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27 April, 2017
The Government of Vietnam has released Decision No. 111 as the new official policy for the development of solar power projects in Vietnam. Decision No. 11 is aimed at enabling the private sector to invest in clean energy sources that can help meet the country’s surging demand for electricity. Among other things, it provides for a Feed-in-Tariff (FiT) of USD cents 9.35 per kWh for grid-connected projects, as well as a net-metering scheme for rooftop projects.
However, Decision No. 11 leaves a number of issues unresolved, which may have an impact on the bankability of solar projects, especially for large utility-scale solar power plants.
Feed-in-Tariff (FiT) for grid-connected projects
Under Decision No. 11, the FiT at the delivery point is approved at VND2,086 per kWh (equivalent to USDcents 9.35 per kWh, exclusive of VAT). However, this FiT is only applicable if the efficiency of solar cells is greater than 16% or the efficiency of modules is greater than 15%.
The FiT can be adjusted according to the fluctuations of VND-USD exchange rate under the standardized power purchase agreement (PPA) to be issued by the Ministry of Industry and Trade (MOIT). However, Decision No. 11 does not provide for indexation of the FiT by way of escalation in accordance with the Consumer Price Index (CPI) or the exchange rate.
Net-metering scheme for rooftop projects
Decision No. 11 provides for a net-metering scheme for rooftop projects equipped with bi-directional meter systems. Specifically, in a payment cycle, if the electricity generated is more than that consumed, a credit can be transferred to subsequent payment cycle. At the end of the year or when the PPA is terminated, the excess in electricity generated can be sold to EVN at the FiT rate.
However, the rate at which surplus electricity will be purchased from rooftop solar investors remains unclear. Instead, every year, the MOIT is supposed to promulgate a purchase price for the following year based on the central rate of VND versus USD quoted by the State Bank of Vietnam on the last quoting date of the previous year.
Further details on the net-metering scheme still need to be formulated and the MOIT is required to issue technical standards for solar power and metering for solar power projects, and to provide guidelines on the procedures for connection, meter installation and net-metering mechanism for rooftop solar projects. Until then, it remains unclear what limitations may apply to net-metering schemes (e.g., system size, transferability of credit in case of excess generation, etc.), except that it may be inferred from other provisions in the Decision that this scheme applies to rooftop projects 50KW and less.
The PPA term
For utility scale projects, the term of the standard PPA is twenty (20) years from the date of commercial operation. After twenty (20) years, the parties may extend the term or enter into a new agreement in accordance with the then current provisions of law.
Incentives for solar power projects
In addition to the FiT, Decision No. 11 refers to incentives related to investment capital, import duties, enterprise income tax and land lease and use. However, no special additional incentives are actually provided. In general, solar power investors may enjoy the existing incentives under the relevant specific laws on tax and land, specifically:
Mobilization of investment capital: The investors are entitled to mobilize capital from both domestic and foreign organizations and individuals for their solar power projects as per existing regulations.
Import duty: Solar projects are exempted from import duty for imported goods used as fixed assets for the projects. For imported goods, the current regulations governing export and import duties apply to items that serve project production including raw materials, supplies, and semi-finished products that have not been domestically produced.
Enterprise income tax (EIT): Exemption or reduction of EIT is available for solar power projects along the same lines as applied to projects in the sectors that enjoy investment incentives under the current provisions of tax laws.
No mechanism for direct corporate PPAs
Decision No. 11 specifies Vietnam Electricity ("EVN") or its affiliated entities only as the power purchaser under the standard PPA. It excludes application of "direct PPA" model, which would have allowed non-utility corporate customers such as industrial parks or manufacturing facilities to purchase solar power directly from solar power generators.
Whether such arrangements, which have become increasingly popular in international markets, will be allowed remains uncertain.
Uncertainty after 30 June 2019
Decision No. 11 will be in effect only until 30 June 2019, and the Prime Minister has given an instruction to the MOIT to study a new policy for solar power for the period after 30 June 2019. However, Decision No. 11 does not give early investors a specific assurance that they will receive treatment no less favourable as compared with post-30 June 2019 investors in respect to the basic terms and conditions of their investment agreements and especially their PPAs, even if this means retroactive adjustments to the FiT.
Model PPA for solar power projects
Decision No. 11 requires the MOIT to formulate a standard PPA template for solar power projects. Currently, standard PPA templates for wind and biomass have been issued and they have been generally assessed to be "non-bankable". Therefore, it remains to be seen whether the standard PPA for solar power will improve on those precedents to reflect international best practice.
Classification and policies for different types and segments of solar power players
Decision No. 11 does not provide clear guidelines to help distinguish between projects with different scales (i.e., small-scale, medium-scale and large-scale) or between utility-scale solar power plants and small-scale residential solar power systems for self-consumption.
In addition, Decision No. 11 applies to conventional solar photovoltaic (PV) (i.e., sunlight / photons striking solar cells causing a chemical reaction that releases electrons and generates electricity). It does not address concentrated solar power (i.e., mirrors or lenses focus solar thermal energy into a small area to heat liquid which drives a conventional generating turbine), as another type of solar technology. It remains unclear whether Decision No. 11 will enable such projects to proceed.
Grid connection costs
Decision No. 11 imposes liabilities only on the project developer/power seller for grid connection costs and associated risks. In the event the connection point is not the point where the metering equipment is installed, the loss of power on the connection line and the loss of power on step-up substation of the plant are borne by the seller/generators. In this respect, the MOIT is required to issue a detailed regulation on calculation method for the loss on the connection lines.
Grid connection costs can be key to project feasibility. However, Decision No. 11 does not address the allocation of grid connection costs and risks, such as project capacity and distance from existing transmission lines. It is silent on how to balance cheaper land rental and use costs in relatively unpopulated areas against the greater costs of running transmission lines over longer distances.
Silence on other key issues
Decision No. 11 provides helpful guidance on the project formulation and approval process for solar power projects, but it does not provide for certain support policies that investors wish to have, for example:
There is no provision for any form of government guarantee, assurance or support to enhance the creditworthiness of
EVN as the sole off-taker/purchaser;
There is no provision for any guarantee for minimum revenue, or payments by EVN upon termination of the PPA;
There is no specific policy to address the risk for change in law or tax and costs;
There is no provision for payment protection or deemed availability in circumstances of political force majeure; and
There is no concept of deemed commissioning to allow for certain payments by EVN if the facility or a section is ready but EVN fails to construct grid connection or is otherwise unable to take power produced.
Transitional provision
Although Decision No. 11 takes effect only on 1 June 2017, it provides that with respect to on-grid projects and rooftop projects with a PPA entered into before 1 June 2017, the parties must amend the PPA in accordance with Decision No. 11. Presumably, this requirement would be applied in accordance with the general principle that only new requirements that are more favorable to the investor should apply, but this is not clear from the language of the Decision.
Next legal documents to be formulated for solar power
In Decision No. 11, the Prime Minister and the Government instruct the MOIT to:
- issue detailed regulations on the contents, order, procedure for formation, assessment and approval of solar power development master plans;
- regulate in detail the method for calculation of losses on grid connection lines in the case where the metering point and the connection point are not the same;
- issue a standardized power purchase agreement template for on-grid and rooftop solar power projects and guidelines for implementation;
- issue technical standards on solar power, metering for solar power projects and provide guidelines on the procedures for connection, metering instalment and net-metering mechanism for rooftop solar projects;
- conduct study on and propose a support mechanisms for solar power projects for the period after 30 June 2019;
- issue FIT for solar power projects according to the fluctuations of VND-USD exchange rate for the coming year.
The Ministry of Planning and Investment is required to coordinate with other ministries to formulate mechanisms to encourage the development of enterprises manufacturing solar power equipment in Vietnam for the Prime Minister's issuance.
In addition, the Ministry of Finance is required to take the lead in researching and supplementing fee and tax exemption regulations for rooftop solar power projects (with capacity up to 50KW).
For the time being, private developers can proceed with solar power projects based on Decision No. 11, taking into account up-coming detailed implementing regulations (including a standard solar PPA), as well as the other issues noted above.
1 Decision No. 11/2017/QD-TTg of the Prime Minister dated 11 April 2017 on the mechanism for encouragement of the development of solar power projects in Vietnam (Decision No. 11). A copy of Decision No. 11 in Vietnamese can be obtained on the website of the Government (last accessed on 14 April 2017).
For further information, please contact:
Frederick Burke, Partner, Baker McKenzie
frederick.burke@bakermckenzie.com
