Vietnam: Solar Power Circular 16

Last Updated: 3 January 2018
Article by L-Martin Desautels, Andrea Wilson and Hoang Phong Anh

New Regulatory Framework to Bolster Growth of Vietnam's Solar Energy Sector

In its ongoing efforts to bolster renewable energy, the Vietnamese government has passed a new circular prescribing the power purchase agreement form between generators and Electricity of Vietnam ("EVN") for grid-connected and rooftop solar projects in Vietnam.  With a clear regulatory framework now in place, the solar energy sector in Vietnam is set to grow, provided that the challenges in financing solar energy projects can be overcome.

The much anticipated Circular No. 16/2017/TT-BCT of the Ministry of Industry and Trade ("MOIT") on the Development of Solar Power Projects and the Power Purchase Agreement Form Applicable to Solar Power Projects, dated 12 September 2017 ("Circular 16") has just been released, setting the regulatory stage for solar power investments in Vietnam. The new Electricity and Renewable Energy Authority, which took over responsibility for renewable energy matters from the General Directorate of Energy, will be responsible for implementing Circular 16 in coordination with other relevant authorities.

A Growing Market for Renewables

Although renewable energy is only beginning to take off in Vietnam, the Vietnamese government has laid the groundwork for growth in this sector. Vietnam's National Power Development Plan VII 2016 – 2030 prioritizes the development of renewable energy sources, with the aim of increasing the proportion of electricity generated from renewables to 7% in 2020 and to more than 10% in 2030. Wind energy projects have been supported by tax and land-related incentives, as well as a feed-in-tariff ("FIT") of 7.8 US cents/kWh since 2011. The MOIT recently proposed that the FIT for onshore wind power projects be increased to 8.77 US cent/kWh and to 9.97 US cent/kWh for offshore wind projects. In April of this year, Decision No. 11/2017/QD-TTg by the Prime Minister on Mechanisms for Encouraging the Development of Solar Power in Vietnam, dated 25 April 2017 ("Decision 11"), introduced a regulatory framework for solar energy projects, which has now been further clarified under Circular 16.

Incentives for Investors

The FIT rate of 9.35 US cents/kWh (excluding VAT) for grid-connected solar power projects introduced by Decision 11 is confirmed by Circular 16. This FIT is available for 20 years to projects which reach commercial operation before 30 June 2019. Any residual electricity generated by rooftop solar projects will be purchased by EVN at the same FIT for a 20 year term, provided that the project reaches commercial operation before 30 June 2019. Lacking here is any provision for indexation of the FIT by way of escalation in accordance with the Consumer Price Index to address inflation risks.

In addition to the FIT incentive, solar project investors will benefit from tax exemptions on raw materials and supplies imported for project purposes, corporate income tax relief, and an exemption from land rental fees within the first three years of commencing commercial operation.

Conditions for Investors

Circular 16 sets out the conditions that have to be met by investors to develop a solar energy project in Vietnam. Any project to be developed must be included in the provincial or national master solar power development plan, or in the provincial or the national master power development plan. If not already included, the investor must take steps to add its project to a master plan before proceeding with the investment. In this way, the Government will control the development of projects across regions and attempt to re-direct investments in order to meet provincial targets.

Solar power investors are further required to maintain an equity ratio of at least 20% of the total investment, and to limit project land-use to 1.2 hectares/1 MWp. Both grid-connected and rooftop solar projects with a capacity of 1 MW or higher will be subject to mandatory power sector licensing requirements with the MOIT.

Power Purchase Agreement for Solar Projects

An important aspect of Circular 16 is the prescribed power purchase agreement form for grid-connected solar energy projects ("Solar PPA") which investors will have to sign with EVN as the sole offtaker in the Vietnamese market. A separate power purchase agreement form is also introduced by Circular 16 for rooftop solar projects.

When introduced in draft form, Circular 16 prompted considerable discussion within Vietnam's business community on how to improve the bankability of the Solar PPA. However, the main features of the Solar PPA as introduced in draft form have been maintained, presenting risks for developers and raising material challenges for project financing.

Risks for Developers

For example, EVN as the power purchaser is not obliged to purchase power generated under the Solar PPA when EVN is in the process of installing equipment, making repairs to, or inspecting the solar power plant's grid connection, or when EVN's transmission or distribution grid is experiencing problems.

The transfer of risk to solar power producers, particularly in the event of disruptions beyond the control of the power producer, is a risk to developers that is not accompanied by a compensation mechanism to address situations where power is generated but cannot be delivered. The Solar PPA does not include a deemed production calculation or deemed commissioning principle which would require the purchaser to make payments even in circumstances where EVN is unable to off-take the electricity produced. In addition, the Solar PPA does not include any mechanism to extend the PPA term if EVN is unable to off-take the power seller's electricity for an extended period of time due to circumstances outside the control of the power seller.

Connection and Metering

Responsibility for investing in and installing all necessary equipment for the transmission and delivery of electricity to EVN at the power delivery point falls with the power seller under the Solar PPA. The power seller is also required to install and maintain main and backup metering equipment in order to measure electricity output and for billing. Metering equipment is subject to annual inspection requirements, with any associated costs to be incurred by the power seller.

Damages, Disputes and Changes in Law

The Solar PPA provides that compensation owed by any party who breaches its obligations under the agreement will be the value of the direct, actual loss that the aggrieved party has incurred and the direct benefits to which the aggrieved party would be entitled if there was no such breach.  In the event of termination by the power seller due to breaches by the power purchaser, the Solar PPA attempts to limit the damages to be paid by the power purchaser to the value of actual power output of the power seller for the year leading up to the termination.

Disputes under the Solar PPA can be submitted to the Electricity and Renewable Energy Authority (formerly the General Directorate of Energy) for mediation.  Where mediation is unsuccessful, either party can submit the dispute for resolution to the Electricity Regulatory Authority of Vietnam ("ERAV") or choose to pursue litigation in the Vietnamese courts.  The option of domestic or international arbitration are not specifically provided for as dispute resolution mechanisms under the Solar PPA, which may be viewed as problematic by potential investors and developers. 

Protection against changes in law is not provided for in the Solar PPA.  Change in law protections are already in place for investors under Vietnam's investment regime, and these protections would reasonably apply to foreign-invested solar projects, even if such provisions are not explicitly spelled out in the Solar PPA. 

Further bankability issues raised by the Solar PPA include the absence of a distinction between natural force majeure events and political force majeure events, which would allow for the risks presented by such events to be better allocated between power purchaser and power seller. The absence of a government guarantee to enhance the creditworthiness of EVN as the power purchaser, and lack of clarity regarding whether direct agreements between purchaser and lenders will be permitted to allow lenders to step in and cure company defaults are other bankability issues raised by the Solar PPA.

By requiring EVN to purchase all of the power produced by a grid-connected solar power project, the Solar PPA also excludes the possibility of direct power purchases between solar power generators and large electricity consumers such as industrial parks or factories.  Given the increasing popularity of direct power purchase agreements worldwide as a means of securing electricity costs over the long term while allowing large corporates to reduce their carbon footprint, it would make sense for the regulatory framework in Vietnam to allow for such direct power purchases of solar energy.

Cautiously Optimistic

Despite concerns regarding the bankability issues raised by the Solar PPA and a relatively low FIT rate compared to developed solar markets in the region, such as China, Thailand, and the Philippines, international investors appear keen to move forward with solar projects in Vietnam.  While project financing may be difficult to secure from international banks, solar power projects may present new financing opportunities for local banks.  Also, the growth of solar power manufacturing in Vietnam means that solar panels for projects can be locally sourced.   With a clearer regulatory framework now in place, the stage has been set for the future development of the solar power sector in Vietnam.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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