Tag Archives: biomass

VIETNAM – BIOMASS POWER PROJECTS – NEW LAWS AND HOW TO GET HIGHEST LEVELS OF LEGAL CERTAINTY AND BANKABILITY UNDER EU-VN INVESTMENT PROTECTION AGREEMENT (“EVIPA”) AND COMPREHENSIVE AND PROGRESSIVE TRANS-PACIFIC PARTNERSHIP (“CPTPP”)

On 07 July 2020, the Ministry of Industry and Trade (“MOIT”) issued Circular No. 16/2020/TT-BCT to amend and supplement certain provisions of Circular No. 44/2-15/TT-BCT dated 09 December 2015 of the MOIT Minister on project development, avoided cost tariff and standardized power purchase agreement for biomass power projects.

In particular, this new Circular provides that investors be only allowed to build on-grid biomass power investment projects, which have been included in the approved Power Development Plan or Provincial Power Development Plan.

In addition, feed-in-tariff for on-grid biomass power projects will follow Decision No. 08/2020/QD-TTg dated 05 march 2020, which increases the feed-in tariff for biomass co-generation heat power to 7.03 US cents per kilowatt hour (up from 5.8 US cents), and for other types of biomass projects to 8.47 US cents per kWh (up from 7.3 to 7.5 US cents depending on location).

Investors whose projects operated before 25 April 2020 will sign a new Power Purchase Agreement (“PPA”) with the buyer in order to be entitled with the abovementioned feed-in-tariff from 25 April 2020 until the expiry of the signed PPA.

How to get highest levels of legal certainty and bankability under the EU-Vietnam Investment Protection Agreement and the CPTPP

The recent EVIPA and CPTPP further open the market to foreign investors. The investors now can bring their technology and know-how, especially those from countries with high level of development in renewable sectors to Vietnam with less market access barriers and being more secured. In particular, the CPTPP and the EVIPA make it possible that foreign investors could sue Vietnam’s Government for its investment related decisions according to the dispute settlement by arbitration rules. The final arbitral award is binding and enforceable without any question from the local courts regarding its validity. This is an advantage for investors considering the fact that the percentage of annulled foreign arbitral awards in Vietnam remains relatively high for different reasons.

Although the transition period for the aforementioned Investor-State Dispute Settlement (ISDS) mechanism is 5 years from the effective date of the EVIPA, Duane Morris Vietnam has the legal and technical tools to make such provisions work in favor of investors from now.

For more information on the above, please do not hesitate to contact the author Dr. Oliver Massmann under omassmann@duanemorris.com. Dr. Oliver Massmann is the General Director of Duane Morris Vietnam LLC, Member to the Supervisory Board of PetroVietnam Insurance JSC and the only foreign lawyer presenting in Vietnamese language to members of the NATIONAL ASSEMBLY OF VIETNAM.

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.

 

 

 

 

 

 

Lawyer in Vietnam Oliver Massmann Biomass Power Plant Development – SMALL SCALE BIOMASS POWER PLANTS IN VIETNAM – HOW TO STRUCTURE IT RIGHT?

Vietnam’s economic dynamism over the past years has given rise to a swift increase inenergy demand. Electricity demand in the country has been growing in the double digits annually.Vietnam has experienced rapid economic growth since it made a shift from a highly centralised planned economy to a socialist-oriented market economy in the mid-80s. This also resulted in unprecedented growth in electricity demand, which has not been observed in any other regions or developing countries.Electricity demand in Vietnam is forecasted to increase by up to 14.2 pct. annually for the 2011-2015 period and 11.4 pct. for the 2016-2020 period, and the electricity demand is expected to increase 7 times to 800 billion Kwh in 2030.
In this context, the Vietnamese government identified the necessity that the available resources of renewable energies have to be exploited and expanded to meet such a big electricity demand. While hydroelectric energy, whose resource is abundant in Vietnam, shows certain potential risks, biomass energy could be a choice for development in Vietnam. This derives from Vietnam’s advantage of widespread agriculture. The capacity for sustainable power production from biomass amounts to just 150 million tons per annum, 700 – 780 MW for electricity generation alone can be reached.
Government’s policy with regards to renewable energies in general and biomass energy in particular
Vietnamese Government recognizes the importance of renewable energy in power development and reflects its objectives in the Master plan VII on energy development in Vietnam.The renewable energy is increasingly accounting for power sources (4.5% in 2020 and 6.0% in 2030 of the total power supply.The Master plan VII sets the renewable energy target rate at 5.6 pct. of total primary energy consumption by 2020 and 9.4 pct. by 2030. The Government’s target is to increasethe biomass power to 500 MW (0.6 pct. of electricity production) by 2020 and 2,000 MW (1.1 pct.) by 2030.
Further, on 24 March 2014, the Prime Minister issued Decision No. 24/2014/QD-TTg to provide mechanism to support biomass power plants. In particular, this Decision offers the following incentives to off-grid biomass power plants:
• Investment capital:
o The investor can mobilize capital from organizations and individuals in and out of the country for investing in implementation of biomass power projects
o Biomass power projects are entitled to incentives in terms of investment credits in accordance with prevailing legal provisions on investment credit and export credit of the State.
• Import tax: Biomass power projects are exempt from import tax for goods imported to create fixed assets for the projects; imported goods are materials, supplies and semi-products which have not been locally produced and imported for serving production of projects in accordance with prevailing legal provisions on export tax and import tax.
• Corporate income tax: The exemption, reduction of corporate income tax for biomass power projects will be conducted inthe same way as for projects which are subject to investment incentives under laws on taxation.
• Land use: Biomass power projects and power line and substation works for connecting to the national power grid are entitled to exemption or reduction of land use or land rent fees.
For on-grid biomass power projects, Electricity of Vietnam (“EVN”) is to buy all of the plant’s biomass energy output at the current price of 1,220 VND/kWh (excluding VAT, about 5.8 UScent). This price will be adjusted according to the fluctuation of the VND/USD exchange rate.
Market access for foreign investor
Currently, there is no foreign ownership restriction in energy sector in Vietnam. The foreign investor may choose among permitted investment forms: 100% foreign invested company, joint venture or public private partnership (“PPP”) in the form of BOT contract.
Starting up a biomass power plant
In order to construct a biomass power plant, foreign investors first need to apply for an investment certificate. The application process is quite complicated and involves many state agencies, with certain unpredictable issues occurring. However, as the new Investment Law and Enterprise Law, which mainly regulate investment environment in Vietnam, takes effect from 01 July 2015, it is expected that it will be more time saving and less complicated for foreign investors in the licensing process.
Either before or after the investor is on board (but in each case before the construction), it is necessary to establish the project enterprise and to secure investment certificates issued by competent authorities. Then, the project enterprise has to conclude negotiations with regard to a wide range of important project contracts including the land lease contract and the power purchase agreement (PPA).
Under the PPA, EVN (in case of network-dependent network) – or in rare cases also other buyers – undertake to purchase energy from a project enterprise for a definite period and at a specified rate. The PPA is probably the most important agreement to be negotiated because it determines the future income from the project. It is crucial that, according to the PPA, the project enterprise cannot be burdened with a penalty if the power supply is affected by small amounts of biomass. In view of the fact that at the moment there is only one buyer (EVN) for network-dependent power projects, the negotiations may be sometimes unilateral. Moreover, the electricity producers have to consider that the consumers (according to the Electricity Law) have a statutorily regulated right to renegotiate the purchase price in the medium term. They have to take it into account in their project planning.
The land or real estate lease contract in Vietnam should be kept rather simple, though the aspects of land sale approval and compensatory payments may be fraught with difficulties. Usually, the duration of such contracts should correspond at least to the loan repayment plan and, in addition, a considerable period for profit generation after the repayment of the loan should be agreed (as a rule 25-30 years). Furthermore, it is important to make sure that the land use rights of the project enterprise can be provided for the lender as security and are transferable.
Small scale biomass power project in Vietnam – How to structure it right?
Considering the monopoly role of EVN as well as tough negotiation of the PPA, investors could still get out of this trouble. According to Article 1.2 of Circular No. 56/2014/TT-BCT promulgating methods to determine electricity generation price and examination steps of the PPA, the important requirement to negotiate with EVN is whether it is an on-grid or off-grid project. If it is an on-grid project with capacity of more than 30 MW or under 30 MW but voluntarily participating in the power market, the investor must negotiate with EVN. This indicates that if the project is off-grid, there will be no requirement to negotiate with EVN.
Moreover, in order to operate small scale biomass power project, the investor needs to obtain a power operation permit issued by the local People’s Committee or the local Department of Industry and Trade as authorized by the local People’s Committee.To get such permit, the operator has to negotiate (or sign in principle) a PPA with a buyer. In case the project is off-grid and renewable energy project (biomass), the operator can negotiate with a local distributor/buyer assigned by the local People’s Committee.

Please do not hesitate to contact Oliver Massmann under omassmann@duanemorris.com if you have any questions or want to know more details on the above. Oliver Massmann is the General Director of Duane Morris Vietnam LLC.

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