Tag Archives: renewable energy Vietnam

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.

Solar project COD extension for Ninh Thuan province finally confirmed

Prime Minister Nguyen Xuan Phuc signed Resolution 115/NQ-CP on 31 August 2018 to confirm some special policies to support Ninh Thuan province (“Resolution 115”). Pursuant to Article 1.1.e of the Resolution 115, the Prime Minister  confirmed that the commercial operation date (COD) deadline (previously 30 June 2019) for solar projects in Ninh Thuan province to enjoy the 9.35 US cents feed in tariff has been extended to the end of 2020.  This extension applies to those solar energy projects approved in the relevant Master Plan (approx. 2000MW).  Resolution 115 took effect on 31 August 2018 and lays to rest the badly kept secret that Ninh Thuan, a literal hot spot for solar projects, will enjoy more favorable terms than projects in other locations which remain bound to the 30 June 2019 COD deadline.   Clear and definitive statements as to what will happen after 30 June 2019 for projects in other locations is now desperately required.  Our view and intel is that no-one else should bank on extensions and should develop strategies now to mitigate risks of missing the 30 June 2019 date (e.g. – look to be an early mover in the hotly-anticipated DPPA (direct power purchase) market).

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

Vietnam plays a calculated game of risk with new solar PPA

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

 

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

 

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

 

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

 

Tariff trouble

 

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

 

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

 

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

 

A risk too far?

 

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

 

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

 

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

 

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

 

Playing by house rules

 

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

 

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

 

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

 

One step forward… wait and see

 

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

 

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

 

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

 

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

 

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

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

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

 

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

 

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

 

Change of direction

 

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

 

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

 

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

 

Not winding down yet

 

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

 

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

 

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

 

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

 

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

 

Incremental improvement

 

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

 

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

 

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

 

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

Wind energy in Vietnam – Blowing in the right direction?

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

 

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

 

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

 

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

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

Current and Proposed Solar Projects in Vietnam

Depending on the MW size, solar energy projects in Vietnam must be included in either the National Energy Masterplan or the relevant Provincial Energy Masterplan.  This is a notoriously opaque process and it is all but impossible to know for certain the status of discussions to include or not a given project.  Investors need to be extremely pro-active and do their homework to make sure they are working on the right levers.      The table in the link below indicates the status of current known existing and proposed solar energy projects based on public information.  It pays to be aware however that there’s plenty of discussions going on behind the scenes.  The message: don’t sit and wait!

Solar Energy Projects in Vietnam_July 2017

For questions please contact Giles at GTCooper@duanemorris.com or any of the attorneys in the Vietnam office listings.