A step closer to harmonising and streamlining piecemeal power sector regulations

The next generation of Vietnam’s power sector regulation is taking shape, with a proposed new circular set to bring nearly all technologies together in one place for the first time.

On 29 December 2023, the second draft of a new circular on determining electricity generation tariffs and power purchase agreements (PPA) was published by the Government for public consultation (Draft Circular).1 The new circular will replace Circular 57/2020/TT-BCT of the Ministry of Industry and Trade (MOIT) stipulating the method for determining electricity generation tariffs and PPAs (as amended) (Circular 57). The Draft Circular is critical to establishing what tariff power generators will be paid under the PPA and the commercial terms on which they will contract with Electricity of Vietnam (EVN). While some positive changes are evident, whether the terms will be adequate to spur the huge sums of private investment required to meet Vietnam’s power demand and decarbonisation goals remains to be seen.  

Contents

1. Overview of regulations on electricity generation tariff
2. Recap on key principles of the pricing mechanism
3. Key changes under the Draft Circular
4. Concluding remarks

1. Overview of regulations on electricity generation tariff

Under the Electricity Law,2 electricity sellers (open to private investment) and buyers (nearly always EVN) are entitled to agree the tariff for sale and purchase of electricity under a PPA, provided such tariff is within a statutory range.3 That tariff range runs from 0 to the ceiling tariff applicable to the relevant technology as determined and announced annually by the Ministry of Industry and Trade (MOIT).

At present, the set of regulations on determining tariffs is divided into two categories:

• those regulating determination of the electricity tariff range appliable to a specific technology; and
• those governing the determination of the tariff applicable to each specific power plant.

Existing regulatory regime

With respect to tariffs for hydro and thermal power projects, stable regulations have been in place for a relatively long time and include:

• Circular 57/2014/TT-BCT dated 19 December 2014 stipulating the method, sequence of formulation and issuance of the electricity generation tariff ranges applicable to hydro and thermal (coal-fired and combined cycle gas using natural gas or liquefied natural gas (LNG)) power projects);
• Circular 57 regulating the mechanism to calculate the electricity generation tariff of individual thermal and hydro power plants (excluding small hydro power projects using avoided cost tariff (ACT), multi-purpose hydro power projects, build-operate-transfer (BOT) projects, power plants providing auxiliary services, solar power, wind power, waste-to-energy and biomass power plants) and promulgating the model PPA applicable to such plants (see link for our discussion of the details and some changes made to Circular 57 in 2023); and
• Circular 32/2014/TT-BCT dated 9 October 2014 stipulating the sequence of formulation and application of the ACT and issuance of the model PPA for small hydro power projects.

In contrast with hydro and thermal power, Vietnam opted to differentiate the regime for renewable energy (RE) projects by using feed-in-tariffs (FiTs) to spur development. However, FiTs applicable to wind and solar power expired in 2020 and 2021 respectively, and current FiTs applicable to biomass and waste-to-energy plants are likely to cease in the near future.

New and upcoming regulatory regime

The MOIT has recently issued, or plans to issue, the following regulations to govern determination of the electricity generation tariff ranges and the electricity generation tariff of specific RE power plants:

• Circular 15/2022/TT-BCT dated 3 October 2022 of the MOIT on the method for formulating electricity tariff ranges for transitional solar and wind power plants (Circular 15) (see link for our summary of key issues in Circular 15);
• Circular 19/2023/TT-BCT dated 01 November 2023 stipulating the method, sequence of formulation and issuance of electricity tariff ranges applicable to solar and wind power projects (Circular 19) (see link for our summary of key issues in Circular 19);
• Draft Circular stipulating the method, sequence of formulation and issuance of electricity tariff ranges applicable to biomass and waste-to-energy projects (Other RE Draft Circular) (see link for our summary of key issues in the Other RE Draft Circular); and
• This Draft Circular to govern the formulation of electricity tariffs of specific power plants, covering not only hydro (including small hydro power using ACT) and thermal power as currently, but now also RE projects, excluding multi-purpose hydro power, BOT projects and power plants providing auxiliary services.

2. Recap on key principles of the pricing mechanism

To recap, the key principles to determine the electricity tariff for a specific power plant are as follows:

• The electricity tariff agreed in the PPA consists of two elements agreed between buyer and seller: (i) contract price, and (ii) specific transmission price.
• The contract price is agreed by the seller and the buyer in accordance with certain principles and statutory formula, as further explained below.
• In principle, the formula to calculate the contract price and the specific transmission price is designed to enable the seller to recover the costs of construction, operation and management (O&M), as well as the cost for fuel and fuel transportation in accordance with the applicable law.
• This specific transmission price is calculated in VND/kWh or VND/kW or VND/month. It is not mandatory to use a specific unit, but it depends on which calculation method the parties use when computing the specific transmission price.
• The contract price is first calculated for the base year (Base Year) in which the relevant project’s total investment capital is approved (Base Year Contract Price). Based on the Base Year Contract Price, the contract price is calculated, or subsequently adjusted, to account for, among other things, indexation and foreign exchange rate fluctuation affecting the project, subject to the following principles:
  • the Base Year Contract Price is calculated using the forecast costs at the Base Year and capped at the ceiling price applicable to the relevant technology, as calculated and announced by the MOIT for the relevant Base Year or, if no tariff range is available for such year, the available tariff range of the most recent year;
  • the Base Year Contract Price consists of two elements: (i) fixed price and (ii) variable price; and
  • an internal rate of return (IRR) which must not exceed 12%, though it is unclear whether this rate factors in financing costs or not.
• The fixed price element is to recover (A) the total investment capital/costs within the responsibility of the seller from the power plant to the connection point (including costs for investment and construction of the power plant and other infrastructure facilities, but excluding transmission costs), as well as (B) O&M costs, such as costs for major repairs and costs for human resources for daily O&M.

  Total investment capital

  The total investment capital means all costs of investment in, and construction of, a project, determined in accordance with current law and commensurate with the preliminary design and other contents of the feasibility study report on investment in construction:

  • The total investment capital to be used for calculating element (A) of the fixed price is the one applicable at the time of PPA negotiation, as elaborated further below:
• including compensation, assistance and resettlement costs (if any); construction costs; equipment costs; project management costs; construction consultancy costs; other costs and contingency costs for additional volumes of work, and indexation; and
• consisting of all costs incurred by the seller from the power plant up to the connection point, including infrastructure such as a port for the power plant, terminal for importing LNG (for LNG-to-power projects), and other costs allocated to the project (if applicable).

Adjusted total investment capital

• The total investment capital can be adjusted at the time of PPA negotiation in specific cases, as follows:

• as a result of the impact of natural disasters, environmental incidents, hostilities, fire and other force majeure factors;
• where factors appear that bring higher efficiency to the project when the investor has proved that project adjustment will result in financial and socio-economic efficiency;

Finalised total investment capital

• Upon obtaining the approved finalised total investment capital after construction, the seller can propose to have the electricity tariff recalculated with the input being updated, provided that:

• the adjusted contract price (based on the new fixed price) will be capped at the ceiling price applicable at the time the finalised investment capital is approved; and
• the fixed price applicable to the years preceding the signing of the PPA amendment (to reflect the new tariff) will remain the same—ie only the fixed price applicable for the following years after the PPA amendment will be adjusted to reflect the change in the investment capital.
•  
• where changes to construction planning directly affect the project;
• where the construction price index announced by the Ministry of Construction or a provincial people's committee during the project implementation period is higher than the construction price index used to calculate the provision for inflation in the project’s previously approved total investment capital; and
• where the project must be adjusted due to an adjustment to the investment policy.
  • Element (A) of the fixed price must be agreed between the parties and subject to conditions on loan repayment and IRR. It can be fixed the same for each year over the project life or can be fixed differently for each specific year, considering the borrowing conditions and expected financial capability of the project over the project life.
  • Element (B) of the fixed price is calculated based on costs for major repairs, as well as costs for human resources for O&M.
• The variable price is to recover the cost of fuel and transportation of fuel. It is calculated based on the average cost for main fuel, auxiliary fuel and transportation of main fuel specified in the relevant agreements.

3. Key changes under the Draft Circular

Scope of application

The Draft Circular expressly states that it regulates all power projects connected to the national electricity system, namely thermal power (ie those using natural gas, LNG, coal and diesel), hydro power (including the extension), RE projects (ie onshore wind, offshore wind, biomass and solid waste) and ‘new’ sources (ie hydrogen and ammonia). Notably then, unlike current Circular 57 which carves out RE projects from its scope, the Draft Circular will cover RE. The Draft Circular only excludes from its scope multi-purpose hydro power projects, BOT power projects and power plants providing auxiliary services.

With this change, the Draft Circular is significantly broader in scope than current Circular 57, reflecting a move towards cohesive regulations for all projects directly participating in Vietnam's wholesale electricity market (VWEM) (including small hydro power projects which, pursuant to Circular 57, use ACT) and those indirectly participating in the VWEM, except for BOT projects and multi-purpose hydro power projects as noted above.

For power plants directly participating in the VWEM, the Draft Circular regulates fundamental bilateral pricing and contractual matters. Like Circular 57, the Draft Circular will form a key part of the regulations for the VWEM, along with Circular 45/2018/TT-BCT dated 15 November 2018 of the MOIT (Circular 45). Circular 45 (i) sets out the operational rules of the VWEM (currently also under review), in particular how generated electricity will be mobilised on the VWEM, and (ii) regulates how the guaranteed capacity (ie the contracted capacity) that the purchaser commits to taking or paying for at the guaranteed price (ie the contract price as discussed above) is agreed between the seller and the purchaser each year under a contract for difference (CfD), as well as how it is allocated or adjusted for each year, each month, each day and each trading interval. We will publish a separate update on Circular 45 and the draft replacing that circular.

Principles for determining electricity generation tariff

The Draft Circular generally follows similar principles for determining electricity generation tariffs as stipulated in Circular 57. However, there are key changes which we summarise as follows:

Basis for determining fixed price

Basis for determining variable price

Energy storage price

Energy storage cost is a new component under the Draft Circular. It is expected that this cost will be treated in a similar manner to the specific transmission cost in that such cost forms part of the electricity generation tariff and is an element to be added on top of the contract price. However, the Draft Circular does not provide in detail how this cost will be calculated. It seems from the current wording that the energy storage cost will be agreed between the parties and calculated to recover the costs incurred by the investor for construction, management and O&M of the energy storage system. Once these actual costs are finalised, the parties will recalculate the energy storage cost.

Temporary contract price

Circular 57 is silent in cases where the parties are unable to agree on the contract price to sign the PPA. From the wording of the Draft Circular, in such circumstance, it seems the parties will have an option (not an obligation, though the wording is not entirely clear) to agree on a temporary contract price and such price must be within the applicable tariff range. The temporary contract price is subject to appraisal by the Electricity Regulatory Administration of Vietnam (ERAV) and decision of the MOIT and will be effective until the official contract price is concluded. The so-called 'transitional' RE projects would be captured by this mechanism.

Detailed changes for renewable energy

Covering RE is the most significant change in the Draft Circular given the Draft Circular does not introduce any critical changes specific to LNG-to-power projects.

1. Electricity tariff and contract price

1. The electricity tariff of an RE power plant generally follows the same approach for other technologies. The contract price for solid waste-to-energy, biomass, hydrogen and ammonia is treated the same as in the case of coal-fired power or LNG-to-power in that it also consists of both the fixed price and the variable price because these technologies require feedstock for electricity generation. In contrast, the contract price for solar and wind power only consists of the fixed price and not the variable price, because these technologies do not require feedstock. The same structure applies to setting the ceiling prices under Circular 19 for solar and wind power.
    
2. The contract price component will be capped at the ceiling price of the Base Year. Considering the definition of the Base Year above, that means the contract price must be capped at the ceiling price of the tariff range applicable at the time of PPA negotiation or at the time the finalised investment capital is approved.
    
3. The calculation of contract price under the Draft Circular as well as the calculation of the ceiling prices in accordance with Circular 19 and the Other RE Draft Circular excludes costs of investment in transmission lines and substations to the connection point and any storage system. It is understood that the seller will still recover these costs as part of the electricity tariff, but separately from the contract price (which is capped at the ceiling price).

2. Fixed price

1. The fixed price is calculated based on certain inputs that are the same as for other technologies regulated under the Draft Circular. These inputs include (i) total investment capital (excluding transmission and storage costs), (ii) economic life of the project, (iii) average generation capacity over many years as determined based on the approved basic design applicable at the time of PPA negotiation, (iv) rate of self-consumption and loss at the transformer and over transmission lines, (v) time of depreciation of each group of main assets, (vi) ratio of equity, loan and equity contribution schedule, (vii) interest rates (for foreign currency loan and VND loan) and repayment schedule during operation period, and (viii) taxes. However, there is also no specific formula to calculate the fixed price.
   
   There are no specific features of RE as compared to hydro/thermal power projects. In our view, there should be a specific approach to determine the average generation capacity over many years for RE. In the case of solar and wind, that could follow the same approach as provided in Circular 19.
    
2. The variable price is irrelevant for solar and wind power and is not factored into the electricity tariff of a solar or wind power project. However, it is applicable to the case of waste-to-energy, biomass, hydrogen and ammonia power plants. The Draft Circular adopts the same approach as in the case of thermal power plants to those new technologies. As such, the variable price is calculated based on the average cost of all the sale and purchase agreements of the main fuel/feedstock or auxiliary fuel/feedstock and the average cost of all transportation agreements for the main fuel/feedstock.

3. Electricity tariff for wind and solar projects with signed PPAs but having no official tariffs

1. Wind and solar projects having signed PPAs but having had no official tariffs will apply the same method of determination of tariffs.
2. For a project being only partially in operation, the tariff will be determined based on the input for the entire power plant and it will apply for the part which has not had the official tariff. The economic life is 20 years.
3. The contract price will be capped at the ceiling price in the tariff range issued by the MOIT.

4. Model PPA

It seems each technology of solar, wind, solid waste-to-energy and biomass power will follow a different model PPA to be set out in separate circulars referred to in the Draft Circular. They will not follow the one set out in the Draft Circular as attached in Appendix 3 which seems only applicable to hydro power projects (excluding small hydro power using ACT and multi-purpose hydro projects), coal-fired power, natural gas-to-power and LNG-to-power projects. So far, the Draft Circular makes only very limited provision for changes to the standard thermal project PPA template. A lot of attention will turn to whether and what further changes might be made to that template, as well as developments to the other template PPAs for RE.

5. Relationship with the auction scheme

According to the last version of the draft Decree on investor selection for grid-connected power projects and transmission projects (made public in 2022), interested investors would have to bid a proposed tariff and, if successful as lowest bidder, would subsequently negotiate the final tariff with the purchaser. The final tariff must not exceed the lower of the proposed tariff set out in the bid and the ceiling tariff applicable at the time of PPA negotiation. It is unclear how the tariff determination in such an auction scheme could be matched with the electricity tariff determined in accordance with the Draft Circular. Specifically, it is unknown what the answer would be in case the tariff calculated under the Draft Circular was higher than the proposed tariff at the time of the bid due to project cost inflation arising during a prolonged bidding process. If negotiation of the tariff in the PPA is still required as part of the investor selection auction scheme, the seller would likely be put in a difficult situation, especially if negotiations were prolonged. This is not limited to RE as the auction scheme will supposedly apply to selection of investors for other non-RE technologies as well. At time of writing, it is unclear whether and how the proposed auction scheme might develop further.

4. Concluding remarks

The Draft Circular is an important part of the government's goal to harmonise and streamline currently piecemeal power sector regulations. Combining RE and hydro along with thermal power under the same fundamental pricing mechanism is also a further step towards realising full operation of the wholesale electricity market. However, there remain key points that need further consideration and action by the Government:

• The provisions specifically applicable to RE need to be tailored to be more appropriate for RE. It remains unknown if the pricing mechanism under the Draft Circular will be adequate to encourage RE investors—something critical to Vietnam achieving its decarbonisation targets. Another critical component requiring further consideration is more clarity and certainty around mobilisation of energy from RE plants.
• The investor selection process needs to be further considered, taking into account the pricing mechanism under the Draft Circular. If the auction scheme is to be adopted, it should be properly designed to address change in costs over the time from commencement of the auction process until the PPA is signed.
• The final critical missing piece at present is the template PPAs. The Draft Circular does not include proposed template PPAs for RE and only very limited indication of changes to the template thermal PPA. While the regulations on commercial aspects of the power market (ie pricing and capacity), to be established substantially by the Draft Circular and circular being prepared to replace Circular 45, are central to fully understanding a given project's overall feasibility, the PPA terms are fundamental to bankability and thus final investment decisions.