Changes in Vietnam’s model wind PPA could put investment in new projects at risk

While
the country has a goal of installing 6 GW of wind power capacity by 2030, government
guarantees that thermal energy project developers have enjoyed may not be
available for wind power projects.

Vietnam’s
revised National Power Development Master Plan has emphasized the role of
renewable energy sources in alleviating Vietnam’s electricity deficit and has
targeted an increase in wind power generation to 2,000 MW by 2025 and 6,000 MW
by 2030.  The Vietnamese government now
provides several incentives to foreign investors in wind power projects
including 100% ownership, free transferability of equity, lower rates of income
tax, exemption form or lower rates of property taxes and levies and customs duty
relief on importation of equipment.

This
article explains the recent changes made by the Ministry of Industry and Trade
(MOIT) to the model power purchase agreement (PPA) applicable to grid-connected
onshore and offshore wind power projects in Vietnam.  

PPA
term is now flexible

In
order for construction to commence, a developer must first execute a PPA with
Electricity Vietnam (EVN).  It is
mandatory to use the prescribed form of PPA, which was recently revised, for
the sale and purchase of electricity from grid-connected wind power projects in
Vietnam.  Although this is not
immediately clear from the current legislative language, it would seem that
substantial amendments to the standard form of PPA are not be permissible. 

The
term of the PPA is 20 years from the commercial operation day (COD) extendable
by the parties’ mutual agreement.  This is
an improvement to the position under the previous standard form PPA (henceforth
referred to as the “original PPA”) which had a fixed 20-year
term. 

Higher
feed-in tariffs

EVN
is obliged to purchase all the electricity generated by any grid-connected wind
project at the prescribed tariff.  For
offshore and onshore wind projects which reach COD between 1 November 2018 and
1 November 2021, the tariff has been increased to VND 2,223 (equivalent to 9.8
US cents) per kWh) and VND 1,928 (equivalent to 8.5 US cents) per kWh,
respectively.  Although the revised
tariffs are an improvement over the previous tariffs, they are still low
compared to wind power tariffs offered by other South Asian countries. 

Greater
currency risk

The
tariff for wind power projects is calculated and paid in Vietnam Dong (VND) and
is indexed to the exchange rate for United States Dollars (USD) announced by
the State Bank of Vietnam on the date on which the invoice is issued by the
power generator to EVN.  Risk of fluctuation
of the USD/VND exchange rate between the date of the invoice and the date of
payment, however, remains as payment could be delayed for up to 25 business
days from the date of receipt of an accurate and valid invoice by EVN and even
longer if there are disputes. 

In
the original PPA, the tariff was indexed to the USD/VND selling rate announced
by the Vietnam Foreign Trade Bank (which has been historically more favorable
to a purchaser of USD) at the time of payment. 
Also, the fact that the rate was referenced to the payment date (rather
than the invoice date) reduced currency risk for the wind farm developer and
its lenders.

Consistent
with the original PPA, neither the availability of USD nor remittance of USD
revenue outside Vietnam are guaranteed. 

Wind
farm owner carries transmission risk

All
transmission risk under the revised PPA is transferred to the generator.  EVN is only obliged to purchase the power
output if it is delivered to the delivery point.  EVN is not required to purchase power when
the grid is under repair, inspection or testing, breaks down, needs support to
recover after a breakdown or is not operated in accordance with applicable
regulations or technical standards. 

If
the transmission facilities beyond the delivery point are not available or
functional, it may not be technically feasible for the wind farm to generate
electricity.  As wind power projects
cannot be considered to be “available for dispatch” like coal or
gas-fired power projects, it may not be possible to structure wind power
tariffs on a “take-or-pay” basis and, consequently, a
“take-and-pay” type structure may have to be considered.  In these circumstances, the allocation of
transmission risk becomes very important. 

Reduced
force majeure protection

The
definition of force majeure in the revised PPA is narrower compared to the
definition in the original PPA.  The new
definition is also exhaustive with only a limited number of events being
specified as force majeure.  Events of a
“political” nature which were previously included as force majeure events have
been deleted from the revised PPA. 
Specifically, non-issuance of licenses or approvals to the developer of
the wind project, expropriation, acts of the Vietnamese authorities which
affect the developer’s performance of its PPA obligations etc. are no longer
force majeure events.  If the force
majeure continues for more than one year, either party is entitled to terminate
the PPA.  The developer is not entitled
to receive any compensation is in these circumstances.

No
change in law protection

The
revised PPA does not include any provisions regarding change in law and
developers of wind projects will need to rely upon the investment guarantee
protection provided under the Law on Investment in the event of an adverse
change in law.

Improved
termination compensation

Compensation
is payable to the developer of the wind farm if the PPA is terminated by the
developer for EVN’s breaches but in no other circumstances.  The amount of compensation is equal to the
aggregate of the proven loss sustained by the developer directly attributable
to EVN’s breach and the value of the proven direct benefit which the developer
would have received but for the breach. 

Although,
this is an improvement of the position under the original PPA where the
compensation was limited to the value of electricity generated during the
previous year, it is still well short of what international investors and their
financiers would expect particularly considering the risks to which they are
subject. 

No
step-in rights

The
original PPA included step-in rights for lenders but the revised PPA has
deleted these. 

Dispute
resolution

Like
the original PPA, the revised PPA has retained Vietnamese law as the governing
law but now allows for dispute resolution to be “pursuant to relevant provisions
of law.”  As Vietnam is a signatory to
the New York Convention on Recognition and Enforcement of Foreign Arbitral
Awards 1958, it would be possible for international developers to negotiate
provisions for international arbitration under the aegis of a neutral tribunal
such as the Singapore International Arbitration Centre.

Offtaker
credit support/EVN risk

Last
but not the least, EVN’s creditworthiness remains a concern among international
developers and financiers but the government guarantees provided to developers
and financiers of large scale, thermal power projects in Vietnam implemented
under the BOT model are unlikely to be available for renewable energy projects
unless they are considered to be of national importance by the government.

Although
Vietnam is poised for a renewable energy boom spurred by the increasing demand
for energy, financing for wind power projects in Vietnam is currently limited
to Vietnamese banks, multilaterals and a few ECAs.  The MOIT is expected to introduce policies
for a reverse auction process to procure the installation of wind power
capacity from November 2021 following the example of other APAC countries such
as India, Indonesia, Kazakhstan and Pakistan all of which have implemented such
auctions for bringing wind power into the energy mix. 

It is hoped that the new policy will address some of the bankability issues that have so far limited foreign investment in this important sector of Vietnam’s economy.  

Lead image: Bình Thuận Province, Vietnam Photo by Tony Pham on Unsplash

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