How Vietnam Can Launch a Bankable Solar Power Purchase Agreement

How Vietnam Can Launch a Bankable Solar Power Purchase Agreement

Following the issuance of the Prime Minister's Decision No. 11/2017/QD-TTg
("Decision 11") on the development of solar power in April 2017, which we
reported in "Vietnam Goes Green with New Guidance on Solar Power Projects",
the Ministry of Industry and Trade ("MOIT") has proposed a draft circular
that, once issued, will guide the implementation of Decision 11. The draft
circular includes a power purchase agreement (PPA) standard form that,
pursuant to Decision 11, will be mandatory for the sale of solar power to
the Vietnamese government-owned single purchaser - Electricity of Vietnam
(EVN). The draft PPA falls short of expectations since it heavily resembles
the one used for wind independent power projects (IPPs), which is generally
viewed as appropriate for only very small projects. The viability of the PPA
standard form is critical to a well-functioning regulatory framework for the
burgeoning Vietnamese solar energy sector. Investors and other stakeholders,
such as international financiers, will likely expect a significant number of
changes to the final form of the PPA to make solar transactions in Vietnam
bankable. In this legal update, we will discuss concerns with the standard
form PPA and offer some recommendations for positive revisions.

Standard PPA may not be suitable for large power projects

While the standard PPA may be appropriate for smaller scale solar power
projects, a more detailed PPA is more appropriate for larger projects. As a
significant amount of capital investment is required for larger projects,
sponsors and lenders would expect the PPA to specify compensation procedures
applicable in a range of situations, including when a seller is no longer
able to generate power due to a political force majeure event. A more
detailed, long form PPA should be introduced, or the Government should
explicitly allow a negotiated form of PPA be used for large-scale projects.
As a matter of comparison in the region, similar short form PPAs in
Thailand's Very Small Power Producer Program only apply to power projects
that do not exceed 10 megawatt.

Significant gap between standard form PPA and international market practice

There are numerous issues that need to be addressed so as to align the
standard PPA form with international market practice. For instance, the
draft requires changes to the commercial operations date to be announced six
to 12 months in advance of the scheduled date. However, this approach may
not be workable in practice as delays are often unforeseeable. It is common
practice for scheduled commercial operation dates to be extended after the
plant's construction has already been delayed if triggered by factors beyond
the seller's control.

Additionally, a seller's creditor should be notified of defaults. Lenders
would typically be given "step-in rights" after a material default. If
step-in is not viable, lenders may wish to have the project transferred by
the power purchaser to a new owner. The purchaser must, therefore, be
willing to enter into direct agreements with the project company, lenders,
and regulatory bodies to give effect to such rights. Inserting a provision
requiring the parties and regulatory bodies to enter into direct agreement
with the seller's creditors may help address these concerns. Furthermore,
the PPA should clarify that any enforcement action by lenders in itself will
not constitute a ground for termination.

One other shortcoming is that the PPA does not provide for offshore dispute
settlement such as submission to the jurisdiction of an international
arbitral forum.

Unbalanced risk allocation

The draft does not impose any "take or pay" obligation on the purchaser, and
the PPA relieves EVN from its payment obligations even where it is unable to
take power due to a breakdown of the transmission or distribution grid.
Transmission and distribution risk would generally be assumed by the
purchaser. Where the purchaser cannot take power due to a breakdown of the
transmission or distribution grid, minimum take-or-pay obligations should
remain in place as long as the plant exists. This would customarily be
addressed in the form of a capacity payment.

Moreover, market practice in other jurisdictions in the region requires a
government-affiliated offtaker to assume the risk in cases of political
force majeure events, such as a diplomatic freeze or the introduction of
sanctions. The standard PPA should be revised to specify the burden of risk
in cases of political force majeure events. For instance, PPAs with a
government-affiliated offtaker may entitle sellers to cost relief in the
event that a new tax is introduced or the existing taxes are increased.
Privatisation or reorganisation of the power purchaser, as well as its
insolvency would customarily be seller termination events.

Government guarantee?

It is unclear whether or not the Government is prepared to provide a
guarantee covering customary matters that financiers will usually require,
such as purchaser's payment obligations under the PPA (including termination
payments which may be due following the termination of the PPA) and foreign
currency availability. Vietnam is trending in the direction of weaker
government guarantees in recent years, which is in stark contrast to the
robust guarantees offered on earlier large scale power projects. As reported
in our legal update in February "Tightening the Belt on Vietnam's Sovereign
Guarantees", obtaining sovereign guarantees on corporate loans for projects
that are difficult to finance has recently become increasingly challenging.

Conclusion

The Government has taken an important step forward in proposing the standard
PPA, along with guiding implementing legislation, and by inviting public
comment on the framework. Developing a viable solar energy plan constitutes
progress towards focusing attention and resources on meeting Vietnam's
renewable energy goals. That said, the draft standard form PPA can be
improved in several ways as discussed in this article. Adapting the PPA to
international market standards to ensure bankability and clarifying the
scope for a government guarantee of EVN's obligations as offtaker are key
factors. The latter issue will likely prove challenging given Vietnam's
reluctance to offer strong guarantees in recent years.

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John Diecker
APT Consulting Group Co., Ltd.

www.aptthailand.com