United States: The Sun Rises On Vietnam's Energy Sector

Over the past three decades Vietnam has witnessed startling economic success thanks to the country's openness to international trade and investment. The energy sector in particular has grown rapidly, with abundant hydrocarbons and hydropower resources allowing the country to keep pace with the energy demands of a rising population.

However, there may be clouds on the horizon. The most easily-accessible resources are running out and imports of coal and gas will be increasingly needed to keep industry chugging along. To maintain its high rate of growth Vietnam will be looking for huge investment over the coming years. In order to do this, and keep to its international greenhouse gas commitments, the government has set its sights on some ambitious targets for solar power generation.

Recent decisions issued by the government represent baby steps in this direction. Evidently, there is some enthusiasm for a solar-powered future, but is it enough?

Keeping the lights on

The country's energy needs are immense. Rapid industrialization and urbanization has increased energy consumption growth to an average of 12 percent per year – almost double GDP growth. Vietnam has risen to the challenge, hooking up almost all households to the national grid, with the remaining rural villages expected to be powered up by 2020.

The country's power production is expected to grow at an annual rate of 14 percent between 2015 and 2030 in order to fuel its expected economic growth and supply energy to its population of over 90 million people.

Fossil fuels are still the dominant sources of energy, generating over 66.2 percent of the country's power, according to the World Bank. Coal has taken over from hydropower as the leading source of electricity, and more coal-fired thermal plants are being built to meet demand. Vietnam is also buying electricity from neighboring China to stem the outages that sometimes hit rural areas.

However, the government, proud of the country's currently low carbon footprint, is intent on decreasing reliance on fossil fuels. It has committed to cutting coal consumption 30 percent by 2030 and is turning to renewable energy to help provide its power needs.

A Renewable Energy Development Strategy, published in 2015, is evidence of a growing appreciation for the part alternative sources of energy will play in the nation's power production. The revised Power Development Plan 7 (PDP 7) targets a 6.5% share of electricity generated from renewable energy by 2020 and 10.7% by 2030. Such achievements would have a side benefit of reducing greenhouse gas emissions by 25 percent.

A step in the right direction

While wind has been the main focus up until now, 2017 may well be the start of Vietnam's solar future. Geographically, Vietnam is well positioned to achieve these goals, having one of the highest number of annual hours of sunshine globally, approximately 2,000 to 2,500, on average. The country racks up solar radiation of 4.5KWh per sq metre per day, so the sunlight is there for the taking.

According to PDP 7, the capacity of solar photovoltaics (PV) is slated to grow to 850MW by 2020 and 12,000 MW (12 GW) by 2030, accounting for 3.3 percent of total energy production that year.

In April, the government confirmed a feed-in tariff (FiT) scheme for utility-scale solar projects and a net metering scheme for rooftop PV systems. The proposed FiT has been set at VND2.086/kWh (US$0.0935). This tariff has been set according to the current exchange rate and would only apply to projects where cell efficiency is more than 16% or module efficiency more than 15%.

The government followed up on the announcement in May with the Ministry of Industry and Trade of Vietnam (MOIT) releasing a draft circular providing some more details on the direction for solar power projects in Vietnam.

The circular released included a solar power purchase agreement (PPA), providing some insight into the kind of deals the government would be pursuing when it comes to Vietnam's energy sector. The most important factors in the development of renewables will be attractive tariffs and incentives that offer a better choice over Southeast Asian neighbours.

The draft circular, although warranting optimism, leaves certain key issues unresolved, which will have an impact on the bankability of solar projects, especially for large utility-scale solar power plants. Some adjustments may be needed if this effort to bolster the domestic renewable sector is to be successful.

How to fix the PPA in 3 easy steps

Out of the information released in the draft circular, the proposed PPA is attracting the most attention. Once agreed upon, investors will have to use the PPA to sell the electricity they generate in Vietnam, and it is unlikely that major changes will be permitted.

Three elements in particular stand out, and improvements on these could ensure Vietnam's solar sector shines for investors.

A fair rate: As mentioned previously, the government has set the FiT at $0.0935/kWh, based on the VND/USD exchange rate. Although this is a reasonable rate for the region, the proposal means that significant risk is shouldered by investors. Lacking an escalation clause, the PPA proposes no indexation of the rate according to CPI or inflation.

FiTs are the most widely used policy in the world for accelerating renewable energy deployment. To encourage solar sector growth in Vietnam, policies need to offer investors stable, long-term revenue streams. In uncertain times, it's crucial to protect the real value of project revenues from changes in the broader economy. A number of approaches can be used to adjust for inflation, and many countries use one form or another to give investors some added security.

Reducing risk: Under the proposed PPA, Electricity of Vietnam (EVN) is named as the sole purchaser of energy generated from solar power projects. Particularly problematic is the fact that the purchaser has the right to stop purchasing electricity in circumstances that are outside of the control of the seller, and without having to provide any compensation.

This lack of payment protection in instances of force majeure shifts a large portion of risk onto investors. In general, and as per comparable agreements worldwide, the power producer is rarely required to take on such risks. In fact, the Vietnamese government knows this well and there are multiple examples of it agreeing to international-standard force majeure terms in other project financed energy deals. So why not for solar? As with the FiT, the bankability of the PPA will depend on investors seeing a stable revenue stream for the lifetime of their projects. Too much risk, and producers will look elsewhere.

A firm future: If the PPA is terminated by EVN the seller will only be able to recover payment for 1 year of electricity generated, and will not be able to recover any outstanding debts. This limited protection will mean investors are less likely to put cash down on pricey projects for fear they'll be unable to recoup costs if EVN backs out.

In summary, solar power projects in Vietnam face significant shortfalls in protection under the government's proposals, and investors may be wary of shouldering such risks when looking to make long-term investments. The recent decisions are an acknowledgement of Vietnam's solar potential, and we hope that the issues mentioned are taken into account so that the country can become a poster child for renewable energy in the region and the wider world.

Adjustments on the three points listed above would certainly make the government's proposition more attractive, and ultimately ensure that the sun doesn't set on Vietnam's clean energy future.

Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.

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