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29 May, 2017
Following the issuance of Decision No. 11/2017/QD-TTg of the Prime Minister on mechanism for encouragement of development of solar power in Vietnam (Decision 11), the Ministry of Industry and Trade released the first draft of a Circular guiding the Decision last month (Draft Circular). The Circular is aimed at providing regulations on formulation, approval and amendment of the national as well as provincial power master plan. In addition, the draft solar Power Purchase Agreement (Draft PPA), which is of great interest for many foreign investors, is also provided in the Circular as a mandatory template for future solar power projects with only minor changes expected to be permitted during the contract negotiations.
In essence, the Draft PPA is almost the same as current applicable PPAs for renewable projects. This creates bankable issues for solar projects and a hindrance to foreign investors planning an investment in the sector.
Feed-in-Tariff (FiT)
The draft Circular repeats the solar FiT for power output from on-grid projects and excessive power output generated from rooftop projects specified in Decision 11 to be VND2,086/kWh or US 9.35 cents/kWh. However, unlike Decision 11, the Draft PPA does not require that the conversion between USD and VND be according to the exchange rate at the time of payment.
EVN’s rights and obligations as the sole off-taker
EVN is delegated to purchase all power output generated from solar power projects pursuant to terms and conditions of the draft PPA within 20 years.
It is noteworthy that the Draft Circular and the Draft PPA list out certain circumstances where EVN is not obliged to purchase power as negotiated with the seller, for example:
- when EVN is in the process of installing equipment, or making repairs, replacement, inspection or examination of the grid connection of the seller’s power plant;
- when the transmission grid or the distribution grid connected to EVN’s grid has a problem or grid equipment directly connected to EVN’s transmission grid or the distribution grid has a problem; and
- when EVN’s grid needs support to recover after the incident in accordance with the provisions of operation of the national power system and the standards, technical regulations of the electric industry.
Unfortunately, the current Draft PPA does not include provisions protecting the interests of the seller in the abovementioned circumstances. It is quite risky for the producer if the output is ready to be fed to the grid but the connection is not available to do so. Absent a clear indication of whether the Draft PPA is a ‘take or pay” agreement, investors will find it difficult to secure and ensure the profits and revenue of their projects.
Dispute resolution
The Draft PPA allows either party to the agreement to bring the dispute to local courts for litigation and other energy-related state bodies of Vietnam (General Directorate of Energy and the Electricity Regulatory Authority of Vietnam) for mediation and resolution.
The Draft PPA does not provide for international arbitration to be an option to resolve the dispute. This could be a great concern for foreign investors, especially those of large utility scale projects.
Other key issues of concern
- No Government guarantee to enhance the credit of EVN as the sole off-taker;
- No provision addressing the risks of changes in applicable laws; and
- The Draft PPA is required to follow a specific template, which is not bankable.
While the current Draft PPA leaves certain key issues unresolved, we note that this is only the first draft. Thus, it will be subject to potential revisions before its official adoption. We believe that with lessons learnt from the PPA for other renewable projects, the Ministry of Industry and Trade will complete the Draft PPA towards a mutually beneficial agreement for both the seller and the purchaser.
How to avoid EVN – The 30 MW rule
Considering the monopoly role of EVN as well as tough negotiation of the PPA, investors could still get out of this trouble. According to Article 1.2 of Circular No. 56/2014/TT-BCT promulgating methods to determine electricity generation price and examination steps of the PPA, the important requirement to negotiate with EVN is whether it is an on-grid or off-grid project. If it is an on-grid project with capacity of more than 30 MW or under 30 MW but voluntarily participating in the power market, the investor must negotiate with EVN. This means if the project is off-grid, there will be no requirement to negotiate with EVN. Therefore, if you are new to the market, an off-grid 30MW project or less is a smart option to test the water. Once you have built up your track record, you can go for larger scale projects.
For further information, please contact:
Oliver Massmann, Partner, Duane Morris
omassmann@duanemorris.com
