27 March, 2019
Recent developments
Effective from 28 February 2019, Circular No. 02 revises certain provisions in the model power purchase agreement (PPA) as well as stipulating the procedure for negotiation and execution of PPAs for grid-connected wind power projects in Vietnam.1
The revised model PPA under the new Circular No. 02 replaces the previous model PPA of Circular No. 32 from 20122as well as adding certain clarifications based on practical PPA negotiations with Vietnam Electricity (EVN) for wind and other renewable power projects in Vietnam.
Notably, Circular No. 02's revised model PPA clarifies certain terms to improve the bankability of wind power projects in Vietnam, including:
- clarification on technical curtailment risks;
- removal of EVN's limitation of liability for compensation upon termination of the PPA;
- relaxation of the power seller's event of default due to failure to achieve its proposed commercial operation date (COD); and
- clarification of the consequences of force majeure events.
Circular No. 02 appears to be a bona fide attempt to address some of the concerns of renewable energy developers in Vietnam regarding certain risk issues arising out of the previous model PPA.
Process of negotiation and execution of wind PPAs with EVN
a) Order and process for execution of a wind PPA with EVN
Circular No. 02 includes the following guidelines:
- The developer must prepare and submit an application dossier to EVN for EVN's appraisal, approval, and execution of the PPA.
- Within a period of 15 business days from the date of receipt of a complete and valid dossier, EVN is required to proceed with organizing a review of the draft PPA for execution of the PPA with the power developer.
In practice and based on EVN's procedure, once the dossier is submitted to EVN's Electricity Power Trading Company (EPTC), the power developer will need to (i) sign a minutes of negotiation meeting with EVN and (ii) initial the finalised draft of PPA for EPTC's submission to EVN's management and relevant departments for internal appraisal and approval before EVN can officially sign the PPA.
b) Dossier of application documents for a wind PPA
Under Circular No. 02, the power developer must prepare and submit the following documents to EVN / EPTC:
- The power developer’s official request letter;
- Legal, corporate, and project documents of the wind project;
- Draft PPA;
- Grid Connection Agreement (attached with the interconnection plan of the project); SCADA/EMS Agreement; Protective Relay System Agreement; and
- Written calculations of the loss of capacity and energy of transformers / substations and electrical lines from the power plant to the connection point with the national electrical grid system; and written calculations of electricity used by the power plant itself.
Among the above documents, item 5) is a newly proposed requirement compared to the previous regulation.
In addition, as a matter of practice, EVN / EPTC also requires submission of the regulatory appraisal for the basic design of the project, meaning that the developer will have to obtain the basic design document before it can officially sign the PPA with EVN.
Application of the Model PPA
Circular No. 02 makes application of the model PPA compulsory in the sale and purchase of power with EVN as the State power off-taker / utility. Power developers and EVN, as parties to the PPA, can supplement the contents of the PPA only to clarify the rights and obligations of the parties, but may not change the basic contents of the model PPA issued by the MOIT.
Specific Revisions to the Model PPA
Circular No. 02 includes a revised model PPA for wind farms. Compared to the previous model PPA of Circular No. 32 in 2012, the revised model PPA of Circular No. 02 includes certain clarifications and revisions, as summarized below:
a) Clarification on technical curtailment risks
- Under the model PPA, EVN as power purchaser may not be obliged to take and pay power output in certain circumstances mostly for technical reasons, including: when the local transmission or distribution grids break down, or electrical equipment and facilities directly connected to the local grids break down or the operation regimes violate the regulations on operation of the national electrical power system and the power industry technical regulations and standards.
- On the other hand, the model PPA provides that EVN as power purchaser is obligated to minimize any period of reduction or suspension of EVN's receipt of power output in said circumstances, and in such a case, EVN must provide the power seller/developer with at least 10 days' advance notice specifying the reason and the proposed time for commencement and the proposed duration of the interruption.
- On this point, Circular No. 02 clarifies that any such reduction or suspension of EVN's receipt of power output should be "in conformity with the regulations on operation of the national power system, the regulations on the process of handling breakdowns in the national power systems and the power industry technical regulations and standards."
- Having said that, we note that EVN has recently introduced certain supplemental technical requirements into grid connection agreements, which may have an impact on project costs and timelines to achieve actual COD given EVN's concerns over potential grid capacity issues in certain areas of Vietnam following EVN's Official Letter 3078 dated 25 June 2018.3
b) Removal of EVN's limitation of liability for compensation upon termination of PPA
- In the previous model PPA, there was a provision that if the power seller is the aggrieved party (i.e., EVN is the defaulting party and the power seller is the non-defaulting party) and the power seller elects to terminate performance of the PPA, then the value of compensation for damages shall be calculated as equal to the value of the actual output of power generated by the power seller within the previous 1 (one) year period calculated up until the time of termination of performance of the PPA. This provision has caused concerns over EVN's limited liability upon early termination of PPAs especially in the early years of the 20-years PPA term or any risks of EVN's delays of energy payments or default of other PPA terms.
- Circular No. 02's revised model PPA now removes this provision on EVN's limited liability, and accordingly, the general principle of compensation for damages will apply, meaning that the value of compensation may comprise (i) the value of actual and direct losses incurred by the aggrieved party as caused by the defaulting party and (ii) the value of direct benefits which the aggrieved party would have been entitled to if there was no such default.
- Having said that, we note that the burden of proof lies with the aggrieved party and so it must prove such losses and direct benefits.
c) Relaxation of power seller's event of default due to failure to achieve proposed COD
- In the previous model PPA, one of the power seller's events of default was that the power seller fails to achieve its intended COD provided in the PPA appendices for a period of three (3) months, except for delays due to force majeure events.
- Circular No. 02's revised model PPA now adds another exemption, namely, that in the case where the competent authority permits an extension of investment schedule in accordance with applicable regulations, then arguably, it may not be triggered as an event of default by the power seller;
- In addition, in the model PPA, within a period of 6 (six) to 12 (twelve) months prior to the intended COD, the power seller may officially elect to change the expected COD. In such a case, the parties must cooperate with each other to make any change of the intended COD, and EVN/the power purchaser must not deny any request for such change to the expected COD unless it has a legitimate reason. The model PPA of Circular No. 02 is revised by way of referring to such provisions as an exemption under the power seller's events of default, it clarifies that in such a case when the intended COD is changed pursuant to the above clause, failure to achieve the originally intended COD will not constitute an event of default by power seller.
d) Clarification on consequences of force majeure events
- In the previous model PPA, after taking all of the necessary measures as required under the PPA following occurrence of a force majeure event, the defaulting party shall, as a result of such event of force majeure, be exempt from its liability relating to its failure to discharge its obligations under the PPA.
- Circular No. 02's revised model PPA now clarifies that such exemption from liability will not include "liability in relation to payment of amounts due under the PPA before the point of time when such event of force majeure occurs". This clarification seems to reduce, partially, the risk of claim by the power purchaser based on the power purchaser's force majeure events to delay energy payments.
- In addition, if a force majeure event is prolonged, Circular No. 02's revised model PPA adds a requirement that the parties shall meet and use their reasonable efforts to agree on appropriate and reasonable solutions through good faith negotiation. This may help to reduce the risk of unilateral termination of the PPA by either party due to force majeure events.
e) Change of applicable exchange rate for tariff indexation
- Before 1 November 2018, for the purposes of USD indexation of the previous FiT of VND 1,614 per kWh (equivalent to US cents 7.8 per kWh) for monthly energy payments, the previous model PPA applied VND/USD selling exchange rate of Joint Stock Commercial Bank for Foreign Trade of Vietnam (Vietcombank). This exchange rate was applied for certain early operating wind farms in Vietnam.
- Following the recently approved new FiT of VND 1,928 per kWh (equivalent to US cents 8.5 per kWh) for onshore wind projects and VND 2,223 per kWh (equivalent to US cents 9.8 per kWh) for offshore wind projects, the revised model PPA has adjusted the exchange rate for the purposes of USD indexation to the central VND-USD exchange rate announced by the State Bank of Vietnam (the central bank of Vietnam), similar to the exchange rate currently applied to solar power projects.
Other notable revisions
- Circular No. 02 makes other adjustments to the model PPA for wind projects to better align it with the model PPA currently applied for solar projects, including, among other things: specified force majeure events, the silence on lender's ability to step in on project companies' defaults, slightly modified clause on dispute resolution, and provisions for assignment of the PPA.
- In addition, Circular No. 02's revised model PPA has made other clarifications and revisions on metering equipment and procedures, invoicing and payment timelines, late payment interest, and operational requirements and outages.
- Other than that, however, the template, other key features and issues as well as certainty, clarity and drafting standards of the model PPA remain mostly unchanged.
Read our previous alert on Circular No. 02's detailed guidelines on wind project development.
For further information, please contact:
Frederick Burke, Partner, Baker McKenzie
frederick.burke@bakermckenzie.com
1 Circular No. 02/2019/TT-BCT of the Ministry of Industry and Trade regulating the implementation and development of wind power projects and a model power purchase agreement for wind power projects ("Circular No. 02").
2 Circular No. 32/2012/TT-BCT of the MOIT dated 12 November 2012 on the procedure for development of wind power projects and model PPA for wind power projects ("Circular No. 32").
3 EVN Official Letter No. 3078/EVN-KH dated 25 June 2018 on implementation of grid connection agreements for solar and wind power projects in Vietnam.
