Vietnam: How Vietnam Can Launch A Bankable Solar Power Purchase Agreement

Last Updated: 4 September 2017
Article by David Harrison and Van Hai Nguyen

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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This article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein. Please also read the JSM legal publications Disclaimer.

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