Resolution 98/2023/QH15 introduces pilot policies to invest in green projects, including hi-tech and clean energy in Ho Chi Minh City. It outlines conditions and incentives for strategic investors (defined in the Resolution).
Investor selection conditions
Under Resolution 98/2023/QH15, the HCM City People’s Committee has the authority to offer green projects for investment. Eligible projects will be listed on the National Bidding Network System. Investors that meet the financial criteria and have the necessary experience can apply. Depending on specific scenarios, the selection process will be governed either by the Investment Law or by the Procurement Law. If only one investor qualifies as a strategic investor, that investor will be approved under the Investment Law. If more than one meets the conditions, state agencies will use the Procurement Law to make the selection.
Incentives
There is an incentive mechanism. Strategic investors are permitted to deduct Research and Development (R&D) costs when fixing their Corporate Income Tax (CIT). Specifically, qualified investors will enjoy a deduction equivalent to 150% of the actual costs associated with these operations. Actual R&D costs will be determined according to accounting rules.
Additionally, and as a further incentive, strategic investors will have customs priority. Under certain conditions, more liberal import and export tax procedures will apply.
Obligations
There are, however, strict obligations. Investors must disburse the investment capital within certain time frames; the project may not be transferred during the first five years. Investors must hire local labor, actively contribute to local workforce development, and prioritize training.
Failure to comply, of course, puts the incentives at risk.
Current challenges
The green energy landscape is broad and includes solar, wind, biomass, green hydrogen, and green ammonia. A critical question emerges: How can the energy generated from these sources be effectively marketed?
The alternatives are either to sell it to Electricity of Vietnam (EVN) via the national grid or to sell directly to end users via private lines.
Challenges in selling electricity to EVN
If electricity is to be sold to EVN, the Power Purchase Agreement (PPA) model between renewable energy producers and EVN must incorporate fair mechanisms for sharing risks and benefits. However, the weakness of Vietnam’s current PPA format is well known within the industry and among banks otherwise willing to provide financing.
Most importantly, the current PPAs rely solely on a “take-and-pay” mechanism without any obligation to purchase the entire production or even a fixed production. That is, EVN only pays for the electricity it decides to take from wind or solar projects. It even lacks a minimum purchase commitment. This creates huge uncertainty and limits bankability.
Explaining its hesitancy to make minimum purchase commitments, EVN cites several factors, with the primary concern being the impact on grid stability if the grid must carry significant amounts of variable renewable energy. That is, an inadequate grid infrastructure has the potential to overload transmission and distribution systems, thereby restricting the flow of electricity. It’s worth noting that this concern is not exclusive to Vietnam, as irregular availability is inherent in various forms of renewable energy. But it can be addressed.
Moreover, EVN is not ready to guarantee long-term agreements with investors. This further disrupts the funding of projects through the Just Energy Transfer Partnership (JETP).
Another problem is the fluctuation in demand: this impacts energy needs throughout the day. Demand variation, however, is not exclusive to Vietnam; it is a universal issue that necessitates open discussion, effective management, and learning from the experience of others.
EVN fears that it may over-contract, meaning that existing contracts to purchase electricity may exceed consumption. This limits EVN’s willingness to make further commitments to purchase renewable energy. We agree that this can be an issue, but, again, every market that uses renewable energy must find a way to manage supply and demand.
Furthermore, EVN imposes large connection fees to connect energy sources to the national grid.
To incentivize investors to invest in renewable energy and to supply EVN and the national grid, PPAs should incorporate a buy-out mechanism. This mechanism would offer a pre-determined purchase price, contingent upon various termination scenarios, ensuring mutual protection for both parties.
Challenges in selling energy directly to consumers via private lines
This path is inevitable; EVN should embrace it.
The bottleneck lies in the absence of clear regulations for Direct Power Purchase Agreements (DPPAs). These agreements enable producers to sell electricity directly to consumers, bypassing the national grid.
In the absence of a defined framework for DPPAs, investors are unable to move forward. The proposed draft circular implementing DPPAs awaits approval. Delay creates uncertainties that already hinder investment. To surmount this challenge, investors continue to advocate for swift approval of the circular, establishment of standardized contracts, a simplified grid access process, and an amplified public awareness campaign. These actions are essential to harness the untapped potential of renewable energy in Vietnam.
The remaining challenges include administrative hurdles, a lengthy permit process, and issues regarding transparency and corruption. These factors contribute to delays and add costs to project development. Consequently, alongside high capital expenses and currency fluctuations, securing financing becomes an exceedingly challenging task.
Focus on energy efficiency
The traditional model of delivering cooling or lighting services centers around producing and selling cooling or lighting equipment. This model is built around energy-consuming equipment. As a result, it contributes to greenhouse gas emissions and resource depletion.
In the traditional model, the equipment manufacturers prioritize higher sales and profits from equipment production, with a lack of consideration for energy saving. They also prioritize the functions of equipment and its appeal to consumers. They often ignore energy efficiency. How to optimize energy from equipment usage and how to dispose of the used equipment is mostly neglected.
The traditional model of relying only on the grid has a negative impact on the environment. The focus is being shifted toward ways to promote energy efficiency.
Cooling as a Service (CaaS) is an alternative to the traditional model.
At its core, CaaS focuses on end users paying for the cooling they consume, rather than paying for a physical product (equipment) or for the infrastructure that delivers the cooling. Customers no longer own the cooling infrastructure. The technology provider owns, installs, and maintains the equipment. The provider then recovers its costs through periodic payments made by the customers. In brief, customers enter into a pay-per-service (PPS) model.
This PPS model requires customers to pay a fixed cost per unit of the cooling service delivered, such as dollars per tonne of refrigeration or cubic meters of cooled air or cooled water. The cost is inclusive of actual energy usage, equipment management, and energy consumption monitoring. PPS can be a suitable approach for the cooling needs of large-scale operations.
CaaS agreements are simple and transparent, providing customers with clarity and simplicity in understanding and managing their energy consumption and costs.
An energy service company (ESCO) is a typical type of business that provides CaaS. By entering into an agreement with an ESCO, customers only make ongoing service payments. They cover none of the initial capital costs associated with investing in cooling infrastructure.
Currently, there is no legal basis for ESCOs. Government intervention is crucial to enhance the legal framework, provide financial incentives, educate the public about this model, and support research for the development of ESCOs.
Part of an ESCO’s services is to monitor and manage energy consumption. In instances where both the consumption volume and associated costs escalate, ESCOs will investigate and strategize to implement optimizing solutions. As HCM City continues to consider energy-saving solutions, adopting CaaS from ESCOs has the potential to achieve a breakthrough in the cost-effective delivery of this innovative yet underutilized method of energy conservation.
Conclusion
It is imperative that HCM City establish an agency dedicated to centralized and specialized planning and execution of green projects. This agency would play a leading role in coordinating efforts and implementing initiatives aimed at green energy and energy efficiency.
Resolution 98 presents not only opportunities but also challenges to investors.
Article 7 of the Resolution clarifies the procedures, criteria, and obligations for investors in green projects in HCM City. Investors may receive tax benefits from their investment; yet they must adhere strictly to tax and customs regulations, project scope, capital disbursements, and local workforce development commitments.
Resolution 98 encourages more strategic investment in order to respond to HCM City’s special needs. But a well-managed transformation is crucial. The push for green projects within this Resolution should not only focus on a swift transition to clean energy sources but should enhance the energy efficiency of the existing infrastructure. A balanced strategy that addresses both aspects is crucial for steady development and transformation in the city.
For further information, please contact:
Lam Nguyen Hoang Thao, Russin & Vecchi
LNHThao@russinvecchi.com.vn
