Vietnam: First draft of the solar Power Purchase Agreement released by the Ministry of Industry and Trade

Vietnam: First draft of the solar Power Purchase Agreement released by the
Ministry of Industry and Trade

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.

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John Diecker
APT Consulting Group Co., Ltd.

www.aptthailand.com