With the cessation of the feed-in tariff mechanism for renewable energy, generators, especially transitional power generators that missed the FiT deadlines, have been looking for other routes to market that have the potential for an assured fixed price over the long term and so DPPAs have been a welcome development. In developed markets like the U.S., corporate offtakers are willing to pay more than utility board rates for the economic benefits of a DPPA over the long term and for the ability to burnish their green credentials. For generators as well, an inflation-indexed fixed price DPPA with financially strong corporate entities reduces uncertainty of revenue, making the funding of their generating assets more bankable. As a result, the global DPPA market has grown at an impressive rate over the last few years. While Decree 80 is a step in the right direction, several challenges still need to be overcome before Vietnam can see similar outcomes.
Structures under Decree 80
Decree 80 envisages two DPPA structures.
On-site DPPAs
Also called private-wire DPPAs, under this model, generators and corporates enter into a power purchase agreement for the physical delivery of a defined amount of electricity at a fixed price through a private connection line.
The use of on-site DPPAs is typically limited to those renewable energy generating projects that are at or close to a large corporate offtaker’s assets and often supplies only that offtaker. The generators are permitted to negotiate with EVN or its subsidiaries to sell excess electricity after delivery to the corporate offtakers. However, there is no further guidance on the tariff that EVN would pay, unless the renewable energy generators decide to participate directly in the Vietnam wholesale electricity market.
There is no template prescribed for the on-site PPA but certain mandatory provisions are set out in Decree 80 and the Electricity Law. Parties are free to agree the price of electricity except in certain circumstances. There are no prescribed registration requirements but corporate offtakers must report, including by providing a copy of the DPPA, to the local People’s Committee, the local EVN’s power subsidiary, and the electricity market operator. Given the freedom in agreeing the price for electricity and the PPA terms, this DPPA structure could attract interest from power generators and large corporate power purchasers in industrial zones such as industrial factories or data centers etc., where there is a demand for renewable energy.
Off-site DPPAs
This model applies only to solar or wind power projects that have a minimum capacity of 10MW and which participate directly in Vietnam’s wholesale electricity market. In addition, only large corporate offtakers that (i) consume at least 200 MWh of electricity per month for production purposes and (ii) that use transmission lines with at least 22 kV capacity, are eligible to participate under this model. It is not totally clear as to how the electricity consumption for production purposes will be determined for large electricity consumers providing products or services contributing to manufacturing. Electricity retail units in industrial and economic zones, clusters etc. with a connection voltage of 22kV that purchase electricity of at least 200 MWh per month to sell to industrial consumers in those zones are also eligible to enter into off-site DPPAs. The generator is required to obtain an electricity retail license and be authorized by the industrial electricity consumers to purchase from EVN’s distribution companies being Northern Power Corporation, Central Power Corporation, Southern Power Corporation, Hanoi Power Corporation and the Ho Chi Minh City Power Corporation, as the case may be depending on the location. In this model, a renewable energy generator will sign a PPA with EVN for selling generated electricity into the Vietnam wholesale electricity market (“VWEM PPA”). Under the VWEM PPA, EVN will pay a spot price or full market price (FMP) for the generated electricity output as determined under the regulations of the VWEM. Separately, the generator and a large corporate offtaker or an eligible retail unit (“corporate offtaker’) will enter into a contract for difference (“CfD”), also called a synthetic or virtual PPA in other markets. Under the CfD, the two parties will agree a fixed contract price (or a strike price) for the electricity purchased by the corporate offtaker and also a contracted electricity quantity. If the VWEM spot price is lower than the strike price, the corporate offtaker will pay the difference to the generator and vice versa. This CfD intends to provide price protection against volatility in spot prices.
There is a third contract under this model, which is an electricity supply agreement between the corporate offtaker and EVN’s distribution companies) under which those distribution companies will supply electricity to the corporate offtaker through the national grid.EVN subsidiaries will be able to pass through to the corporate offtakers the VWEM spot price paid to renewable generators and also to charge transmission fees and other charges. If the corporate offtaker consumes more than the generated output of the renewable generators, the corporate offtaker will pay EVN for the excess electricity at the applicable electricity retail price.
Unlike other forms of corporate PPA, the agreement between the generator and the corporate offtaker in an off-site PPA structure does not involve the actual purchase or physical delivery of electricity. Instead, the generator continues to physically supply electricity to EVN under a traditional PPA and the corporate offtaker continues to obtain its electricity from the grid under a supply agreement with an EVN distribution company as shown above.
Decree 80 prescribes mandatory provisions to be included in the CfD, the PPA between EVN and the generator and the supply agreement between the corporate offtaker and the power company. The generator and the corporate offtaker are free to agree the strike price under the CfD. The generator and the corporate purchaser are required to register with the National Load Dispatch Centre to participate into this off-site DPPA mechanism and to disclose their CfD.
Some issues around Decree 80
As on-site PPAs are relatively straightforward and flexible from a contracting perspective, most of the issues for them are of a regulatory and compliance nature.
Lack of clarity on compliance with planning laws: Decree 80 states that electricity generators must comply with legal planning to align with national and provincial plans. However, Decree 80 does not actually say as to what this means in practice. Nor does it clarify what a DPPA generator must do to comply with such plans or laws. This could lead to inconsistencies in how Decree 80 will be implemented on a project-by-project basis. The current national master plan and its detailed implementation plan allocate planned renewable capacities to regions or provinces, but there is no clear method for an individual DPPA generator to confirm that it is approved within the allocated capacity for a particular region or province. More guidance is required around what this part of the compliance requirements actually means.
Private wires construction and operation: Except in a case where the corporate offtaker has electricity transmission and connection at its own sites, Decree 80 requires the renewable generator to develop, construct and operate the private wire infrastructure. However, although developing or operating electricity lines is no longer the exclusive preserve of EVN and its subsidiaries, the laws remain uncertain as to whether foreign invested companies could be allowed to develop, operate and charge for operating fees over private wires. Foreign owned developers or generators with interests in this DPPA mechanism will need to get clarity around this point, especially for generating projects where the private wire infrastructure is shared by different parties requiring a separate private wire charge to recover the development and O&M costs of the private wire infrastructure.
Renewable Energy Certificates: The appendices to Decree 80 acknowledge that carbon credits from the use of renewable energy under an off-site DPPA will belong to the generator and can be transferred to the corporate offtaker. However, these template power purchase agreements are for reference only. As such, the title and rights related to carbon credits require further guidance. This guidance may need to align with Vietnam's roadmap for building a carbon market.
Other issues generally for renewable energy generators and customers
Leaving the Decree 80 and its DPPA models aside, familiar issues will still need to be addressed for renewable energy generators and their customers, particularly for the off-site PPAs. However, these issues are neither particular to direct PPAs nor to Vietnam.
Concerns around electricity supply: Depending on the nature of their business, some large corporate consumers may not wish to rely on electricity supply from renewable sources alone, particularly if renewable generators do not also bring some battery storage solution. They will require the option of switching to purchase electricity from EVN at retail industrial prices. Under Decree 80, private wires are defined to be quite separate and different from the EVN’s electricity lines. This raises a concern about potential disruptions in electricity supply when switching back and forth between the wire connectors of EVN and the private wires of the renewable generators.
Cash flows for renewable generators: This issue is not unique to corporate PPAs but is relevant to all renewable generators in Vietnam who have prescribed form PPAs with EVN, particularly solar and wind projects that do not have the benefit of the feed-in tariff. Mandatory participation in the VWEM auction market is expected to exacerbate the situation because the quote for renewable electricity is expected to be higher than the VWEM spot price. This is due to competitive tariff bids from lower-cost hydropower and coal plants, as well as from state-owned enterprises or portfolio generators who are able to rely on a weighted-average cost across a range of generating plants in the portfolio. Although the payment mechanism under the Cfd could provide protection, a corporate offtaker will need to study the tariff structure and consider the total payments to both EVN and the renewable power generator to see whether the DPPA structures on offer make commercial sense.
Financial standings: In emerging market utility PPAs, renewable energy generators may take certain comfort as to the status and financial position of a utility offtaker. For DPPAs, lenders being asked to finance renewable energy generators will require additional due diligence on the corporate offtaker’s underlying financial standing and business. Financiers may require certain credit support.
That said, given EVN’s recent track record in Vietnam on payments to certain renewable energy generators as well as financial standing generally, some renewable energy generators and their financiers may see the opposite now being true – corporate offtakers of robust financial standing and businesses in Vietnam may be seen as more creditworthy than EVN, or at least offering a financial hedge to offset EVN counterparty risk.
Construction risk: As with a utility PPA, construction and operational performance risks on a greenfield project are likely to continue to be assumed by the project in a DPPA.
Transmission risk: In the off-site model, it is unclear up to what point the generator will bear the risk of transmission and, therefore, whether the generator will be liable to find replacement power at the VWEM spot price in the event of a shortfall. Indeed, having to use the national grid will not necessarily mitigate any issues around certainty of electricity supply and outages that corporate offtakers might be concerned about.
Change in law risk: In the renewable energy sector in Vietnam, EVN as the state-owned offtaker does not take change-in-law risks or provide any adjustments to make economically whole under template PPAs. A private corporate offtaker is arguably even less able to assume the economic consequences of these kind of risks. That said, this can be a point for negotiation and, for example, in certain corporate PPAs in the Taiwan market, corporate offtakers seem willing to accept adjustments to the tariff for change in law but not other political risks such as non-renewal of permits, convertibility and transferability risk, expropriation, war etc. Parties may need to seek protection against these risks under domestic investment protection regimes and bilateral investment treaties. Commercial lenders may also look to be covered by export credit agencies, DFIs or the PRI market.
Conclusion
Decree 80 is a positive step towards invigorating the renewable energy industry in Vietnam, especially after the cessation of feed-in tariffs. It finally gives legal recognition to a burgeoning sector that had needed to rely on less-than-robust regulatory status for some generators. The benefits of DPPAs for both renewable energy generators and corporate entities are clear in terms of both flexibility in electricity sourcing, cost control and achieving sustainability goals. Nonetheless, more work may need to be done to clarify how certain risks will be allocated between stakeholders in the off-site model and to address regulatory questions for the on-site model. A resolution and clear understanding of these risk allocations are essential to position Vietnam as an attractive destination for foreign investment in the renewable energy sector.
