21 November, 2017
Interview with Dr. Oliver Massmann
1. Which significant changes does the new PPA contain for the solar energy sector?
Decision 11 introduces the Feed-in-Tariff (FiT) rate of UScents 9.35 per kWh. The FiT rate is only applicable for on-grid solar power project with efficiency of solar cells greater than 16% or with efficiency of the modules greater than 15%. The FiT rate depends on the currency exchange rate of the Vietnamese Dong and the US-Dollar. The rate remains the same throughout the whole year. It is adjusted by the Vietnamese State Bank on the last working day of the year for being used in the following year.
As a result, the financial planning is easier and it grants certain security for investors such as protection against currency fluctuation.
2. Which aspects in the new PPA have changed compared with the draft PPA from April 2017?
Compared with the draft PPA, the FiT rate is now indicated in the final version and there is reference to the adjustment of the FiT in case of USD/VND exchange rate fluctuation.
The MoIT made no big changes regarding the shortcomings of the draft of the PPA from April 2017.
The investor still has to bear the biggest risk.
3. Is the PPA bankable?
No, in general the PPA is not bankable in its final version.
4. Is there a way to make it bankable?
Yes, it is possible to make the PPA bankable. We have 20 years of experience making PPAs bankable for gas and coal fired power plants and wind energy plants in Vietnam. The investor should use all business channels and experienced negotiators to make the PPA bankable.
It is a matter of negotiation and experience. Decision 11 is granting investors the possibility to negotiate the conditions with EVN. The price remains fixed.
Agreements such as the EU – Vietnam Free Trade Agreement (“EVFTA”) or the Trans-Pacific Partnership (“TPP”), which is now called the Comprehensive and Progressive Agreement for the Trans-Pacific Partnership (“CPTPP”), lay a big milestone for making the PPA bankable.
The EVFTA was signed in 2015 and is expected to be ratified by all member countries by 2018. It is probably going to take effect in 2019. It is estimated to generate an increasing GDP and to liberalize the economy of Vietnam.
Another aspect is the elimination of almost all custom duties (over 99% of all tariff lines). As a result, there will be a huge impact on trade development and the interest of investors.
Another important agreement is the CPTPP. On 4th February 2016 the TPP was signed between 12 countries. The signing nations made up 28% of the global trade and 40% of the global GDP. However, at the beginning of 2017, the US President Trump decided to withdraw from the TPP. The remaining 11 member states discussed the future of the TPP in APEC event in Da Nang, Vietnam and agreed to push ahead with the TPP but now under the name of CPTPP. Furthermore, the states agreed to work out a new framework agreement, which includes changes to the previous TPP agreement. The largest amendment was made in the field of intellectual property, for example, easing the protection of copyright or the special protection of biologics and pharmaceuticals.
However, the level of market access is still the same as in the first TPP. For some countries, further negotiations have to take place and they need time to adapt their laws to the CPTPP rules. The negotiators have set the goal of signing the revised TPP by the first quarter of 2018. After 6 countries have ratified the partnership, it will come into effect.
With the CPTPP, market access to more sectors will be opened than the WTO such as telecommunication, distribution of goods, manufacturing and fabrication. However, there will remain a few restrictions in the power/energy sector as discussed below.
As a result of the EVFTA and the TPP, Vietnam will get access to a huge part of international markets. This gives Vietnam the possibility to increase the amount of imports and exports (estimated up to 37% higher until 2025) and to improve foreign investments.
Another essential instrument is the Investor-State Dispute Settlement (ISDS)[N1] which is going to be applied under the EVFTA and the TPP. Under that provision, for investment related disputes, the investors have the right to bring claims to the host country by means of international arbitration. The arbitration proceedings shall be made public as a matter of transparency in conflict cases. In relation to the TPP, the scope of the ISDS was reduced by removing references to “investment agreements” and “investment authorization” as result of the discussion about the TPP’s future on the APEC meetings on 10th and 11th November 2017.
As a conclusion, the bankability of the PPA will get enhanced as a consequence of the EVFTA and TPP in the next few years if the legislative framework is being reformed in the right direction. The economy will become more dynamic because of access to other markets and further foreign investments. With the implementation of the ISDS in the TPP, investors will be more secured in relation to dispute resolution and protection against the risks of international trading. As a result, banks will be more willing to finance PPAs.
Our recommendations: For now, the bankability of the PPA is not as it is expected. But you should be aware of the upcoming agreements which will lead to a big impact on the economy growth and the economy itself. If everything is improving in the right direction as it is now, the PPAs will be more bankable in the future and there will be better investment opportunities.
5. How was the bankability issue handled in the past years?
The TPP and the EVFTA are not the only agreements regarding the bankability of the PPA.
Vietnam and the USA signed the Bilateral Trade Agreement (BTA) in 1999 which was implemented in 2001. It was a huge success and very important agreement for the economy of Vietnam. It was the first opening of the Vietnamese market and important for the creation of more business opportunities and new standards for financing projects.
Another important fact was Vietnam’s accession to the WTO in 2007. This has improved trade relations between Vietnam and other countries by removing trade barriers and the commitment to non-discrimination. It was also a political sign to show Vietnam’s will to get integrated in the international trade by accepting international trading rules.
To be able to fulfill the commitments, it is necessary to make legislative adjustments and adopt laws that ensure the viability and efficiency of the projects. In the last years, many important laws have been introduced. They have helped to enhance the bankability of the PPA, for example, the 2014 Investment Law, 2014 Enterprise Law, 2012 Labor Law, etc.
In addition, in 2011, the legal framework for wind power projects was introduced.
Our recommendation: You should use existing international agreements and local laws as the bases for negotiation. Remember to rely on existing precedents and keep in mind that there are some difficulties for project development. But with a well-structured project development, it is still possible to getting a bankable PPA done.
6. What are the main risks of the PPA for investors?
With many solar projects currently focused on a few central locations, the capacity of existing facilities to absorb power must be a cause of some concerns given the PPA’s transfer of such risk to power producers.
EVN holds a monopoly of distribution, repair, maintenance, inspection and examination of the grid.
There is a big risk because of the lack of the government’s guarantee for EVN’s payment obligation in cases energy is provided from the producer but cannot be transmitted due to interruption of EVN’s grid connection. One solution for bridging that guarantee gap can be the use of the MIGA backup from the Worldbank (Multilateral Investment Guarantee Agency) or backup from the Asean Development Bank.
Reasons for the interruption can be, for example: force majeure or termination of contracts. EVN can refuse transmitting the energy in cases of maintenance or repairing.
Circular 16 does not contain any guarantee or compensation for investors in these cases.
Our recommendations for avoiding potential risks: Be aware of veto rights of EVN and Vietnamese authorities. You have to be patient because the decision making process in Vietnam goes through many levels and takes time.
7. There will be conflicts between the investors and EVN because of the shift of risks to the investors. Which means of conflict resolution does the PPA grant to investors?
In general, the PPA is governed by the Vietnamese law.
The PPA does not provide for international arbitration as a means of dispute resolution.
Conflicts can be submitted to the Department of Electricity and Renewable Energy. If this option fails, investors can seek help at the Electricity Regulatory Authority of Vietnam (ERAV) or with application to a Vietnamese court.
The PPA implicitly allows the involvement of domestic and offshore arbitration. However, whether it can be a prior agreement with EVN in the PPA or only until there is an arising dispute simply lies in the hands of EVN.
Our recommendations for successful negotiations with EVN: You have to understand how EVN is working and what their targets are. Be aware of their monopoly position in the energy sector in Vietnam. Don’t try “to reinvent the wheel”!
Do not overexert them with too ambitious intentions related to the development proposal. They might be afraid of so many new things. Rely on workable precedent strategies and make reference to successful projects.
8. Which view does the MoIT hold regarding the shortcomings of the PPA?
The MoIT knows about the shortcomings of the PPA and is aware about the fact that the PPA will not attract investors to meet the power demand or to solve problems regarding the development of renewable energy.
The MoIT also knows that the solar energy sector in Vietnam has a lot of potentials.
Finally, the MoIT expects to attract smaller investment projects where bankability is not really an issue for the investors.
9. Is the view of the MoIT realistic?
In our opinion, the MoIT’s view is not realistic. It may lead to unfeasible projects because of the existing risks of the final version of PPA and without assurance for supportive services from a bank. Furthermore the success of projects depends on the result of the negotiation with EVN.
10. Which advice can you give to future investors regarding their project development?
Be aware! You have to take care of your project on a step-by-step-base and get well prepared for the negotiations with EVN when you decide to invest in an on-grid power project.
For further information, please contact:
Oliver Massmann, Partner, Duane Morris
omassmann@duanemorris.com
