Key takeaways
The new Electricity Law establishes fundamental principles for the energy sector while leaving detailed regulations to future directives from the Government and the Ministry of Industry and Trade (MOIT), the primary regulatory authority for the electricity market. While subsequent regulations are expected to provide much-needed clarity, several key principles of the new law are noteworthy.
Tariff mechanisms
The new Electricity Law sets out directions on structuring tariff mechanisms under power purchase agreements for conventional gas-fired power projects (domestic gas-fired and LNG-to-power projects) and renewable energy projects. The MOIT is authorized to determine the principles on which the tariff will be calculated for different types of projects. Following the feed-in tariff regime for renewable energy projects and the previous generation of negotiable power purchase agreements for BOT power projects, investors are keenly awaiting a tariff mechanism that will ensure investment returns and meet bankability requirements from international lenders.
The new Electricity Law introduces the concept of long-term minimum contracted quantity, which, although not detailed, promises to provide more certainty in the dispatch level and cashflow returns, especially for large-scale power projects such as offshore wind plants, LNG-to-power projects or domestic gas-fired plants. Additionally, the new law also introduces capacity charges for non-BOT power projects, subject to MOIT's discretion, though it is unclear if this would be on a case-by-case basis.
Bankability
Vietnam’s model power purchase agreements have well-publicized bankability concerns, including the lack of financial support for EVN’s payment obligations, project finance style risk allocation and termination provisions, compensation for curtailed project output by EVN and USD indexation applicable to tariffs. While the new Electricity Law makes some progress by including minimum purchase obligations and a pass-through of fuel costs, it leaves many other concerns unaddressed, such as EVN’s creditworthiness and the lack of governmental support for it and currency fluctuations. It doesn’t address other bankability concerns with the model PPAs, and it seems that stakeholders will need to look to future regulation to provide a legal basis for negotiating PPAs different to the prescribed forms.
Competitive bidding
To ensure transparency, fairness, and efficiency in the allocation of investment opportunities, the Government recently announced that future power projects within the scope of PDP8 and in which there is interest from two or more investors, will be awarded based on a competitive bidding process under Decree No. 115/2024/ND-CP of the Government and Circular No. 27/2024/TT-BCT of MOIT (i.e., the bidding regulations). This requirement is reiterated in the new Electricity Law. Exceptions to this rule are limited and include projects in sectors reserved for the government (such as multi-purpose strategic hydropower plants, important transmission power grids or nuclear power plants), projects without MOIT’s tariff framework, direct power purchase projects, emergency power projects, and certain offshore wind projects.
One of the issues related to this bidding requirement is that the maximum electricity price that EVN negotiates for the PPA tariff cannot exceed the proposed tariff of the winning bidder. This raises a question about whether the proposed tariff can be adjusted for fluctuation of variable costs, such as fuel or construction costs, that may change after the bidding. Other issues remain, including how State authorities, MOIT or EVN prepare bidding studies, bidding documents with draft PPAs, and investment transfer restrictions under the bidding regulations.
Direct Power Purchase Agreements (DPPAs)
The new Electricity Law briefly addresses DPPAs stating that projects with DPPAs will not be subject to the bidding process, providing some relief to renewable energy projects intending to use synthetic DPPAs. It also summarizes the basic contents of a forward contract, which currently relies on mechanisms in the competitive electricity market operating regulations. Sales under DPPAs are required to be consistent with the competitive electricity market level, although it is not clear what that implies or how it will be set out in further implementing regulations. Developers or electricity purchasers interested in the synthetic DPPA model should familiarize themselves with the mechanisms under the competitive electricity market and their implications for financial or tariff hedge models.
Local content
The new Electricity Law hints at a potential new local content requirement in power generation and transmission projects to ensure national energy security and local industry development. However, the law does not say what kind of projects or equipment it will apply to, what the local content requirements will be, how they will be measured, the consequences of non-compliance, and whether it applies to projects already under construction or operation. While local content requirements are not uncommon across Asia, Taiwan recently had to backpedal on its local content requirements following a World Trade Organization dispute with the European Union.
Technology
The new Electricity Law emphasizes the importance of using advanced and modern technology in both renewable energy projects and coal-fired plants, calling for international collaboration. It encourages fossil fuel plants to convert to low-emission fuel sources and to install carbon capture systems. The new Electricity Law provides for new coal-fired plants to be of large capacity and utilize advanced and modern technology to achieve high efficiency, although in reality new coal-fired power projects are not expected in Vietnam. Some new green technologies, such as integrated batteries, are encouraged although details of incentives are not yet laid out.
Sectors
The new Electricity Law promotes the development of renewable energy sources such as solar, wind, tidal, geothermal, hydro, biomass, waste-to-power and others. It also promotes new energy forms like green hydrogen and green ammonia and re-introduces nuclear power while acknowledging a role for high-tech, efficient coal-fired plants. Development of large-scale renewable energy projects that can form clusters or renewable energy centers will be given priority. Projects are encouraged to integrate energy storage systems to leverage natural advantages and existing infrastructure efficiently.
A few key project types are discussed below.
Domestic gas-fired projects
There seems to be the most clarity in terms of policy for these kinds of projects. The new Electricity Law prioritises the maximum utilisation of domestic gas in thermal power projects by linking the dispatch level with gas supply availability and constraints. Although it is still early to anticipate how mechanisms will work in practice, the new law seems to confer benefits for domestic gas- fired projects by providing a legal basis to negotiate passing through gas take-or-pay obligations from domestic gas sources and providing for a dispatch commitment under power purchase agreements. This dispatch commitment, along with the capacity charge component mentioned above, can be key in dealing with the issues of maintaining minimum cash flow.
LNG-to-power projects
Compared to domestic gas-fired projects, the new Electricity Law is less forthcoming for LNG-to-power projects. the new law can be seen to represent a positive step in that it recognizes certain broad principles such as minimum offtake obligations, including for LNG-to-power projects. The principle of minimum contracted quantity can be available to LNG-to-power projects at the Government’s discretion, but whether this can be linked to take-or-pay obligations that LNG sellers typically require under long- term LNG supply agreements remains to be seen.
In addition, the new Electricity Law does not deal specifically with one of the key things which LNG-to- power project developers need to see, which is the passing through of fuel costs. Although arguably the Government still has grounds to provide a pass-through mechanism for fuel costs for LNG-to-power projects, several additional measures may need to be considered to ensure an effective pass through of such variable fuel costs, including how MOIT's tariff framework will apply or how bidders interested in an LNG-to-power project will propose a tariff which can be treated as a maximum cap for later negotiation.
The law also mentions a Government preference for applying a model in which different neighboring power plants share common LNG infrastructure, with the aim of reducing the generation tariff by lowering or sharing certain development costs for LNG-to-power plants. What those preferences could be in practice are not clear. However, usual issues around shared facilities and infrastructure will apply, such as LNG terminal and infrastructure development and funding responsibilities, as well as operating responsibilities etc.
Renewable generally
The new Electricity Law promotes the development of renewable energy sources and allows for a preferential mechanism for projects that integrate battery storage systems, although no details are provided. It recognizes concepts of long-term minimum contracted quantity, and states that the government will provide preferential mechanisms and support for the development of energy storage systems as part of renewable energy projects. After the FiT regime, this will be a new way to secure stable revenue for renewable energy projects.
Offshore wind
Offshore wind (OSW) projects are defined as those that have turbines constructed beyond 6 nautical miles from the lowest average sea level of the mainland. Although OSW projects are large-scale compared to other renewable power projects, the incentives for OSW mentioned in the new Electricity Law are not substantially higher than those for other renewable energy projects. OSW projects can be entitled to a long-term minimum electricity offtake quantity and incentives in the form of reduced land and sea usage fees. However, the new Electricity Law doesn’t go further to address specific developer concerns such as committed long-term dispatch or a tariff structure that can achieve development cost recovery, foreign currency denomination or other project finance bankability requirements. The specific requirement for selecting developers of OSW projects by tender include that the tendering invitation documents from the bidding authority will include a draft PPA, which raises immediate questions about whether the draft PPA is bankable or whether the bidders can propose or negotiate deviations from the draft contract.
Hydrogen and ammonia
The new Electricity Law encourages the production of green hydrogen or green ammonia for power generation. Projects for green hydrogen and green ammonia production and projects that produce green hydrogen and green ammonia for export are listed as priority items. However, the new law is silent on the incentives that might be available for such projects.
Some positive steps, but not far enough?
Vietnam's new Electricity Law is intended to be a long-awaited step forward in creating a comprehensive legal framework for the country's power sector. While the law sets out certain key principles and promotes the development of various energy sources, for many developers it will not go far enough because it leaves much anticipated detail still to be determined through subsequent regulations from the Government and the MOIT. Investors, developers and the lending community should closely monitor these developments to understand the full implications of the new Electricity Law and the opportunities it presents.
