BACKGROUND
In the first few months of 2019, the MOIT released several regulations and proposals on wind and solar power projects, including:
- Circular No. 02/2019/TT-BCT (Circular 02) to provide guidance on the implementation of Decision 39 issued by the Prime Minister last September on wind power incentives (see our report here). Circular 02 introduces some notable changes to the regulations on wind power projects and the mandatory terms of the wind power purchase agreement (PPA). It replaces its predecessor, Circular No. 32/2012/TT-BCT (Circular 32) of the MOIT;
- a new draft decision (Draft Decision) to replace Decision No. 11/2017/QD-TTg of the Prime Minister (Decision 11) on the development incentives, and most importantly the Feed-in Tariff (FiT), for solar power projects; and
- Circular No 05/2019/TT-BCT (Circular 05), dated 11 March 2019, to issue a new model PPA for rooftop solar projects.
We set out below a summary of the key changes and proposals. Please feel free to contact us for copies of our English translations of Circular 02, the Draft Decision and Circular 05.
CHANGES TO WIND POWER REGULATIONS
Omission of equity ratio and wind farm efficiency rate requirements
Unlike Circular 32, Circular 02 no longer requires projects to have:
- a minimum 20 per cent equity ratio; and
- a minimum 90 per cent wind farm efficiency (ie the ratio of the farm’s capacity to the combined capacity of all of its turbines).
It should be noted that, in practice, local governments may still evaluate the equity ratio when licensing a project to address thin capitalisation concerns. Solar power projects still need to satisfy the equity ratio of at least 20 per cent.
Reduction of land use area
Circular 02 sets the maximum land use ratio that can be allocated to a wind project at 0.35 ha/MW. This is lower than the 0.5 ha/MW ratio set by Circular 32. In comparison, the land use ratio for a solar power project is 1.2 ha/MW.
Signing of the PPA
A specific process for signing of the PPA is provided by Circular 02, which could provide more clarity and certainty for investors. In particular, an investor must offer to sign the PPA by submitting a proposal dossier that contains certain prescribed documents to the buyer, ie EVN or one of its subsidiaries or assignees as permitted by laws. Within 15 business days after receiving the complete set of proposal documents from the investor, the buyer must review and sign the PPA.
Auction mechanism for PPA pricing
With the aim of developing a competitive wind power market, the Electricity and Renewable Energy Authority has been tasked to prepare and submit to the Prime Minister and MOIT an auction mechanism for wind power projects. The mechanism is intended to take effect from 1 November 2021. This signals a similar scheme may also be considered for solar power projects.
Other changes
Circular 02 also includes changes to the development of the power master plan, key contents of a project's feasibility study report, wind measurement, wind farm equipment and turbines.
CHANGES TO MODEL WIND PPA
Circular 02 contains a new model wind PPA (the New Wind PPA), detailing mandatory terms that parties can clarify, but not deviate from. The model still has many of the perceived bankability issues we reported in our earlier paper here, and introduces some notable developments, as set out below.
Removal of reference to lenders
The wind PPA under Circular 32 (the Old Wind PPA) refers to certain rights for lenders, such as the rights to step in and cure in the event of a breach by the seller, or the right to an assignment from the seller without the consent of the buyer. The New PPA has removed all such references to lenders.
Price
The electricity purchase price will now follow the FiT set out in Decision 39, ie the VND equivalent of 8.5 US cents per kWh for onshore projects, and 9.8 US cents per kWh for offshore projects.
Payment
The payment terms under the New Wind PPA are less favourable for the seller than under the Old Wind PPA. In particular, while both provide that payment must be made in the VND equivalent of the FiT set by the Government in USD, the New Wind PPA uses the forex rate published by the State Bank of Vietnam on the invoice date, as opposed to the forex rate published by the Joint Stock Commercial Bank for Foreign Trade of Vietnam (which is usually higher) on the payment date, as used by the Old Wind PPA. The change of the forex reference date, from payment date to invoice date, and the fact that the New Wind PPA extends the deadline for the buyer to make payment from 15 days (approximately two weeks) to 25 business days (approximately five weeks), means the seller is exposed to a higher risk of currency fluctuation.
Force Majeure
The New Wind PPA excludes some specific examples of force majeure events that existed in the Old Wind PPA, including acts of authorities that affect the performance of the PPA, the non-issuance of licences or approvals for the seller, and the Government's nationalisation or appropriation. This means the excluded events will no longer be considered force majeure events by default and, to be claimed as such, they must be proved to be out of a party's control, unforeseeable and not capable of mitigation despite all reasonable measures having been taken.
Damages
The New Wind PPA removes the clause that, if the seller terminates the PPA for a breach of contract, the buyer must pay damages equal to the value of generated electricity during the preceding one year period. Instead, damages will be calculated based on actual and direct losses the aggrieved party suffers, and direct benefits it would have otherwise received. While the liquidated damages provision in the Old Wind PPA (which is still contained in the model PPA for solar power projects) is often seen as a bankability issue, as it could limit the amount the seller may claim from the buyer, it remains questionable if the new position would improve the odds for the seller as it is usually difficult in Vietnam dispute resolution forums to accurately quantify losses.
NEW FIT AND OTHER PROPOSALS FOR SOLAR PROJECTS
Decision 11 imposes one FiT rate of 9.35 US cents per kWh for all solar projects nationwide. By contrast, the Draft Decision proposes various FiT rates based on geographical zones and project types. The rates would range from the lowest of 6.67 US cents per kWh (in provinces where investment activities have been most fervent due to the higher hours of sunshine), to the highest of 10.87 US cents per kWh (in gloomier provinces). The FiT rate would be secured for 20 years for projects that achieve a commercial operation date between 1 July 2019 and an unspecified date in 2021.
Other notable proposals include:
- the power purchaser is still required to purchase all electricity generated by grid connected solar power projects, but only to the extent permitted by operation of the power grid. This seems to pre-empt network overload problems and confirms a major concern of investors;
- projects would have to be developed in accordance with the national power master plan, rather than national and provincial solar power plans, as per Decision 11. This may have resulted from the Government’s nervousness about the surge of new solar projects, without sufficient centralised oversight following Decision 11;
- a direct PPA between power developers and end-purchasers, without going through the national grid, would be permitted, but this only applies for solar rooftop projects (which are defined to have capacity of no more than 1 MWp); and
- the MOIT is responsible for researching a bidding mechanism for solar projects.
CONCLUSION
Overall, the recent changes to the wind power regulations, and the proposed changes to solar power regulations, reflect incremental experiences the Vietnamese Government has accumulated over the years of managing the renewable energy market. They are generally more buyer-friendly (ie State-friendly), and lessen the benefits that were given to first wave developers. This indicates a more mature market and the Government's confidence that the new FiT is still attractive for investors.
If you have any questions on wind or solar power projects, or other renewable energy laws, please do not hesitate to contact us.
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