Vietnam Releases First Draft of Solar Power Purchase Agreement

Vietnam Releases First Draft of Solar Power Purchase Agreement

Following the Prime Minister's issuance of Decision No. 11 adopting the new
policy for solar power, the Ministry of Industry and Trade of Vietnam (MOIT)
has released the first draft of a Circular (Draft Circular) providing for
detailed guidelines on the development of solar power projects in Vietnam.
The Draft Circular includes a draft solar power purchase agreement template
(Draft PPA), as well as detailed guidelines on the formulation and approval
of national and provincial solar power development plans. However, the Draft
Circular leaves certain key issues unresolved, which may have an impact on
the bankability of solar projects, especially for large utility-scale solar
power plants.

Tariff structure

The Draft PPA reinstates Decision No. 11's approved Feed-in-Tariff (FiT)
rate of VND2,086 per kWh (equivalent to USD cents 9.35 per kWh, exclusive of
VAT) for grid-connected projects. For rooftop projects, this FiT rate
applies only to the excess power generated as compared with power consumed
during the relevant year. Though the price is converted in USD based on a
current exchange rate, the Draft PPA does not include any indexation of the
FiT by way of escalation in accordance with the Consumer Price Index (CPI)
or the exchange rate, or any other provision to address inflation risks.

Offtake obligation and curtailment by the purchaser

Under Decision No. 11 and also the Draft PPA, Vietnam Electricity (EVN), as
the State-owned utility, is delegated to purchase all electricity generated
from solar power projects. Under the Draft PPA, EVN as the purchaser is
given the rights to stop purchasing electricity in certain circumstances
beyond the reasonable control of the seller, without any compensation or
payments to the seller/project developer.

Specifically, the Draft PPA specifies that the purchaser is not required to
purchase or take electricity in, among others, any of the following
scenarios:

during the time when the purchaser installs equipment, or it repairs,
replaces, inspects or examines the grid directly related to its connection
to the seller's power plant;

when the transmission grid or the distribution grid connected to the
purchaser's grid has a problem or grid equipment directly connected to the
purchaser's transmission grid or the distribution grid has a problem; and

when the purchaser'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.

In addition, under the Draft PPA, the purchaser is obligated to make
payments to the seller only for the electricity that the purchaser has
received. There is no concept of deemed commissioning to allow for the
payments if the facility or a section is ready but EVN fails to construct
grid connection or is otherwise unable to take the electricity produced.

Compensation upon termination of the PPA

Under the Draft PPA, in the event of termination due to the purchaser's
default, the termination payment amount will be limited to the value of the
seller's actually generated electricity output during he past one (1) year
until the time of the termination of the PPA. No termination payment by way
of compensation by EVN as the purchaser is provided to recover for the
project company / seller's outstanding debts, as well as expected return on
equity capital.

The Draft PPA provides that upon termination of the PPA, the non-defaulting
party can make a claim to the defaulting party for compensation of direct
and actual damages. The non-defaulting party must prove any such damages
caused by the defaulting party and any direct benefits that the
non-defaulting party would have been entitled to in cases where there is no
such default by the defaulting party. Other than that, there is no
termination payment or protection for outstanding debts of the project
company in the event of the project company/seller's default.

Dispute resolution

The Draft PPA provides and allows for EVN to bring disputes to Vietnamese
courts for litigation and other State energy authorities of Vietnam for
mediation or resolution.

Specifically, the Draft PPA details the procedure for resolution of disputes
over the PPA as follows:

In case of a dispute between the parties to the PPA, the party who raises a
dispute must notify the other party in writing of the dispute and its
demands.
The parties will negotiate to settle the dispute within sixty (60) days from
the date of receipt of the notice of the party who raises the dispute.

The dispute resolution process related to the payment of electricity shall
be conducted within fifteen (15) days from the date of receipt of a notice
of the claiming party.

If the parties fail to reach an agreement, the parties may send a request to
the General Directorate of Energy (GDE) for support in the parties' dispute
resolution process.

If the parties still fail to reach an agreement after the mediation by the
GDE, the dispute shall be resolved by the MOIT's Electricity Regulatory
Authority of Vietnam (ERAV) in accordance with the procedure of Circular No.
40/2010/TT-BCT dated 13 December 2010 of the MOIT. At the end of the
process, any party who disagrees with the decision made by the ERAV can
bring the dispute to the Vietnamese courts for litigation.

In addition to resolution of disputes by the ERAV, the Draft PPA adds
another option, namely "another dispute resolution body to be agreed by the
parties" but this wording in the PPA may allow EVN to refuse any negotiation
for other forums for dispute resolution.

The Draft PPA does not provide for offshore arbitration. International
arbitration would be an essential element of any large-scale PPA.

Other key issues under the Draft PPA

The Draft Circular does not provide for certain support policies that
investors expect, nor does it address certain key issues in the Draft PPA,
including:

No provision for any form of government guarantee, assurance or support to
enhance the creditworthiness of EVN as the sole offtaker/purchaser.

No provision addressing the risk of changes in law and/or tax (in the form
of supplemental tariffs or otherwise) after the date of the PPA in such a
way as to diminish the economic returns of the transaction for the seller.

No provision for payment protection for the seller in circumstances of
political force majeure.

The Draft PPA imposes liabilities on the project developer/power seller for
grid connection costs and associated risks, without addressing how to
balance cheaper land rental and use costs in relatively unpopulated areas
against the greater costs of running transmission lines over longer
distances.

Although a number of issues exist, the MOIT is proposing this Draft PPA is a
nonnegotiable template. Specifically, Articles 16.1 and 17.3 of the Draft
Circular impose a compulsory application of this PPA template to all grid
connected solar PPAs. It only allows the parties to the PPA to supplement
the PPA to clarify the rights and obligations of the parties, but not to
change the basic contents of the PPA template. Under the Draft Circular,
there is no specific treatment for making the PPA bankable, even for
large-scale projects. Obviously a more pragmatic and flexible approach will
be needed for the Draft PPA to accomplish its objective of mobilizing
investment into clean solar power.

Guidelines on the development of solar power projects

The Draft Circular provides for, among other things, the following
requirements for solar power projects:

the impact of the plan to connect the power project with the electricity
system in the relevant region must be assessed;

the ratio of the land area used permanently must exceed one (1) ha per one
(1) MW;

the project must have equipment connecting with SCADA system; and

a plan and estimate of costs and techniques served for disassembly and
disposal of solar power plant equipment after the end of the project.

The Draft Circular also provides for the process, required documents and
timeline for inclusion of a solar power project in the solar power
development plans, as well as detailed guidelines for formulation, appraisal
and approval of the national solar power development plan and
provincial-level solar power development plans.

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John Diecker
APT Consulting Group Co., Ltd.

www.aptthailand.com