainage systems, waste treatment systems, amongst others.

 

– The reduced list clearly articulates and reinforces Hanoi’s current policy priorities regarding target PPP investment sectors.

 

 

– Limited scope, seemingly excludes important sectors (agriculture, public housing, public lighting systems etc).

 

– Potentially excludes sub-projects connected to the primary project (i.e. terminals, pipelines, transmission lines, storage facilities etc).

 

– Ambiguities surround the statutory scope of “power plant.” Potentially excludes some forms of renewables (i.e. rooftop solar systems).

 

Competitive Bidding – All proposed PPP projects must undergo competitive bidding, except for projects related to security, defence, high technology, and “other special cases as decided by the Prime Minister”.

 

 

 

 

 

– Global best practice.

 

– Attracts top international expertise.

 

– Demonstrates policy commitment to ensure development of quality and transparent public infrastructure works.

 

– Transparent process that encourages the participation of tier-one international expertise. However, implementation in practice must be transparent and efficient to be valuable.

 

– Some investors may however prefer to self-propose projects with the option of direct appointment.

Bid Security / Contract Performance Security – Investors must provide bid security of between 0.5%-1.5% of the total investment value of the project (to be later released).

 

– PPP project companies must provide contract performance security of between 1%-3% of the total investment value of the project (to be later released).

 

 

– Ensures only investors who are genuinely committed to completing the tender process are selected.

 

– Provides the government with some form of compensation should a non-completion scenario arise.

 

– Such requirements are problematic as financing may not yet be complete at this early stage of the PPP investment cycle.

 

– A lower security threshold or more flexible timing may be more appropriate.

 

Minimum Total Investment Threshold

 

– Minimum investment threshold of USD 8.7 million (for projects in the specific permitted investment sectors) reinforces current government policy focus on large-scale PPP ventures.

 

– NB: Minimum investment threshold lowered to USD 4.3 million for projects located in geographical areas with difficult or extremely difficult socio-economic conditions.

 

– Minimum investment threshold does not apply to O&M contracts.

 

– Reinforces Hanoi’s policy preference for large-scale high-impact PPP investments.

 

 

– Small-scale projects of significant social value may still require private sector investment and expertise, and thereby be unnecessarily excluded.

 

– Particularly relevant for smaller projects in health, education, science and technology, and environmental protection.

 

Statutory Definition of “Project Enterprise”

 

 

– The new law narrowly defines “project enterprise” to that of an entity executing and implementing a single PPP project contract. – Unclear policy objective but may be linked with desire to clearly ring fence projects for ease of administration (e.g. – assessing revenues and applying tax incentives). – This would seemingly prevent the enterprise from executing ancillary sub-projects connected to the primary project (e.g. construction of regasification assets connected to proposed gas turbine power plant development).

 

Assignment of Rights

 

 

– Restricts equity investors from assigning their shares/capital contribution/rights in a PPP project company until after the completion of the construction phase.

 

– Ensures only qualified investors are selected and thus genuinely capable of implementing the proposed project agreement.

 

 

 

– Rigidly prohibits assignment. Share ownership group structures should be flexible and allow for supplemental participation, including new and affiliate membership.

 

– The participation of new members can potentially add significant value and expertise to a project.

 

Contractual Governing Law

 

 

– The PPP project agreement must be governed by Vietnamese law.

 

In contrast to the incoming provision, the Vietnamese Civil Code permits parties to a PPP contract to select foreign law where the contract includes a “foreign element.”

– Projects are located in Vietnam and it is standard global PPP practice for the agreement’s governing law to be the same with that of the host government or procuring entity. – Important concepts of commonly used contract laws (e.g. English law) are not recognized under Vietnamese law.  For example, Vietnamese law does not recognize agreement on liquidated damages.

 

– The unpredictability of Vietnamese law will likely discourage foreign lending syndicates from providing debt funding and therefore significantly impact the project’s bankability assessment.

 

Dispute Resolution

 

– Where contractually agreed, parties to a project agreement may opt for international arbitration as a dispute resolution mechanism.

 

– The new law also references international treaties as a means to resolve disputes where applicable, leading to a possible application of formal Investor State Dispute Resolution.

 

– The potential to resolve disputes via international arbitration in a third country (i.e. Singapore International Arbitration Centre) is attractive and provides additional comfort to prospective foreign investors should a dispute scenario arise.

 

 

– Potential application of Investor State Dispute Resolution under the Comprehensive and Progressive Agreement for Trans-Pacific Partnership / EU-Vietnam Free Trade Agreement is welcomed.

 

 

Viability Gap Funding

 

 

– Allocation of public funding designated for the construction phase, site clearance and compensation, and resettlement capped at 50% of the total investment amount. – Provides a tangible incentive for private investors to participate in projects which may otherwise not be economically viable or financially attractive.

 

–  Use of viability gap funding mechanism to attract investment is consistent with other comparative regional PPP markets (e.g. Indonesia, the Philippines, and India) and is welcomed.

 

Minimum Revenue Guarantee – Subject to satisfaction of certain conditions, where revenue reaches less than 75% of the revenue in the project’s financial plan, the government shall share with the investor and the PPP project company 50% of the difference between 75% of the revenue in the financial plan and the actual revenue realized. – Important financial risk allocation mechanism, providing additional encouragement to international financiers to join PPP infrastructure developments. – Availability subject to satisfaction of complex terms and conditions, heavily weighted against the private investor.

 

– Restricts revenue risk sharing to that of a change in plan, policy, or law scenario.

 

– Fixed threshold creates financial feasibility concerns.

 

– Threshold should be flexible and adjusted on a case-by-case basis, dependent upon the specific investment sector.

 

Financial Closing Timeline – Equity and debt financing into the project vehicle must be completed within 12 months (or 18 months for projects whose decisions on investment policy fall within the approval of the National Assembly or the Prime Minister) from the execution of the project contract.

 

– Deadlines ensure funding is provided in a timely manner, injecting the requisite equity and debt amounts into the project vehicle. – Too restrictive and unnecessarily prescriptive and threatens financial feasibility.

 

– Financial closing should be more flexible and account for the different forms of potential funding (i.e. bond solutions may take more time to prepare than bank solutions).

 

Step-in Rights: Lenders – Where a project contract is terminated early, the procuring entity, lender, investor, and project company have the ability to agree to coordinate with the government entity in the selection of an alternative investor.

 

–  This is more restrictive compared to the current position under Decree 63, whereby lenders have the right to step in on their own or to appoint another competent organization to take over all or part of the rights and obligations of investors and project companies if investors or project companies fail to discharge the obligations prescribed in the relevant project contracts or loan agreements.

 

 

 

 

– Allows participants to agree on the selection of an alternate investor should a termination scenario arise.  – Too restrictive and inconsistent with global PPP best practice. In practice, lenders will not lend without pre-agreed step-in rights recorded in Direct Agreements and we do not expect this to change.

 

 

Termination – Government may terminate in the “interests of the nation.” – Provides protection and contractual flexibility should proposed investments become unviable or inconsistent with the public interest. – Reference to national interests creates a very broad termination basis in favor of the government entity and is inconsistent with international best practice.

 

– Parties should be free to directly negotiate and define specific termination events in the project agreement.

 

Foreign Lender Security – The requirement to mortgage in accordance with the Law on Land remains, meaning that security over land use rights and real property is only available to domestic lenders. – The incoming law remains consistent with key Vietnamese concepts in relation to foreign legal interests over real property. – Foreign lenders’ inability to directly take security over land and assets attached to land is a serious impediment to attracting international project finance funding.

– The use of local security agents to hold land-related security remains fraught with uncertainty and practical constraints.

 

Change in Law – No specific stand-alone change in law provision. Government will however allow for amendment of project contract terms where changes in law result in actual project revenue to be 75% less than the anticipated revenue projected in the initial financial plan.

 

– Apparent policy decision to allocate change in law risk to investors though, more likely, in knowledge that terms will be subject to case-to-case negotiation and agreement.

 

 

– The PPP Law or government-issued contractual template should provide specific clauses protecting investors regarding change in law scenarios, as consistent with global PPP best practice.

 

– Particularly important given Vietnam’s evolving legislative landscape.

 

 

For more information, please contact Giles at GTCooper@duanemorris.com or Daniel Haberfield at DHaberfield@duanemorris.com or any of the lawyers in our office listing. Giles is Chairman of Duane Morris Vietnam LLC and branch director of Duane Morris’ HCMC office. Daniel is an associate in Duane Morris’ HCMC office.

Circular 18: New Template PPA and Revised Regulations on Solar Power Developments

Circular No. 18/2020/TT-BCT (“Circular 18”) [1] was recently issued by Vietnam’s Ministry of Industry and Trade, and provides regulations on the development of solar power projects to guide the Prime Minister’s Decision 13 issued in April 2020. Circular 18 is effective from 31 August 2020 and supersedes Circular 16 on the same subject matter.[2]

Circular 18 introduces updated template power purchase agreements (“PPAs”) as well as revised regulations for the development of i) grid-connected solar farms; and ii) rooftop solar power systems.

Despite rapid growth and significant investment potential, the Vietnamese renewable energy market and associated regulatory regime remains highly complex and constantly evolving.

Developers, lenders, and prospective investors are encouraged to consider the key amendments discussed below:

Background – The Second Solar Feed-in-Tariff

As introduced under Decision 13 (extending Decision 11), the second feed-in-tariff regime (“FiT 2”) provides for a preferential feed-in-tariff mechanism for a 20 year contractual term as under an executed PPA with Vietnam Electricity (“EVN”).[3]

This applies to solar power projects (i.e. grid-connected, floating, and rooftop) which achieve a commercial operation date (“COD”) prior to 31 December 2020.[4]

Within this context, developers are racing to complete projects prior to the 2020 deadline in order to enjoy FiT 2.

When Does Circular 18 Apply?

Circular 18 specifically applies to the following solar power projects:

  • 1 July 2019 – 31 August 2020: Where a solar power project (grid-connected or rooftop) achieved COD from 1 July 2019 – 31 August 2020 (i.e. the effective date of Circular 18), the seller and the purchaser must amend any pre-existing executed PPA to ensure that the terms of such agreement are consistent with the terms of the template PPA issued with Circular 18. [5]  This is significant because it means that projects that were financed, built, and commissioned on the basis of a specific executed PPA now face changes to the fundamental underlying contract terms. See further below for some headline comments on the new template PPA.
  • Prior to 1 July 2019: Where a solar power project (grid-connected or rooftop) achieved COD prior to 1 July 2019, such executed PPA shall continue to be valid and need not be amended to reflect the revised template PPA issued with Circular 18. [6]

 New Project Development Regulations

1) Grid-Connected Solar Farms

Circular 18 provides that the total area for construction of a grid-connected solar project (land or water surface area) must not exceed 1.2 hectares per MWp.[7] While this base number is unchanged from the previous regulations, Circular 18 clarifies that this area excludes power transmission lines or road access, but does include the actual power plant and transformer station. [8]

Further, the basic design dossier of the project must include details of the project’s location, solar radiation potential, impact on the electricity systems in the local area, load dispatch information, and design for connection to the SCADA system.[9]

Importantly, from a commercial perspective, Circular 18 overturns the previous minimum 20% equity ownership threshold under Circular 16, [10] thereby enabling developers to secure the bulk of project financing by way of debt funding.

2) Rooftop Solar Systems

Circular 18 provides that where a proposed grid-connected rooftop solar system has a capacity of no more than 1 MW, it is not necessary to obtain a formal power generation license.[11] This is consistent with current regulations, and reaffirms the position under Circular 36 from the Ministry of Industry and Trade.[12]

Rooftop solar developments with a 1 MW capacity or less (AC capacity) or a 1.25 MWp capacity or less (DC capacity) must still nevertheless register their proposed connection with EVN, including details of location for installation, output scale, and proposed connection point.[13]

Additionally, after receiving EVN’s opinion on the project’s transmission capabilities, the developer must then enter into an interconnection agreement (with EVN or the relevant grid owner), obtain approval on the proposed sale of electricity, install metering equipment, and carry out technical testing, amongst other requirements.[14]

The above requirements are all subject to very strict deadlines (often less than 5 working days) and it is highly recommended to seek the formal support of legal counsel to ensure such agreements are negotiated and executed in a timely manner, thereby preventing material transaction delays.

Significantly, the template PPA for rooftop solar projects issued with Circular 18 does not need to be used in cases where the developer sells power to a party other than EVN.  In those cases, the parties are free to agree terms and prices consistent with general Vietnamese contract law.

 New Template PPA

 1) Grid-Connected Solar Farms

  • Mandatory use of template PPA: The use of the template PPA for grid-connected solar farms is mandatory.[15] Parties may negotiate to include additional supplemental clauses which serve to clarify the rights and obligations of the parties, although in practice EVN may be reluctant to do so.[16] Any supplemental terms must remain consistent with the terms of the template PPA, and parties are prohibited from making substantive alterations. [17]

 

  • Force majeure: The previous template PPA excused a defaulting party from broadly performing their obligations should a force majeure event arise. Whilst the new template PPA provides for the same, it specifically limits the ability of a defaulting party to avoid payment of monies owed up to the date of the force majeure event. Such clarification is welcomed and presumably more significant in the context of Covid-19.[18]

 

  •  Change in law: The new template PPA does not provide for a specific change in law clause. This is inconsistent with global best practice, and potentially leaves developers and lenders in a vulnerable position should an adverse change in law circumstance arise. Given Vietnam’s constantly evolving legislative landscape, particularly in relation to renewable energy, the potential protection provided by a change in law clause is significant, and thus would be very attractive to prospective foreign investors.

 

  • Offtake obligation: The new template PPA no longer obliges EVN to contractually agree to purchase the entire yield generated from the solar farm. Legally, this seems inconsistent with the previous obligation on EVN to purchase the entire output generated by the solar farm under Decision 13.[19] Commercially, this creates significant concerns for developers and lenders alike, and may negatively impact forthcoming bankability assessments with regards to anticipated project revenue.

 

  • Curtailment: The new template PPA provides EVN with broad curtailment rights. Specifically, where the solar farm does not conform with relevant power regulations; during times of installation or repair; when EVN is carrying out inspection on portions of the grid which are connected to the farm; when EVN’s gird systems are broken; or when EVN’s power grid requires support to recover following a breakdown. [20] Such broad curtailment rights in favor of the purchaser will again negatively impact on bankability assessments, creating considerable uncertainty for financiers.

 

  • Termination payments: Of particular concern is that where the seller opts to terminate the agreement due to the purchaser’s default, the new template PPA provides that the termination damages amount will be calculated up to the time of termination, rather than based on the remainder of the 20 year contractual term. [21] The previous template PPA under Circular 16 provided no such restriction. The incoming clause will therefore create significant concern for those projects already operating under pre-existing PPAs which now need to conform with the terms of the new template. Furthermore, under Circular 18, the non-defaulting party assumes the burden of proof in establishing loss as a result of the defaulting party’s actions. [22] Such risk allocation greatly favors the purchaser and will again negatively impact forthcoming bankability assessments.

2) Rooftop Solar Systems

The template PPA for rooftop solar system projects is largely the same as the template provided under Circular 5,[23] albeit with the following noteworthy amendments:

  • Mandatory use of template PPA: The use of the template PPA for grid-connected rooftop solar systems is mandatory.[24] Parties may negotiate to include additional supplemental clauses which serve to clarify the rights and obligations of the parties.[25] Any supplemental terms must however remain consistent with the terms of the template PPA. [26] As noted above, the template is not mandatory where the power buyer is not EVN.

 

  • Continued silence: The template PPA still does not provide for specific change in law, termination compensation, grid unavailability, or tariff indexation provisions, thereby continuing to place an unfavorable risk allocation against the developer.

 

  • Dispute resolution: Concerns continue to exist with regards to the transparency and flexibility of the provided dispute resolution process under the template PPA. Where parties are still unable to resolve their differences post-mediation, it appears that the final body responsible for resolving the dispute will be EVN or its parent entity (as the relevant “higher level power unit of the power purchaser”), thereby potentially greatly favoring the purchaser.[27]

 

  • Late payment interest: The new template PPA introduces greater flexibility with regards to late payments. Parties are now free to include a late payment interest clause in an amount as agreed between the parties, in accordance with the Commercial Law 2005.[28] The previous template PPA under Circular 5 limited the calculation of late payment interest to an amount based on the State Bank of Vietnam’s monthly interbank interest rate.

 

  • Metering system malfunction: Where the power metering system malfunctions (e.g. fire, damage), there is now an obligation on the seller to promptly notify the purchaser of such malfunction. The seller and the purchaser must then agree on the output of power during this time of malfunction, measured according to output based on the previous week, month, or year.[29]

Conclusion

Vietnam’s solar power market and associated regulatory regime continues to constantly evolve. The latest piece of regulation, Circular 18, is effective from 31 August 2020 and introduces updated project development requirements as well as a revised mandatory template PPA.

Significantly, those solar power projects which achieve a commercial operation date of between 1 July 2019 – 31 August 2020 will need to revise their pre-existing PPAs to ensure conformity with the updated regulations under Circular 18.

Please do not hesitate to contact us should you have any further queries or wish to discuss how the incoming Circular 18 may impact your current or proposed solar power development.

***

For more information, please contact Giles at GTCooper@duanemorris.com or Daniel Haberfield at DHaberfield@duanemorris.com.  Giles is Chairman of Duane Morris Vietnam LLC and branch director of Duane Morris’ HCMC office. Daniel is an Australian qualified lawyer and associate in Duane Morris’ HCMC office.

 

Giles Cooper, Partner
+84 24 3946 2210
gtcooper@duanemorris.com
Daniel Haberfield
Daniel Haberfield, Associate
+84 28 3824 0240
dhaberfield@duanemorris.com

[1] Circular No. 18/2020/TT-BCT, dated 17 July 2020, Ministry of Industry and Trade (“Circular 18”).

[2] Circular No. 16/2017/TT-BCT, dated 12 September 2017, Ministry of Industry and Trade (“Circular 16”).

[3] Decision No. 13/2020/QD-TTg, dated 6 April 2020, Prime Minister of Vietnam (“Decision 13”).

[4] Ibid.

[5] Articles 6(1)-(3) and 9(2), Circular 18.

[6] Article 9(1), Circular 18.

[7] Article 4(3), Circular 18.

[8] Article 3(2), Circular 18.

[9] Article 4(2), Circular 18.

[10] Article 10(3), Circular No. 16/2017/TT-BCT, dated 12 September 2017, Ministry of Industry and Trade.

[11] Article 5(4), Circular 18.

[12] Article 3(2), Circular No. 36/2018/TT-BCT, dated 16 October 2018, Ministry of Industry and Trade (“Circular 36”).

[13] Article 5(2), Circular 18.

[14] Article 5(2), Circular 18.

[15] Article 1, Circular 18.

[16] Article 6(3), Circular 18.

[17] Article 6(1)-(3), Circular 18.

[18] Article 5(3), Model Grid Connected Solar Farm PPA, Circular 18.

[19] Article 4(1), Decision No. 13/2020/QD-TTg, dated 6 April 2020, Prime Minister of Vietnam.

[20] Article 7, Model Grid Connected Solar Farm PPA, Circular 18.

[21] Article 7(5), Model Grid Connected Solar Farm PPA, Circular 18.

[22] Article 7(4)(b), Model Grid Connected Solar Farm PPA, Circular 18.

[23] Circular No. 5/2019/TT-BCT, dated 11 March 2019, Ministry of Industry and Trade (“Circular 5”).

[24] Article 1, Circular 18.

[25] Article 6(3), Circular 18.

[26] Article 6(1)-(3), Circular 18.

[27] Article 6(2), Model Rooftop Solar System PPA, Circular 18.

[28] Article 4(3)(b), Model Rooftop Solar System PPA, Circular 18.

[29] Article 3(2)(c), Model Rooftop Solar System PPA, Circular 18.

COVID-19 GUIDANCE FOR BUSINESSES IN VIETNAM: FORCE MAJEURE EVENTS AND E-SIGNATURES

The COVID-19 pandemic has given rise to many questions regarding force majeure and e-signatures. In particular, parties to commercial contracts are keen to know (i) whether they can be released from liabilities by relying on a force majeure clause and (ii) whether they can execute contracts by electronic signatures instead of the traditional “wet ink” signatures which have become almost impossible in the context of the COVID-19 pandemic.

  1. Force majeure

 A force majeure event under Vietnamese law

Vietnamese law defines force majeure in Article 156.1 of the Civil Code as “an event which occurs in an objective manner which is not foreseeable and which is not able to be remedied by all possible necessary and admissible measures being taken”.

For contracts that have been entered into prior to the COVID-19 pandemic, affected parties will have to prove that the pandemic satisfies all three components of a force majeure event in order to rely on this statutory right. The first two can be easily met – the corona virus is an objective event that cannot be foreseen. However, the trickiest part for parties would be the last component – whether the party has taken all reasonable measures to prevent the effect of the pandemic on their performance of the contract. This is a subjective test, and will need to be analyzed on a case-by-case basis taking actual facts into account.

  1. The effect of a force majeure event

The effect of a force majeure event is that the affected party who fails to perform its obligation under a contract will be released from liabilities. The relevant provisions are Article 351.2 of the Civil Code 2015 and Article 294.1 of the Commercial Law 2005 as quoted below:

Article 351.2 of the Civil Code 2015:

Where an obligor fails to perform correctly an obligation due to a force majeure event, it shall not have civil liability unless otherwise agreed or otherwise provided by law.

Article 294.1 of the Commercial Law 2005:

A defaulting party will be exempt from liability upon occurrence of a force majeure event.

The wording of Article 294.1 of the Commercial Law 2005 does not explicitly require a causal link between a force majeure event and the default of the affected party. However, logically speaking, to be released from liabilities, the fault should be caused by a force majeure event. It is also worth noting that according to the Commercial Law 2005, in order to be released from liabilities, the affected party is required to (i) immediately notify the other party in writing of the force majeure event and the potential consequences of such event; and (ii) promptly notify the other party when the force majeure event ceases to exist.

Regarding the possibility to terminate a contract, neither the Civil Code 2015 nor the Commercial Law 2005 allows parties to terminate a contract due to a force majeure event. However, the Commercial Law 2005 allows an extension of the deadline for the performance of a contract, and a refusal to perform a contract in the event of a prolonged event. The affected party who refuses to perform the contract due to a prolonged force majeure event must notify the other party of its refusal to perform the contract within ten days from the expiry date of the extended deadline for performance of the affected party’s obligations and before the other party commences to perform its contractual obligations.

  1. Alternative approaches for affected party due to COVID-19

Besides a force majeure event, an alternative approach for parties to consider in the context of the COVID-19 pandemic is fundamental changes clauses provided by Article 420 of the Civil Code 2015. Article 420 the performance of a contract under a fundamental change of conditions, which is quite similar to hardship clauses in other civil jurisdictions. Specifically, a circumstance is deemed fundamentally changed when the following elements are met:

  • The change occurs due to objective reasons after the execution of the contract. The COVID-19 pandemic would seem, prima facie, to satisfy this element;
  • At the time of contract execution, the parties could not foresee any change in circumstances. Contracts executed prior to the COVID-19 pandemic would also seem to satisfy this element;
  • There is such a fundamental change in circumstances that if the parties had known in advance, they would not have executed the contract, or might have executed it but with completely different content. This element is likely to be satisfied as well;
  • The continued performance of the contract without an amendment would cause serious damage to one party. The satisfaction of this element would depend on specific facts of each case; and
  • The affected party has taken all necessary measures in its capability in accordance with the nature of the contract but it still cannot prevent, mitigate the impact on its interest. The satisfaction of this element would also depend on specific facts of each case.

A key difference between a force majeure event and a fundamental change, which is also what might make proving the COVID-19 pandemic to be a fundamental change easier than a force majeure event, is that, with respect to the former, affected parties need to prove that the contractual performance is impossible while, for the latter, affected parties only need to prove that the performance of the contract is possible but with substantial disadvantages to the affected party.

In the event of a fundamental change regulated by Article 420, affected parties may request the other party to re-negotiate the contract within a reasonable period of time. Where the parties to the contract cannot agree on amendment to the contract as such, either party may request a court to:

  • terminate the contract at a specified time; or
  • amend the contract to balance the rights and benefits of the parties;

Of note, the court is only permitted to decide on the amendment to the contract where the termination of such contract would cause loss and damages greater than the costs for the performance of the contract when amended.

  1. Rewriting force majeure clauses

Proving any pandemic, the COVID-19 as analyzed above for an example, is onerous and requires a lot of efforts from affected parties while the outcome is unpredictable as ever. That is why we have seen plenty of new drafting around force majeure terms expressly referencing to pandemic in general and the COVID-19 in particular, as below for an example, which is highly recommended to be incorporated into contracts to be entered into.

Force Majeure Event means an event that wholly or partly prevents or delays the performance of obligations and/or the adherence to deadlines or time periods arising under this Agreement and shall include, without limitation, an act of God, explosion, accident, fire, lighting, earthquake, storms, flood or similar cataclysmic occurrence; an act of war , blockade, insurrection, lockouts, or other labor difficulties; restrictions or restraints imposed by law or by rule, regulations or order of any deferral, state or local government, governmental agency or quasi-governmental agency; a pandemic; COVID-19 (Coronavirus)-related events, including, by way of example but not limitation, quarantines, third party vendor shut downs, business shut downs, and travel restrictions; action or failure to act of any federal, state or local government, governmental agency or quasi-governmental agency; and interruption or other loss of utilities due to causes beyond the reasonable control of the Purchaser.”

  1. E-signatures

Under the Law on Electronic Transactions 2005, an e-signature is defined as being created in the form of words, script, numerals, symbols, sounds or in other forms by electronic means, logically attached or associated with a data massage, and being capable of identifying the person who has signed the data message, and being capable of identifying the consent of that signatory to the contents of the signed data message.

The law also provides that parties to a transaction have the right to agree to use or not to use an e-signature to execute data messages (e.g. a soft copy of a contract exchanged via emails) unless otherwise regulated by the law. In the context of the COVID-19 pandemic, it is advisable that parties explicitly agree on the e-signatures having the same validity of “wet ink” signatures. Internationally we have seen new drafting around e-signatures as below, for an example:

The words “execution,” “signed,” “signature,” and words of like import in this Agreement shall be deemed to include electronic signatures which shall be of the same legal effect, validity or enforceability as a manually executed signature, to the extent and as provided for in all applicable law.”

Notwithstanding the agreement of the parties on the validity of e-signatures, according to Article 24.1 of the Law on Electronic Transactions, e-signatures must satisfy the following conditions in order to have same legal effect with a “wet ink” signatures:

  • The method of creating the e-signatures permit the identification of the signatory and to verify his/her approval of the contents of the data message; and
  • Such method is sufficiently reliable and appropriate for the purposes for which the data message was originated and exchanged.

In addition, Article 21.2 of Law on Electronic Transactions also generally requires e-signatures to satisfy the following “safety” conditions:

  • The data used to create an e-signature is owned only by the signatory;
  • The data used to create an e-signature is under the control of only the signatory at the time of signing;
  • All changes to an e-signature after the time of signing is detectable; and
  • All changes to the contents of the data message after the time of signing is detectable

As all these conditions are vague and may give rise to uncertainty, a practical solution is to resort to third-party certification service providers. Enterprises/individuals can register their e-signatures with such service providers and will receive a certificate of validity of the respective e-signatures.

All analysis aside however, Vietnam remains an ‘old school’ jurisdiction for the time being and, where possible to obtain wet signatures on contracts and contract related documents such as formal notices it remains advisable to do so.

For more information, please contact Giles at GTCooper@duanemorris.com or Dang Ngoc Huyen at HDang@@duanemorris.com or any of the lawyers in our office listing. Giles is Chairman of Duane Morris Vietnam LLC and branch director of Duane Morris’ HCMC office.

Vietnam’s renewable energy industry amid COVID-19: facts, force majeure and (patchy) Government support

Vietnam’s renewable energy development over the past three or so years can variously be described as frenetic, chaotic and heartening. Look past all the noise about non-bankable agreements, insufficient transmission infrastructure and bureaucratic black holes, and it’s clear the market has spoken. Vietnam currently has the largest installed solar capacity in Southeast Asia and is taking strides on wind too. Between May and July 2019, an incredible 82 ground mounted solar plants were connected to the national grid (total of 4,464 MW), more than 400% the target that had been set for 2020. The Ministry of Industry and Trade recently announced that the country is aiming to boost power output produced by renewable energy to about 23% by 2030.

The sector as a whole is also poised on the brink of a new phase. Feed in tariffs are coming to an end, low hanging fruit projects have been developed and local banks’ capacity to continue to finance development is stressed. Meanwhile, energy demand rises steadily and right-minded global citizens are clamoring for an end to coal and a rapid transition to renewable energy sources.

Into this heady mix arrived a novel corona virus and the disease known as COVID-19.

For all the momentum, the clean-energy sectors – solar, wind, energy storage, and companies transforming the power grid – will not escape the COVID-19 impact. They face serious questions across the board: from supply chain issues to workforce shortages, to more macro questions about the economy, energy demand and availability of finance.

New FiT announcement for solar does little to calm waters

Which is why the Prime Minister’s Decision 13 on 6 April 2020 announcing the new solar power feed in tariffs was both a blessing and a curse. On the one hand, the market finally has long-awaited certainty over revenue stream. On the other hand, the COD deadline to qualify for the new tariffs – 31 December 2020 – is like a bad joke. See more about this here: https://blogs.duanemorris.com/vietnam/2020/04/07/solar-fit-2-finally-announced-in-vietnam-but-strict-timeline-remains/

In fairness, the 31 December 2020 deadline had been flagged for some time, but the long delay in making it formal, only to finally issue the Decision in a period of unprecedented global chaos and lockdown, with a deadline just 8 months away, almost seems cruel.

Module production facilities in Vietnam usually carry one or two months of supplementary materials inventory on-site. If production interruptions lasts longer than one month, factories in Vietnam will start to see supply shortages that will reduce their production output. Developers waiting for module delivery from mainland China in the second quarter of 2020 will very likely not see the orders delivered on time. Late module delivery will affect project construction schedules around the world, and projects with Q3 and Q4 2020 targets are likely to be hit particularly hard.

In other words, if you are a ground-mounted solar developer in Vietnam today and had been waiting for certainty of revenue stream before pulling the trigger on procurement (let alone land clearance costs), good luck.

Wind makes out better

Similar to the solar industry, COVID-19 has already interrupted the supply chain for wind power plants, which will lead to commissioning delays. Leading turbines suppliers have already announced delays in delivery dates for turbines and other essential equipment citing force majeure clauses in supply contracts.

Looking past supply, the longer strict public health measures stay in place, the more likely it is that equipment prices will be impacted as well.

At least for wind power projects, Vietnam’s Government seems to be listening. As a result of the COVID-19 situation and pleas from investors, on 9 April 2020, the Ministry of Industry and Trade proposed to the Prime Minister a FiT extension for wind projects until 31 December 2023 (a substantial 2+ years extension on the current deadline of 1 November 2021). The MOIT proposes in Official Letter 2491 that a new FiT should apply from1 November 2021 to 31 December 2023 and thereafter wind power tariffs should be subject to auction.

It remains to be seen if the MOIT proposal will be accepted and if prompt action is not taken, foreign clean energy development companies may withdraw from the wind and solar power market because of the possible negative impacts of COVID-19 on their global operations. Vietnam may lose investment disproportionately because it is considered a high-risk market. The virus could also make it harder to keep wind and solar farms up and running, due to travel bans and maintenance delays.

COVID-19 re-writes force majeure clauses

Where coronavirus causes business disruption, from fulfillment of deliveries to cancellation of events, a common question is whether commercial parties can rely on force majeure clauses in their contracts.

Vietnamese law defines force majeure in Article 56 of the Civil Code: “An event of force majeure is an event which occurs in an objective manner which is not able to be foreseen and which is not able to be remedied by all possible necessary and admissible measures being taken”.

For contracts that have been entered into prior to the COVID-19 pandemic, project developers will have to prove that the pandemic satisfies all three components of a force majeure event in order to rely on this statutory right. The first two can be easily met – the corona virus is an objective event that cannot be foreseen. However the trickiest part for developers would be the last component – whether the developer has taken all reasonable measures to prevent the effect of the pandemic on their project. This is a subjective test, and will need to be analyzed on a case-to-case basis taking actual facts into account.

Internationally, we see plenty of new drafting around force majeure terms expressly referencing COVID-19. An example is:

“Force Majeure Event means an event that wholly or partly prevents or delays the performance of obligations and/or the adherence to deadlines or time periods arising under this Agreement and shall include, without limitation, an act of God, explosion, accident, fire, lighting, earthquake, storms, flood or similar cataclysmic occurrence; an act of war, blockade, insurrection, riot, civil disturbance, sabotage, strikes, lockouts, or other labor difficulties; restrictions or restraints imposed by law or by rule, regulation or order of any federal, state or local government, governmental agency or quasi-governmental agency; a pandemic; COVID-19 (Coronavirus)-related events, including, by way of example but not limitation, quarantines, third party vendor shut downs, business shut downs, and travel restrictions; action or failure to act of any federal, state or local government, governmental agency or quasi-governmental agency; and interruption or other loss of utilities due to causes beyond the reasonable control of the Purchaser.”

Even though the force majeure clauses in standard wind and solar PPA do cover epidemic, they do not refer to epidemic-related events caused by third parties or those within the control of the government (government FM events). Since the power purchaser in Vietnam (EVN) is a State-owned enterprise, this raises the concern of EVN relying on government FM events to exempt itself from obligation. The lack of distinction emphasized between natural FM events and government FM events in the standard clauses, and the lack of expansion on the general reference to “epidemic”, puts power developers in a fragile spot amid this novel virus situation. As a result, it is advised that developers should always try to negotiate their PPAs to reflect international standards. This is of course easier said than done, but doesn’t mean efforts should be ignored.

On the developer’s side, it remains to be seen whether the standard PPA terms on force majeure might operate to allow extensions to COD deadlines, especially considering the deadlines are mandated in legislation. This is a topic that would bear much more scrutiny on a case-to-case basis.

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 Chairman of Duane Morris Vietnam LLC, branch director of Duane Morris’ HCMC office and Asia lead for Duane Morris’ Energy Industry Group.

3 Things About Vietnam’s Updated Legal Framework for Biomass Power Projects

Despite abundantly available biomass feedstock of agricultural origin, ranging from sugar bagasse, wood chip to rice husks and stalks, biomass as a source of renewable energy does not seem to have received the same amount of attention from the government of Vietnam as solar or wind power. It took the government more than six years to acknowledge the modest results of the current incentives package and adopt measures to give a new push to the development of biomass power plants. This was done on 5 March 2020 when the Prime Minister issued Decision No. 08/2020/QD-TTg (“Decision 08“) amending Decision No. 24/2014/QD-TTg dated 24 March 2014 (“Decision 24“) on support mechanisms for the development of biomass power projects in Vietnam. Decision 08 introduces a number of important changes which will take effect on 25 April 2020.

Increase of the Feed-in-Tariffs (“FiT”)

The FiT for electricity produced by combined heat and power (“CHP”) biomass power plants will increase from USD 5.8 cents per kWh to USD 7.03 cents (VND 1,634) per kWh.

The government has also abandoned the use of avoided cost schedules (calculated based on the cost of electricity produced by coal-fired power plants) published annually for determination of the electricity purchase price from non-CHP biomass electricity producers. The FiT for these projects is set at USD 8.47 cents (VND 1,968).

The FiTs are exclusive of value-added tax and are adjusted according to USD/VND exchange rate. The new FiTs will be also benefit the biomass power projects which have started operating before 5 March 2020 for the remaining terms of their power purchase agreements (“PPAs”).

Technical standards for electricity generation equipment

Decision 08 introduces a new requirement to comply with technical standards applicable to biomass electricity generation equipment and quality norms applicable to electricity produced by biomass power plants. Similar requirements already exist in recent regulations applicable to solar and wind power projects. The technical standards and norms will be elaborated by the Ministry of Industry and Trade (“MOIT”) which is also responsible for the issuance of a new model PPA for biomass projects.

Possibility of alternative off-takers

Under Decision 08 Electricity of Vietnam (“EVN”) (directly or through its authorised group entities) remains the sole off-taker of the electricity generated using biomass. However, the new decision also opens the door to “organisations assuming the rights and obligations” of EVN (or its relevant group entities) to become biomass electricity off-takers. This new development is in line with the government’s road-map for the liberalisation of Vietnam’s electricity markets (wholesale and then retail) by 2025. It is not clear whether this would improve the bankability of biomass PPAs, since EVN, as a State-owned enterprise, still enjoys strong government support while such backing may not be available to other off-takers in the future.

The possibility of selling electricity produced by biomass power plants directly to end users is not contemplated by the government at this stage. A recently published draft regulation on pilot Direct PPAs does not seem to include biomass power projects.

The hope is that above changes will make biomass power projects more attractive for investors. Whether the government’s target to increase the share of electricity produced from biomass to 2.1 percent of the total generated electricity by 2030 set out in the Revised Power Development Master Plan VII is achievable still depends a great deal on the new biomass PPA and technical requirements for biomass power projects to be issued by the MOIT in the coming months.

 

 

 

 

 

 

Solar FIT 2 finally announced in Vietnam but strict timeline remains

Vietnam’s Prime Minister has finally issued a decision on new FITs for solar power projects. The Decision formalizes amounts many had been expecting based on previously circulated draft information but comes nearly a year after the previous FIT rate expired (June 2019) and will leave many wondering why the decision couldn’t have been made much sooner.

Decision 13/2020/QD-TTg dated 6 April 2020 confirms that the new FITs will only be available – for now at least – for projects that COD prior to 31 December 2020.   This is a ridiculously short time line considering the long lead in time for delivery of inverters and, for many projects, completing land acquisition procedures.

The new FITs are:

  • For floating solar energy projects: 7.69 US cents/ kWh
  • For ground mounted solar energy projects: 7.09 US cents/ kWh
  • For rooftop energy solar energy projects: 8.38 US cents/ kWh

While providing welcome certainty, the long delay has seriously stressed many approved and licensed solar projects.   Investors and developers had been left in the dark about what revenue they would receive while simultaneously under pressure to meet construction deadlines stated in investment approvals and PPAs.

On the positive side, the Decision confirms that projects that are eligible for the new FITs are those that obtained Decisions on investment policy prior to 23 November 2019. This throws a wider net than previously-floated criteria that projects would have to have already started construction by that date. Practically speaking however, given the tight COD deadline, it will not dramatically affect the number of projects that have a realistic shot at securing the new FIT. Project owners need to make a very calculated decision now about how hard and fast to push ahead for COD by end of the year. Among myriad factors that could threaten such a target – including COVID-19 supply chain issues – must be EVN’s capacity to integrate and connect a potential flood of projects before the deadline.

The alternative, according to the new Decision, is that project owners will need to participate in competitive auctions. Though, also coming into view now, is a new corporate direct power purchase pilot program that will be an attractive option for many developers, albeit initially limited in scope. Read some more about that scheme here.

Notably, the new Decision does not suggest that any improvements will be made to the template solar power PPA, a form widely considered unbankable for international banks. Surely however the days must be numbered for this form if the Government wants to see sound future development of solar power, not to mention lower prices, in future.

With respect to rooftop solar projects, the Decision does not – as many had hoped – increase the existing 1 MW limit (which is not a true limit per se but rather a threshold for dramatically simpler licensing). Many had advocated to increase this to 3MW but not to be.

The Decision does however expressly recognize the concept of private rooftop power sales, something previously not clearly regulated. On that point, the Decision provinces that if EVN is not the power buyer, the parties can agree on their own PPA terms, provided they are consistent with existing regulations. This will be welcome news for rooftop developers who have been currently operating in something of a grey area, often using unconventional contractual arrangements. Further detailed regulation may come from the MOIT to further elaborate this.

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 Chairman of Duane Morris Vietnam LLC, branch director of Duane Morris’ HCMC office and Asia lead for Duane Morris’ Energy Industry Group.

Crunch time for PM’s decision on solar FIT2

In a 6 Feb 2020 report to the PM, the MOIT shares views received from the Ministry of Justice and Ministry of Finance on the long-awaited new FIT regime for solar projects. Interestingly, a new option has emerged: that FIT 2 could apply to all projects approved in principle prior to 23 November 2019 and that reach COD by 31 December 2020. While December 2020 is still very close and thus a practical limit, this option is still markedly broader than the MOIT’s earlier proposal that only projects that had commenced construction (with very narrow criteria of what that means) prior to 23 November 2019 (and reach COD by 31 December 2020) should be entitled to FIT 2.

If the PM accepts this new option it would significantly increase the number of already-approved solar projects potentially eligible for FIT 2. that would be welcome news for approx. 40 projects currently in FIT limbo.

With this document, it appears that all involved ministries and other stakeholders such as EVN have been formally consulted and their opinions formally shared with the PM. The ball is firmly in the PM’s court now.

See the original text of the 6 Feb report here: FIT 2

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.

Narrow view of “under construction” may spell end of FiT goal for vast majority of Vietnam’s approved solar power projects

Only a tiny proportion of already-approved solar projects may qualify for Vietnam’s next feed in tariff (FiT 2) according to draft opinions from the MOIT.  If the Prime Minister agrees with the approach, many projects with already-signed PPAs, some in very advanced stages of development, look set to be forced into participating in tariff auctions or, worse, have their approvals withdrawn altogether.

The unsigned and undated MOIT document follows the Prime Minister’s surprise announcement dated 22 November that FiT 2 will only be available for projects with signed PPAs that are “under construction” and provided they reach COD by end of 2020.  The MOIT document seeks to define what “under construction” means for this purpose.  It takes a narrow view, referring to Article 6.1.b of Decree 59/2015/ND-CP dated 18 June 2015 re management of construction projects to suggest that for a project to be considered “under construction” the project must have completed appraisal of detailed / technical construction designs prior to 22 November 2019.

According to the MOIT’s data contained in the draft, it appears that only four out of 23 projects having already-signed PPAs but not yet reached COD would meet this criteria (some sources indicate there may be in excess of 30 such projects).  That would leave the vast majority of projects with signed PPAs out of contention for FiT2 and left scratching their heads as to what happens next.

As noted, the draft letter sighted is unofficial and draft only at this time so it is not yet definitive.  From our point of view, the MOIT is offering a far too narrow interpretation of what “under construction” could/ should mean.  Article 6.1.b of Decree 59 provides for numerous additional steps in the construction process that, if considered, would broaden the net substantially.  For example, it also refers to land allocation or lease; site investigation works, demining (if any); construction survey work; formulation, appraisal and approval of design and construction estimates; issuance of construction permits (if required); selection of contractors and signing of construction contracts, among other points.  There are approved projects that have paid for land clearance and compensation and started some site preparatory works but have held off completing detailed construction design appraisal pending the next FiT policy news.

As ever, it remains to be seen what final decision the PM will make on this issue.  It is not unreasonable to believe that the PM may consider the MOIT’s suggestion to be too narrow considering the substantial resources already committed by developers on many of these projects, some of which signed PPAs late 2017/ early 2018 expecting to make the FiT 1 cut off of 30 June 2019 and that have been left in limbo over the past nearly 6 months while the PM mulls the country’s new solar policy.

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.

BREAKING NEWS – Vietnam’s PM decides to do away with solar FiTs in favor of auctions

Get ready for auctions!  After months of confusion and uncertainty over the policy for solar power development in Vietnam Prime Minister Nguyen Xuan Phuc today issued his conclusions and looks to have signed the death knell for solar feed in tariffs (FiT) in favor of competitive auctions.

In Notification No. 402/TB-VPCP dated 22 November 2019, the Prime Minster concluded that rational future development of the sector necessitates introducing an auction system for ground-mounted solar projects.  FiTs will continue to apply only for rooftop solar projects and certain already-approved ground-mounted projects.

The decision comes nearly five full months after expiry of the blanket 9.35c/ kWh FiT issued in April 2017 that kicked off a huge, and largely uncontrolled, rush that culminated in some 4,500MW of solar generation capacity becoming operational by July 2019 and, reportedly, an incredible 35GW of registered interest.  The first number alone is some 500% more than the 850MW of solar that was planned to be operational by 2020 in National Power Development Masterplan 7 (revised as of 2016).  That both highlights just how frenetic the activity was and also how efficiently the private sector is able to get these projects developed, financed and constructed.  Just imagine what could be done with an international-standard PPA and a developed grid infrastructure.

The Prime Minister, in his conclusions, chides the MOIT for the helter skelter development over the past two years, with many projects concentrated in areas where grid infrastructure is unable to properly serve the facilities resulting in widespread curtailment problems.  The Prime Minister has urged the MOIT to learn its lessons and re-orient itself towards a new reality.  The gold rush days are over and developers can expect a more rigorous licensing and approval process for new projects now.

FiTs aren’t entirely dead yet though.  The Prime Minister’s conclusions suggest, without stating definitively, that certain projects will still be entitled to FiTs.  Specifically, ground-mounted projects that already have signed PPAs and can be put into operation in 2020 appear set to continue to enjoy FiTs.  Rooftop solar projects will also continue to enjoy FiTs.  The Prime Minister has instructed the MOIT to propose the final FiT terms, including a list of projects entitled to enjoy the new FiT, and present them for his approval by 15 December 2019.  While the number is still unknown, it is widely expected to be 7.09c for ground-mounted projects and stay at 9.35c for rooftop projects (which are favored due to not needing land to be allocated).

Certain, already announced, special rules for Ninh Thuan province will continue to apply with some adjustment.  Specifically, some already-approved projects in that province will continue to enjoy the 9.35c FiT but only until total operational capacity there reaches 2000 MW or until the end of 2020, whichever comes first.  The race is on there.

For all other ground-mounted solar projects, the Prime Minister has determined that competitive auctions are the way forward.  No doubt having an eye on the September 2019 auctions in Cambodia that resulted in solar tariffs as low as 3.87c, and record low prices in other markets around the world, this is seen as the appropriate way to marry investor appetite with actual conditions.  There is of course a huge question mark over how such auctions will function in practice and there remains a lot to be seen.  Most significantly, will there be any changes to the standard PPA terms to facilitate low prices.  If not, the market will have to put a firm price on the bankability and contractual risk.

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.