Tag Archives: power

The sun rises on Vietnam’s energy sector

Over the past three decades Vietnam has witnessed startling economic success thanks to the country’s openness to international trade and investment. The energy sector in particular has grown rapidly, with abundant hydrocarbons and hydropower resources allowing the country to keep pace with the energy demands of a rising population.

 

However, there may be clouds on the horizon. The most easily-accessible resources are running out and imports of coal and gas will be increasingly needed to keep industry chugging along. To maintain its high rate of growth Vietnam will be looking for huge investment over the coming years. In order to do this, and keep to its international greenhouse gas commitments, the government has set its sights on some ambitious targets for solar power generation.

 

Recent decisions issued by the government represent baby steps in this direction. Evidently, there is some enthusiasm for a solar-powered future, but is it enough?

Continue reading The sun rises on Vietnam’s energy sector

Vietnam – Solar Power – Breaking News Update First draft of the solar Power Purchase Agreement released by the Ministry of Industry and Trade

Following the issuance of Decision No. 11/2017/QD-TTg of the Prime Minister on mechanism for encouragement of development of solar power in Vietnam (Decision 11), the Ministry of Industry and Trade released the first draft of a Circular guiding the Decision last month (Draft Circular). The Circular is aimed at providing regulations on formulation, approval and amendment of the national as well as provincial power master plan. In addition, the draft solar Power Purchase Agreement (Draft PPA), which is of great interest for many foreign investors, is also provided in the Circular as a mandatory template for future solar power projects with only minor changes expected to be permitted during the contract negotiations.

In essence, the Draft PPA is almost the same as current applicable PPAs for renewable projects. This creates bankable issues for solar projects and a hindrance to foreign investors planning an investment in the sector.

Feed-in-Tariff (FiT)

The draft Circular repeats the solar FiT for power output from on-grid projects and excessive power output generated from rooftop projects specified in Decision 11 to be VND2,086/kWh or US 9.35 cents/kWh. However, unlike Decision 11, the Draft PPA does not require that the conversion between USD and VND be according to the exchange rate at the time of payment.

EVN’s rights and obligations as the sole off-taker

EVN is delegated to purchase all power output generated from solar power projects pursuant to terms and conditions of the draft PPA within 20 years.

It is noteworthy that the Draft Circular and the Draft PPA list out certain circumstances where EVN is not obliged to purchase power as negotiated with the seller, for example:

  1. when EVN is in the process of installing equipment, or making repairs, replacement, inspection or examination of the grid connection of the seller’s power plant;
  2. when the transmission grid or the distribution grid connected to EVN’s grid has a problem or grid equipment directly connected to EVN’s transmission grid or the distribution grid has a problem; and
  3. when EVN’s grid needs support to recover after the incident in accordance with the provisions of operation of the national power system and the standards, technical regulations of the electric industry.

Unfortunately, the current Draft PPA does not include provisions protecting the interests of the seller in the abovementioned circumstances. It is quite risky for the producer if the output is ready to be fed to the grid but the connection is not available to do so. Absent a clear indication of whether the Draft PPA is a ‘take or pay” agreement, investors will find it difficult to secure and ensure the profits and revenue of their projects.

Dispute resolution

The Draft PPA allows either party to the agreement to bring the dispute to local courts for litigation and other energy-related state bodies of Vietnam (General Directorate of Energy and the Electricity Regulatory Authority of Vietnam) for mediation and resolution.

The Draft PPA does not provide for international arbitration to be an option to resolve the dispute. This could be a great concern for foreign investors, especially those of large utility scale projects.

Other key issues of concern

  • No Government guarantee to enhance the credit of EVN as the sole off-taker;
  • No provision addressing the risks of changes in applicable laws; and
  • The Draft PPA is required to follow a specific template, which is not bankable.

While the current Draft PPA leaves certain key issues unresolved, we note that this is only the first draft. Thus, it will be subject to potential revisions before its official adoption. We believe that with lessons learnt from the PPA for other renewable projects, the Ministry of Industry and Trade will complete the Draft PPA towards a mutually beneficial agreement for both the seller and the purchaser.

How to avoid EVN – The 30 MW rule

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 means if the project is off-grid, there will be no requirement to negotiate with EVN. Therefore, if you are new to the market, an off-grid 30MW project or less is a smart option to test the water. Once you have built up your track record, you can go for larger scale projects.

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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.

 

 

Vietnam – Wind Power Breaking News – One of the first foreign financed Wind PPAs signed – Duane Morris advised on this transaction – What you must know

 

EAB New Energy GmbH (“EAB”), a German privately held SME with business activities around the world (Asia, Latin America, South Africa), engaged Duane Morris Vietnam LLC to advise on one of the very first privately financed Wind Energy Power Purchase Agreements for a wind power project in Vietnam – the “Mui Dinh” wind project (SPV el-wind Mui Dinh LLC) with a total investment value at final stage of about 60 Million USD.

EAB, in close co-operation with its subsidiary in Vietnam – WPV Wind Power Vietnam LLC, has received the Construction Permit for the wind power plant in Ninh Thuan province and will start the wind farm construction works in due course. Duane Morris Vietnam LLC advised EAB in the negotiation of the Wind Power Purchase Agreement with the Electricity of Vietnam (“EVN”) to connect into to the national electricity and sell electricity to EVN (the “Project”). The Wind Power Purchase Agreement was signed on 01 February 2016. This is one of the first signed Wind Power PPA in Vietnam and EAB is one of the first foreign companies with this success.

Given the fact that Vietnam’s wind energy potential is highly appreciated by investors in comparison to its ASEAN neighbours, and very good for building large wind power plants, the success of this Project is considered to pave the way for development of another 40 wind power development in Vietnam, roughly 513,360 megawatts.

This is the beginning of a sizeable privately financed wind energy sector in Vietnam.

Please do not hesitate to contact Oliver Massmann under omassmann@duanemorris.com if you want to know more details on the above or need our assistance in your project. Oliver Massmann is the General Director of Duane Morris Vietnam LLC.

 

 

Lawyer in Vietnam Oliver Massmann THE WORLD BANK REPORT ON RETAIL TARIFF INCREASE SOLUTIONS TO RECOVER ELECTRICITY OF VIETNAM

For the past few years, Vietnam has made the transition from a predominantly agricultural to a mixed economy with substantial development of commercial and industrial activities. Rapid growth in population and improvements in living standards together with the Government’s effort to improve access to electricity throughout the country have led to growing increase in the demand for electricity. This now poses a major challenge for Vietnam to maintain sustained growth of the power sector and to achieve energy security. Meanwhile, Vietnam’s electricity demand continues growing at double-digit number. Electricity infrastructure capacity is limited, operation of certain power projects has been delayed, and private investors are reluctant to invest in the sector due to their concern of low rates of return on equity and low feed-in-tariff. These factors, among others, have left the Electricity of Vietnam (EVN) with no option but to increase debts to cover its operation needs. This article studies and proposes some solutions to improve EVN’s operation in the coming years.

Current situation of the Vietnam’s power market
As of December 31, 2015, the total generation capacity in Vietnam’s interconnected power system was 141.34 billion kWh, an increase of 11.6% compared to 2014. During the period of 2011-2015, electricity generation output increases by 11%/ year on average. Meanwhile, according to World Bank’s report in 2014, Vietnam is one of the most energy intensive economies in the world, and more energy intensive than other countries in the Southeast Asia at the same level of development.[1] Electricity demand has grown at a rapid pace averaging 15% per year from 2008 to 2010 before dropping to 9% in 2011 due to the macroeconomic situation.[2] Electricity demand is expected to be twice as much as GDP growth between 2014 and 2020. The Power Development Plan VII (PDP VII) projects a strong increase in power demand to 2030.[3]

Amended PDP VII sets the target of electricity output in 2020 to be 235 -245 billion kWh, 352 – 379 billion kWh in 2025 and 506 – 559 billion kWh in 2030. In this amended PDP VII, in 2020, the targeted total capacity of power plants is 60,000 MW, in which electricity output from renewable energy sources will account for 9.9%. These numbers in 2025 will be 96,500 MW and 12.5% respectively. In 2030, a target of 129,500 MW being the total capacity of power plants and 21% of electricity output generated from renewable energy sources is also set.

Total investment in the power sector was US$2.6 billion in 2012 and slightly increased in 2013. This is relatively small compared to the investment requirements of about US$7.5 billion per year. Meanwhile, the Vietnam Government as well as state-owned enterprises in the sector is unlikely to invest more due to prohibition from investing in non-core businesses by state-owned enterprises. In addition, the total investment cost from 2014-2020 corresponding to the capacity requirements totals US$53 billion. Thus, most of the expected total investment during 2014- 2020, which is of about US$25 billion should come from private sector. EVN will then still need a substantial investment program, which is hard to be financed until 2020.

The role of EVN in the power market and its financial problems

EVN and its subsidiaries play a vital role in the power sector. Key activities of the subsidiaries are generation, transmission and distribution. EVN acts as the only off-taker from the generators. It incurred significant financial losses in both 2010 and 2011.

EVN’s operation results in 2012 were much better, from a loss of 12% of income in 2011 to a profit of 14% of income. The profitable results maintained in 2013, although the result in 2013 was not as good as in 2012 and investment was still far below the level of needs. EVN has also had a high and rising level of borrowing in foreign currency. EVN is in a total debt of VND86 trillion in 2007, increasing to VND284 trillion in 2013. Total debt is expected to increase from US$14.6 billion in 2014 to US$28.2 billion in 2020.

The reasons behind EVN’s unstable, inefficient and risky operation are largely beyond EVN’s control. In particular, we have to name hydrology, substantial devaluation in the Vietnamese dong against EVN’s major borrowing currencies, lack of strong Government’s commitments in adopting tariffs to cover full cost of power provision as main challenges to the power sector in general and EVN in particular.
In contrast, EVN’s subsidiaries in generation, transmission and distribution have a quite strong operational performance and are well managed. However, low tariffs and low level of equity have put them under considerable financial constraints.

These financial and investment challenges could be solved by appropriate actions from EVN, the Ministry of Industry and Trade – the parent ministry and the private sector. In the worst scenario that EVN could not fulfil its financial obligations, the Ministry of Finance – the guarantor of EVN’s loans must bear the payment responsibility for the loans, resulting in possible decrease in investment and increased levels of supply interruption accordingly.

EVN is not under immediate threat of insolvency. However, if the current delay in payment to its fuel suppliers due to a prolonged delay in increasing tariffs and a series of years with low rainfall continue, EVN could be placed under a much more serious financial pressure. Where its liabilities exceed its assets, insolvency is unavoidable.

EVN’s challenges and solutions

Challenges Solutions
Achieving sufficient level of private investment in the power sector to meet investment needs (1) Improving regulations on guarantees on the remittance of funds, licensing procedures, project appraisal mechanisms, negotiation process with EVN and reducing the numbers of required permits as much as possible;
(2) Maintaining dialogue with private sector;
(3) Improving the MOIT’s capacity to manage IPP projects; and
(4) Divesting GENCOs.
Addressing the current low retail tariffs to enable EVN to improve the electricity system, which in turn improves the reliability of power supply (1) Setting PPAs in line with international standards;
(2) Allowing market prices for new generation investment;
(3) Amending current regulations to attract more private investment; and
(4) Carrying out electricity tariff adjustments to the extent necessary. The tariff adjustment path should be phased over the next 3-4 years (about 40% in total) so that EVN could achieve full cost recovery and financial stability by 2018.
Improving operational efficiency at EVN (1) Appointing a senior EVN leader to coordinate among ministries and agencies to move the financial recovery plan forward;
(2) Better technical management by (i) maintaining a reasonable number of working staff to improve labor productivity; (ii) making use of older coal plants during poor rainfall season and efficiently managing capital program; (iii) enhancing service quality;
(3) Fully unbundling EVN into independent companies;
(4) Disposing non-core assets and focusing only on core business;
(5) Rehabilitating assets; and
(6) Improving governance.
Enhancing EVN’s capacity to manage financing risks (1) Increasing revenues arising from the implementation of cost-based tariffs;
(2) Negotiating with lenders to extend the loan terms;
(3) Establishing a stabilization fund to manage the risks that EVN faces; and
(4) Reducing foreign exchange risks.
We note that these above recommendations are not mutually exclusive. In other words, implementation of any single recommendation could facilitate the implementation and effectiveness of the others. Moreover, these recommendations are not exhausted considering the on-going changes in Government policies and power market situation.
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Please do not hesitate to contact Mr. Oliver Massmann under omassmann@duanemorris.com if you have any questions on the above. Oliver Massmann is the General Director of Duane Morris Vietnam LLC.

THANK YOU !

Lawyer in Vietnam Oliver Massmann Solar Power Latest Updates on Draft Laws:

We have contacted the Department of Renewable Energy under the MOIT who is in charge of drafting this Decision. The Decision is still in a draft version (although it has been submitted to the Prime Minister for signature), thus can’t be published yet.

The final Decision will be issued this year but the exact timing is still uncertain.

Through our consultation with an official of the Department about the content of the Decision, for on-grid solar projects, the FIT rate will be 11.2 UScents/ kWh.

For on-grid rooftop solar projects, the rate will be 18 UScents/ kWh.

The rate in VND will be indicated in the final Decision based on the USD/VND exchange rate at that time and the MOIT will issue an Official Letter every year to adjust the rate in VND according to the fluctuation in the exchange rate.

Rooftop solar projects of less than 50kW will not have to connect to the grid. For those of more than 50kW, connection to the grid is required and an electricity operating permit must be obtained.

Please do not hesitate to contacts Oliver Massmann under omassmann@duanemorris.com if you have any questions on the above. Oliver Massmann is the General Director of Duane Morris Vietnam.

Thank you !

Lawyer in Vietnam Oliver Massmann SOLAR ROOFTOP PROJECT KEY DRIVERS

1. What are the key factors that are driving and restraining the ROOFTOP SOLAR POWER projects market in Vietnam?
In our view, following factors influence investors’ decision in investing in Rooftop Solar Power (RSP) projects in Vietnam:
• Low FIT: the proposed draft law suggests that ‘when electricity generated is higher than electricity consumed, the difference shall be purchased by the purchaser at the connection point, with the electricity tariff is 3150 VND/kWh (excluding value added tax, equivalent of 15 USDcents/kWh). Electricity tariff shall be adjusted according to the fluctuations of the exchange rate between VND/USD’.
• Lack of information on solar power: As a RSP project investment costs are relatively high, investors seek necessary information to support their investment decision. Nevertheless, there is no complete survey or complete source of information on solar energy that investors may access.
• Legal framework: The legal framework for solar power plants are under development. The MOIT is now working on a new draft decree to deal with difficulties that investors may face including application for tax incentives, import of equipment, convenient funding plans, etc.
• Other considerations such as investment costs, technology, etc.

2. Questions regarding cumulative installed capacity:
i. As of December 2013, the cumulative installed capacity for solar PV was 4 MW. What is your estimate of cumulative installed capacity till end of 2015?
The Vietnamese solar PV market is still very small with only around 4.5 MWp installed capacity at the end of 2014. Vietnam is expected to increase to around 7 MWp until 2020 and 1,500 MWp until 2030 with a respective share in renewable power generation capacity of 1.2% (by 2020) and 12.8% (by 2030). I do not have the exact number of cumulative installed capacity in 2015 but I estimate that it should have reached 5MWp.
ii. In your opinion, rooftop solar power installation accounted for how many percent of total solar PV installations? ( 2%?, 5%?)
We do not have access to any official source of latest information on specific numbers of RSP installations and total solar PV installations. Nevertheless, as noted in our answer to your Question 3 above, Vietnam has roughly 15,000 small scale PV off-grid applications, by the end of 2014. Based on such records, the rough percentage of installations of rooftop solar power installations would be 40% of the total solar PV installations (i.e. 6,000 RSP installations for solar home systems and small size PV systems for public use vs. 9,000 ground mounted PV installations for BTS, telecommunication use, public lightening systems and solar signal lights).
iii. What is the expected growth rate from 2016-2020? Is the growth rate of the industry moving in the right direction to achieve the proposed target? (if any?)
It is expected to achieve around 7 MWp until 2020 (growth rate 40% compared to 2016). Yes, the growth rate is moving in the right direction.

3. We are trying to identify the key end-users for ROOFTOP SOLAR POWER systems. What is the percentage (approx.) installed capacity among each of them: Residential, Commercial (Buildings) and Others (Car parking facilities, etc.
We do not have specific figures of RSP system’s installed capacity but according to a recent report of solar power in general, by the end of 2014, roughly 15,000 small scale PV off-grid applications with a total capacity of 3,600 kWp, the vast majority being <200 Wp of size only a few with more than 1kWp, were installed in Viet Nam. Of those, around 5,000 are solar home systems (SHS) with a size of 20-200Wp, 2,100 are telecommunication and BTS systems (300-4,000 Wp) and more than 1,000 are small size PV systems for public use such as in community centers, schools or medical centers (up to 3,000 Wp), which are deployed in rural and mountainous areas or on islands. Furthermore, around 5,000 solar signal lights (20-100 Wp) and 2,000 public lighting systems (50-250 Wp) were installed alongside streets and highways throughout the country.

4. Questions regarding cost:
i. What is the installation cost involved per kWp among different end-user segments in your country? (Residential, Commercial, Community) How is it likely to change in the future?
Residential/Community: $2,500 to 3,000 per kWp
Commercial: $4,500 per kWp
The installation costs can be reduced in future thank to increasing use of locally made products in solar power system and commitments to support including investment costs of the Government of Vietnam.
ii. What is the percentage break-up of installation costs among the various components in a ROOFTOP SOLAR POWER system? (Module, Charge controller, battery, inverter etc.)
Let take an example of a PV at the capacity of 1KWp/2KVA, the percentage of components costs exclusive of costs paid to installation of works by workers will be as follows:
Components Unit Price (USD)
Solar Panel 12 1,636
Battery 6 819
Inverter 1 410
Controller 2 367
3,232

5. What kind of solar panels are largely in demand for ROOFTOP SOLAR POWER systems (Monocrystalline/polycrystalline panels, thin film technologies)? Why? What is the average price range ($/Watt p) for these solar panels in Vietnam?
Monocrystalline/polycrystalline panels are popular in Vietnam as off-grid installed capacity in Viet Nam is dominated by smaller applications such as Solar Home Systems (SHS). Depending the quality and the brand name, the price is different. The average price is 3-5USD/Watt p.

6. How do you hear about new projects and could you please provide me with more examples of key recent projects? How these projects are funded? (banks, financial institutions, government, self-funded)
Basic information of big projects is usually published on the internet. Recently, Vietnam is going to build the first solar power project in Quang Nam with the installed capacity of 120 MW per year, invested by a domestic company Indochina Energy Industry Company Limited.

7. How many system integrators or installers are involved in installing ROOFTOP SOLAR POWER systems? Are there more local players or MNCs? What is the role of system integrator in such contracts? Who are the top 5 system integrators in Vietnam?
We assume that not more than 20 companies, most of them are local and produces components in solar cells/panels and related electronic devices (e.g. – controllers), act as integrators and/or installers. Major players including Hung Gia (Installation), Vtechco (Installation), Vu Phong (Installation), Nam Thai Ha JSC (Solar Materials Incorporated), Red Sun Solar (Solar Cells), Viet Linh AST (solar system), NICS Integration System (Installation).
We do not have specific market shares figures of biggest players in the market but are able to involve a professional market research company to do this job on your behalf.

8. Who are the top 5 competitors/ which brands of solar modules are highly popular in the ROOFTOP SOLAR POWER market?
The rooftop solar power market in Vietnam is still developing and there are not so many competitors yet. The popular names of Rooftop Solar Power Market are Red sun solar, Viet Vmicro JS, Panasonic, Megasun, IREX.

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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.

THANK YOU !

Lawyer in Vietnam Oliver Massmann Solar Power Vietnam Breaking News: First Ever Regulations GOVERNMENT’S INCENTIVES TO DEVELOP SOLAR POWER PROJECTS IN VIETNAM

Vietnam is among the countries with the world’s highest annual sunshine allocation on the world’s solar radiation map. This is an advantage for Vietnam in its efforts to develop a solar power industry, in the context of increasing demand for electricity and the potential risks of traditional electricity production sources.
To encourage investment in renewable energy projects, the Vietnam Ministry of Industry and Trade (MOIT) has proposed the first Draft Decision of the Prime Minister on incentives for solar power projects, especially in terms of investment capital, tax and land use rights. These incentives would apply to power generation projects using the photovoltaic method. The following analysis is based on the latest Draft Decision, which will be subject to further changes when the official decision is adopted.
Investment incentives
Investment capital: Investors may mobilize capital from domestic or overseas organizations and individuals to invest in solar power projects. Such projects are entitled to investment credit and export credit incentives. In particular, investors could apply for a loan of up to 70 percent of the total investment capital of their project with a maximum term of 12 years. Moreover, investors could also enjoy export credit incentives in a loan of up to 85 percent of the export/import contract value, also with a maximum term of 12 years.
Import duty: Solar power projects are exempted from an import duty on those goods imported to create fixed assets of the projects; these include components, materials and semi-finished products that are not available in Vietnam and that are needed for the project’s operation.
Corporate income tax: According to current taxation regulations, solar power projects will also enjoy the same corporate income tax exemption and reduction as projects in sectors that are receiving investment incentives. For example, a corporate income tax rate of 10 percent will be applied for 15 years, tax exemptions will occur within four years and taxes will be reduced by 50 percent in the next nine years.
Land: Solar power projects, lines and transformer stations connected to the national grid enjoy the same exemptions and reductions in land use and land rental as projects entitled to special investment treatment. Such incentives, among other things, include exemption of land rental within three years from the operation date of the project.
Who will be the off-taker?
According to the Draft Decision, the Electricity of Vietnam (EVN) or its authorized member units will be the power purchaser. The power sale and purchase will be conducted by negotiating and signing the power sale and purchase agreement according to the template agreement stipulated by the MOIT. Terms of the agreement extend 20 years from the commercial operation date of the project. Duane Morris will continue to monitor the issuance of the template agreement by the MOIT.
Feed-in-tariff (FIT) rate
EVN is responsible for buying the whole electric output from solar power projects, with the electric buying price at the point of electricity receipt to be 1,800 Vietnamese dong/kwh and 3,500 Vietnamese dong/kWh (equivalent to 12 U.S. cents/kWh and 16.7 U.S. cents/kWh).
For solar power projects installed on the roof of a house connected to the grid, if the electricty generated is more than that consumed, the difference to be bought at the point of electricity receipt is 3,150 Vietnamese dong/kWh (not including VAT, equivalent to 15 U.S. cents/kWh). This price will be adjusted based on the fluctuation rate between the Vietnamese dong and U.S. dollar. If the electricity generated is less than that consumed, the electricity received from the grid must be paid at the normal commercial price charged by the electricity purchaser.
The above FIT rate is still low compared to other neighboring Asian countries. In Thailand, the new FIT is THB 5.66/KWh (about 15.7 U.S. cents/kWh) for a solar farm of less than 90MW. For a solar rooftop, the FIT rate varies depending on the capacity of the project. With a solar rooftop of 250–1,000 KW, the FIT would be THB 6.01/kWh (about 17 U.S. cents/kWh). The FIT for solar rooftops of 10–250 KW and less than 10KW are THB 6.40/kWh (about 18 U.S. cents/kWh) and THB 6.96/kWh (about 19 U.S. cents/kWh), respectively. In the current Draft Decision, Vietnam does not draw any difference between the capacity of the solar rooftop projects but sets the FIT rate based on the difference between electricity consumed and generated. Meanwhile, the FIT in the Philippines for solar power projects is also higher than that of Vietnam, i.e., P 9.68/kWh (equivalent to 21 U.S. cents/kWh). As Vietnam’s FIT is still in the drafting process and not yet final, the anticipation is high for this to be amended in the next draft to reach regional levels. This is of vital importance to attract investment.
Conclusion
If the Draft Decision is adopted, it would be the first-ever legal document regulating solar energy in Vietnam. The Government of Vietnam strives to attract foreign investment in the sector and to take full advantage of the plentiful solar energy—an average solar radiation of 5kWh/m2 per day—across Vietnam. Foreign investors, especially those in the U.S, have been eyeing Vietnam for their investment in clean energy. The Government of Vietnam is aware of the need to garner support for these projects and is offering incentives. While these projects may not meet investors’ expectations in the immediate future, the movement appears positive. The developing agreement on the Trans-Pacific Partnership (TPP), affecting Vietnam, the United States and 10 other countries, points the way toward a developing energy sector in general—and clean energy in particular. Therefore, these factors suggest a growing market and plenty of investment incentives for U.S investors, as well as other members of the TPP.
Oliver Massmann is the General Director of Duane Morris Vietnam LLC. Mr. Massmann practices in the area of corporate international taxation and on power/water projects, matters related to oil and gas companies and telecoms, privatization and equitization, mergers and acquisitions, and general commercial matters for multinational clients in relation to investment and doing business in Vietnam. He can be reached at omassmann@duanemorris.com.

Disclaimer: This article is prepared and published for informational purposes only and should not be construed as legal advice. The views expressed in this article are those of the author and do not necessarily reflect the views of the author’s law firm or its individual partners.

Lawyer in Vietnam Oliver Massmann Liberalization of Distribution in Power Sector – Your Chance to get into business ?

1. What positive impacts will the absence of the current monopoly in distribution and production of power, petrol and coal have on the economy?

Answer: In Vietnam’s energy market, EVN has long been known as the state monopoly in transmission and distribution of electricity. Vietnam still features the Single Buyer Model with EVN’s purchase of all electricity generated from on-grid independent power projects. Investors find it extremely hard to negotiate the Power Purchase Agreement with EVN. Meanwhile, EVN keeps operating at loss with huge debts to PetroVietnam and Vinacomin.
The adoption of the list of goods and services subject to state monopoly will then limit the power of EVN. The State only maintains its monopoly over the operation of multi-purposes hydropower and nuclear power plants, transmission, facilitating as well as operation of the national electricity system of big power plants and those having special importance in terms of socio-economic and national defence and security. Trading in petroleum and oil is also no longer subject to state monopoly.
This is a positive movement of the Government in accordance with its international commitments on market access and its plan on privatization of certain state-owned enterprises. The Government has taken a step closer to Vietnam Wholesale Electricity Market, which is aimed to be launched at the beginning of 2016. More players will participate in the power market. The consumers would have more choices from whom they will buy electricity. A competitive and fair power market will be gradually formed, resulting in greater attraction to investment.

2. How important is it to private investors, especially foreign ones?
Answer: With an open and competitive market, foreign investors will find it more attractive to invest in this sector. They are now no longer required to sell the electricity they generate to EVN but can sell it to other distribution companies or even transmit/ distribute through their own system.
Foreign investors will also no longer face obstacles in negotiating the power price with the EVN. According to a recent report by Ban Viet Securities Joint Stock Company, although power retail price in Vietnam has doubled during the past ten years, from VND 781/kWh (3.5 US cents/ kWh) in 2005 to VND1,622/ kWh (7.3 US cents/ kWh) in 2015, this is still low compared with other countries like Cambodia, Thailand, and Singapore in the APEC. This is among major reasons that discourage investors from pooling their capital into the sector. However, power price is planned to increase from 2016 according to power increase schedule, which aims to ensure capital recovery and reasonable profits for investors. Accordingly, power retail price may increase at 8-9 US cents/ kWh in 2020, equivalent to an increase by 18.4% within the next five years. Power price should also reflect the demand and supply in the market. Foreign investors then find more incentives when making their investment decision.

3. What is your recommendation for Vietnam’s government to reduce its monopoly over the economy?
Vietnam is on its way to obtain its market economy status. In order to realize this objective, the Government should limit its intervention in the market, create fair competition and allow the market to operate on its own. In many countries, fair competition is created by limiting the possibility of monopoly. If the Government only allows the price to fluctuate according to the market situation, there will still be monopolies dominating and influencing the market. Then, together with the price policies and reduction in its monopoly, the Government should expedite the privatization process, make it substantial in nature to effectively create a real competitive market for the players.
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Please do not hesitate to contact Mr. Oliver Massmann under omassmann@duanemorris.com if you have any questions on the above. Oliver Massmann is the General Director of Duane Morris Vietnam LLC.

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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