14 December, 2018
On 15 November 2018, at a high level meeting convened by the Electricity Regulatory Authority of Vietnam (ERAV), the ERAV provided some updates on their studies on corporate Direct Power Purchase Agreement ("DPPA") models for renewable energy for pilot application in Vietnam. The discussion clarified somewhat the prospects for the near future.
The DPPA model is surging around the world as a new model for renewable energy projects and like many other Asian markets, Vietnam has started studying this model in order to implement a pilot program.
The DPPA model refers to a power purchase agreement arrangement in which the power purchasers (off-takers) are private power consumers. This represents a growing global trend whereby instead of buying electricity directly from the State utility offtaker, private businesses will purchase electricity under long-term PPAs directly from independent power developers (generators), as well as investing in power generation assets themselves.
At this stage, the ERAV is the authorized government agency leading the investigation into the suitability of a pilot program in Vietnam.
There are two DPPA models which were proposed for consideration and selection for the pilot program: (i) Sleeved DPPA, and (ii) Synthetic DPPA. Each model presents pros and cons, which we explore below.
Key considerations from the Government’s perspective
According to the ERAV, the comparison and evaluation of the pros and cons of each of the two proposed models will be based on the following four (4) key sets of criteria:
1. Consistency with, and relevance to the context, structure, orientation and roadmap for development of Vietnam’s electricity market; ensuring compatibility with international best practices in applying the DPPA mechanism.
2. Economic impact: the proposed model should harmonize the economic interests of stakeholders and parties involved in the DPPA mechanism, specifically:
- Ensuring that the incentives applicable to renewable energy generating companies are compatible with those currently applied, such as the Feed-in-Tariff (FiT); and
- Relevant network service providers must also be able to fully recover the costs incurred in the DPPA transactions.
3. Operations: the proposed model should be simple and feasible in the context of Vietnam’s power industry, ensuring that it will not create a large amount of undue burden onto network service providers, which may affect the operations of the energy sector's participants when implementing this mechanism.
4. Legal aspects: the proposed mechanism should be consistent with the legal framework. In case revisions and supplements to the legal framework are required, a phased roadmap will need to be formulated, and an attempt to amend all regulations simultaneously should be avoided.
According to the ERAV, whichever model best meets the above criteria will be selected. Accordingly, it appears that from the ERAV's perspective, the ERAV is inclined to prefer the Synthetic DPPA model rather than the Sleeved DPPA for pilot program.
Power customers participating in the DPPA pilot program
According to the ERAV, the long-term goal of the Government is to design a DPPA mechanism which ensures manufacturing customers (including both goods producers and service providers) can have access to clean energy.
In the short term, however, for the pilot DPPA program in particular, the main objective of the pilot phase is limited to assessing whether the proposed models are feasible and effective, and how they impact the structure of the electricity sector in Vietnam, including related power companies and EVN power entities.
Once a feasible model for the pilot program has been determined, the ERAV will consider expanding groups of target customers participating in the DPPA mechanism. It appears from the current perspective of the ERAV that industrial customers will be prioritized for the pilot program.
Target and scale of capacity for the pilot phase
At present, the ERAV is concentrating its efforts on the assessment and selection of a more feasible DPPA model before exploring the pilot program in depth.
The ERAV has yet to determine any specific target or scale of target capacity to be mobilized for the pilot program. The ERAV stated that these matters will be considered at a later stage depending on the findings from its market surveys.
Criteria for selection of power generators participating in the DPPA
According to the ERAV, it is currently conducting market studies and has not determined a definitive list of criteria for renewable energy projects to participate in pilot program yet. However, the ERAV indicated that it is considering the possibility of selecting renewable power plants with a capacity of 30 MW or larger.
The ERAV explained that a new mechanism such as the DPPA requires special approval from the competent authority of the Government of Vietnam before it can be implemented in Vietnam. Specifically, once the ERAV © completes their study, they will report their findings to the Ministry of Industry and Trade (MOIT) for review, and if such approval is beyond the MOIT's scope of power, the proposed pilot program will be submitted to the Prime Minister for approval.
During the period of November and December 2018 the ERAV is working on conducting its study and producing reports on DPPA models in order to submit them to the MOIT.
Components of the DPPA charge (wheeling fees)
According to the ERAV, a clear and transparent set of rules and method of calculation of the actual DPPA charge will need to be prepared, and these rules and methodology shall be the principal method of calculation of DPPA charge's components.
Currently, however, the components of the DPPA charge have not been fully determined or calculated.
In light of the above, the Government of Vietnam is still in the process of studying the DPPA framework, and it may take some time until a specific framework will be approved by the Government of Vietnam for implementation. A definitive timeline for implementation still remains uncertain. In addition, please note that at this stage, the above discussions are merely based on a meeting with certain representatives from the ERAV, and may not represent the final position of the Government.
However, the above discussions are indicative of some intentions, policies, and priorities of the Government on potential DPPA mechanism in Vietnam in the coming years.
For further information, please contact:
Frederick Burke, Partner, Baker McKenzie
frederick.burke@bakermckenzie.com
