A New Way For Renewable Energy Developers To Sell Their Electricity In Vietnam.
Electricity of Vietnam (EVN)–being a state-owned corporation–has been an exclusive supplier of electricity, and power consumers have not been allowed to purchase electricity directly from renewable energy (RE) developers. That has changed. The Government has issued a new regulation (Decree 80) which will allow RE developers to sell their electricity to large power consumers under direct power purchase agreements (DPPA). This is a dramatic change. This Article discusses the DPPA mechanism, conditions and requirements for RE developers and power consumers to participate, contract templates, and the pricing mechanism under Decree 80.
DPPA mechanisms.
There are two forms of the DPPA mechanism in Decree 80: the physical DPPA and the virtual DPPA. Under the physical DPPA format, RE developers can sell their electricity directly to large power consumers via private transmission lines. But what if the distance from an RE plant to the factories of large power consumers is long? It will often be impractical and costly to develop a long private transmission line. In those cases, RE developers can sell their electricity using EVN’s grid under a virtual DPPA mechanism. Under the virtual DPPA mechanism, RE developers can sell their electricity to EVN, and EVN then sells electricity to large power consumers from its pooled supply of power. This innovative and creative feature should open wide the pathway for renewable energy. The virtual DPPA mechanism, in which EVN is an intermediate party, allows EVN to charge for the transmission, distribution, and sale of electricity to power consumers. However, of course, consumers that purchase electricity from RE developers under the virtual DPPA mechanism will not receive 100%-clean energy from the selected RE developer. That is, the electricity under the virtual DPPA mechanism, is transmitted via EVN’s grid, and EVN’s grid contains electricity generated from many sources: coal, gas, RE sources, plus electricity imported from Laos and from China.
Conditions and requirements for RE developers and power consumers.
Under the physical DPPA mechanism, power plants that generate electricity from solar energy, wind, small hydropower, biomass, geothermal, ocean waves, tides, ocean currents, rooftop solar power and other forms of RE, are allowed to sell their electricity directly to large power consumers that have average monthly power consumption needs of 200,000 kWh or more. There is no requirement on the capacity of RE plants. Of course, power plants must have power generation licenses, power retailing licenses, and RE projects must be included in the national power development plan known as PDP8. Those RE projects authorized to be developed under PDP8, can be found in Decision 262 of the Prime Minister dated April 1, 2024. There is no requirement on the voltage connection level of large power consumers. In theory, existing RE projects which have been fully licensed can also participate in the DPPA mechanisms. In such case, the existing PPAs which were signed with EVN must be terminated, and the RE project will not be able to carry forward the existing favourable feed-in tariff (FiT) they enjoyed under the signed PPAs.
Under the virtual DPPA mechanism, only wind and solar power plants can sell their electricity to large power consumers through EVN’s grid, and the capacity of wind and solar power plants must exceed 10 MW. Wind and solar power plants must have power generation licenses and these wind and solar power RE projects must be included in PDP8. In addition, the level voltage connection of large power consumers must exceed 22kV.
Contract Templates.
There is no contract template for the physical DPPA. RE developers and large power consumers are free to negotiate and conclude DPPAs. Decree 80 provides only key terms and conditions (subject of the contract; purpose of use; service standards and quality; rights and obligations of the parties; electricity price, payment method and term; conditions for contract termination; liability for breach of contract; term of the contract; responsibilities for investment, construction, management and operation of transmission lines; other terms and conditions). From the RE developers’ perspective, a number of other provisions need to be included such as termination payment, operation and maintenance costs of the private transmission line, deemed delivery, foreign exchange risks, force majeure, guarantees, etc.
The arrangements, under the virtual DPPA mechanism, are specified in two separate agreements: (i) agreement between RE developer and EVN whereby RE developers can sell electricity to EVN at the market price (spot price), and EVN can re-sell the purchased electricity to large power consumers (or a pool of power consumers); and (ii) agreement between EVN and large power consumers (or a pool of power consumers) whereby large power consumers can buy electricity which EVN has purchased from RE developers plus electricity generated by EVN. These two agreements will take the form of power purchase agreements (PPAs) in the contract templates promulgated in Decree 80. RE developers and large power consumers are also required to enter into another PPA in the form of a forward contract (by using a separate contract template in Decree 80).
In an enlightened move, Decree 80 permits the parties themselves to negotiate other terms and conditions and to incorporate them into these contract templates. Large power consumers or pool of power consumers may authorize power retailers in industrial parks or industrial clusters to sign the forward contract with RE developers and PPAs with EVN.
Pricing mechanism.
Under the physical DPPA (as described above), the parties are free to negotiate the price of electricity. In opposition, the price under the virtual DPPA (also as described above) must be the price stipulated in Decree 80 or it must be determined under formulas set out in Decree 80 and in the power purchase agreement template.
In particular, the price under the power purchase agreement between RE developers and EVN (ie, under the virtual DPPA mechanism) will be the market price (spot price) as determined each and every 30-minutes via the electricity competitive trading market. At this point, wind and solar power projects do not have a competitive advantage over conventionally powered plants in terms of price. As such, owners of solar and wind power projects may be unwilling to participate in the competitive electricity trading market.
Subject to the actual volume of electricity consumed by large power consumers, the price under the power purchase agreement between EVN and large power consumers (under the virtual DPPA mechanism) may vary. If the actual volume of electricity used by large power consumers is less than the agreed output capacity as set out in the forward contract between RE developers and large power consumers, the price will be determined under a formula set out in Decree 80. If the actual volume of electricity used by large power consumers is greater than the agreed output capacity as set out in the forward contract between RE developers and large power consumers, the price which EVN charges large power consumers will include two components: (i) the price which is determined under formulas set out in Decree 80 (for the agreed volume), and (ii) EVN’s then retail price which applies to other consumers pursuant to EVN’s pricing policies and tariff (for the volume that exceeds the agreed volume).
Under the forward contract between large power consumers and RE developers, large power consumers are responsible to pay RE developers if the full market price is less than the agreed price set out in the forward contract. Decree 80 is silent on a situation whereby the full market price exceeds the agreed price set out in the forward contract. This matter should be addressed by RE developers and large power consumers.
There are several transitional RE projects which failed to meet their deadline and so do not enjoy a favourable FiT. In addition, a favourable FiT no longer exists for new wind and solar power projects. The process for owners of transitional RE projects and new wind and solar power projects to negotiate and conclude PPAs with EVN is time-consuming. EVN’s price will probably be increased in the future and it is hard for power consumers to predict EVN’s long-term price. The new DPPA mechanism is welcomed by both RE developers and large power consumers. It helps RE developers to sell their electricity to power consumers at the price agreed by RE developers and power consumers at the outset. In return, power consumers that pursue environmental stewardship can buy clean energy at an agreed price.
