Tag Archives: COVID IMPACT RE

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.