On September 12, 2017 the Vietnamese Ministry of Industry and Trade (MoIT) released the long awaited Circular 16/2017/TT-BCT “Regulating Solar Power Project Development and Standardized Power Purchase Agreement for Solar Power Projects“ (please find all relevant documents for download at the end of this post).
This final version of the Circular that had been publicly drafted in late April follows the Prime Minister Decision 11/2017/QD-TTg, issued April 11, 2017 and regulates in more detail the implementation of the new Feed-in-Tariff (FIT) and net metering support scheme for solar PV projects in Vietnam.
With this Circular potential PV project developers and investors find the binding Standard Power Purchase Agreement (SPPA) that needs to be signed with state owned monopoly utility Electricity of Vietnam (EVN) as well as procedures and templates for the net metering credit calculation and reimbursement for residential and commercial power consumers that install rooftop PV systems.
The April draft of the SPPA had drawn harsh critique particularly from international investors but also from domestic market stakeholders due to asymmetries in risk sharing to the disadvantage of the power seller, i.e. the PV investor and system operator. Basically, the international private sector community, organised in organisations such as EuroCham or the Vietnamese Business Forum (VBF), had earmarked the draft as “non-bankable”.
The expectations regarding improvements in the final version of the SPPA were not overoptimistically high and – to cut it short – those still existing hopes did not come true. The final SPPA shows only minor changes compared to the draft, some clarifications here and there but the key critical points have not been addressed.
Overview of the new regulation
To start with, here is an overview of the new regulation that covers Decision 11/2017 as well as Circular 16 with the key FIT and net metering regulation:
- FIT for ground-mounted PV power plants
- The electricity buyer (single-buyer EVN) has to purchase the entire solar power generated from the PV system.
- The FIT is 9.35USct/kWh (2,086VND), the tariff will be adjusted annually to changing VND-USD exchange rates.
- Sale of solar power via a Standard PPA with 20yrs
- Minimum requirement of >16% cell efficiency and >15% module efficiency.
- Grid connection: Seller responsible for transmission line until connecting point incl. transformer.
- Principal of nearest connection point (agreed between buyer and seller).
- The general regulation (Decision 11/2017) has entered into force by 1st June 2017 and will be valid until 30th June 2019 (commercial operation date, COD).
- The SPPA and further implementation details coming with Circular 16 will enter into force by 26th October 2017.
General requirements for project approval:
- It is required to have an assessment of the impact of the project’s grid connection plan on the local power system.
- Equipment to connected to SCADA or dispatching system has to be installed in order to provide forecast information on generated electricity by hour to the Load Dispatch Centre in charge of system dispatching.
- The equity ownership ratio of grid-connected solar power project cannot be lower than 20% of the total investment capital.
- Long-term land use area of a project must not exceed 1.2 ha/MWp.
- Net metering for rooftop PV systems
- Rooftop systems shall benefit from the net metering mechanism based on bi-directional metering (meter supplied by provincial power company).
- The remuneration for excess power is 9.35USct/kWh (2,086VND, same as ground-mounted) and will be adjusted annually based on VND-USD currency rate.
- Excess power can be transferred from one billing period to the following (“payment cycle”). Remuneration of consisting surplus can be annually or after termination of PPA.
- Solar rooftop projects (residential/commercial) must sign the rooftop SPPA in form of an appendix to the retail power purchase contract with the local utility/EVN. Details and templates for the calculation are specified in Annex 3.1 (residential power consumers) and Annex 2 (commercial and industrial power consumers with time-of-use tariffs) of Circular 16.
- The power company is responsible for meter readings, calculation of access energy and revenues of system owner (but system owner is also responsible to check/validate).
- For rooftop systems <50kWp the Ministry of Finance (MoF) is asked to develop further (tax and fee related) incentives.
Special requirements for rooftop systems depending on system capacity:
- Rooftop systems <1MW have to be registered with the provincial or municipal power company (planned capacity, technical specifications of PV modules and inverters).
- Rooftop systems >1MW must be included into the Solar Power Development Plan and Power Development Plan and these projects must obtain an Electricity Operation License (regulated in MoIT Circular 12/2017/TT-BCT as of July 31st, 2017).
- General requirements for grid connection (rooftop and ground-mounted)
- The total installed capacity of the solar power system into the low voltage line of the low voltage transformer cannot exceed the installed capacity of that transformer.
- Solar power systems, which have a capacity below 3 kVA, can connect to the one (1) phase or three (3) phase low voltage grid.
- Solar power systems, which have a capacity from equal to or above 3 kVA, can connect to the three (3) phase low voltage grid.
Critical aspects of the SPPA
So what are the main critical aspects of the SPPA in particular in the final version of Circular 16 from the perspective of project developers and investors? The following list highlights the most prominent aspects that have been addressed by market stakeholders and experts from the bilateral development cooperation:
- The FIT regulation introduced with Dec. 11/2017 is only valid until 30.06.2019 (Art.15.2 and 16.4 Cir.16).
- To be eligible for the FIT projects have to reach commercial operation date (COD) before 30.06.2019.
- The regulation states: “Commercial Operation Date (COD) is the date when part or whole of the grid-connected solar PV plant is ready to sell electricity to the Buyer and fulfils the following requirements: (i) the power plant has completed basic experiments for part or the whole of the grid-connected solar PV plant and grid connection equipment; (ii) the solar PV plant was granted electricity operation license with regards to electricity generation; (iii) the Electricity Seller and Buyer agreed on record of meter reading to start payment .” (Art. 3.3 Cir.16)
Comment: This requirement creates substantial additional time pressure on project development and represents a major challenge for all projects that have not reached an advanced development stage by now. The regulation remains unclear regarding the COD reached for “parts of the PV plant”.
- The electricity purchaser is not obliged to purchase or receive power in a number of cases including when the electricity purchaser “installs equipment, repairs, replaces, inspects or examines the grid”. The same applies to break downs of the transmission or distribution grid. (Art.2.7 SPPA)
- For power curtailments in these cases that result in not realized power sales there is no obligation for compensation or payments to the plant operator/electricity seller.
Comment: The lack of a compensation rule for power curtailments in case of grid maintenance or problems in the distribution or transmission grid creates financial risks that are difficult to calculate and therefore put another burden on bankability.
- Dispute resolution according to Art.4.5 SPPA and Art.8 SPPA refers to domestic dispute resolution procedures that include domestic Vietnamese courts and the state authorities of the energy sector.
- The regulation states: “In case the Parties are unable to reach agreement as prescribed above, the Parties have the right to submit to the Power and Renewable Energy Agency) a written request for support the Parties in handling the dispute (Art.8.1 SPPA). (…) In case no agreement can be reached by negotiation: Standard procedure for dispute resolution in the electricity market according to Circular 49/2010/TT-BCTZ, 13.12.2010 (Vietnamese courts and State energy authorities).
Comment: The SPPA does not provide for offshore arbitration which has been criticised especially by international investors and financing institutions.
- The force majeure provisions outlined in 5 SPPA have been criticized to not properly addressing political force majeure that lies in the responsibility of public administrations.
- Here the final SPPA was adjusted compared to the draft when “decisions of competent authorities” was removed from the catalogue of force majeure events.
- Now force majeure events include: “any unforeseeable and objective event, which is non-remediable despite all necessary measures and available resources. Force majeure events include:
- a) Natural disasters, fires, explosions, floods, tsunamis, epidemics or earthquakes;
- b) Violence, riots, war, resistance, sabotage, embargo, siege, blockade, any act of war or community hostilities whether war is declared or not.
Comment: Although the force majeure provisions have been adjusted the SPPA does not adequately address risks of political change of law and regulations. Considering that the Circular retroactively forces projects that had already negotiated a PPA with EVN before the FIT regulation came into force to obey to the new legislation and renegotiate their PPA according to the new regulation, there remains a risk of political change for any new project implemented on the grounds of this regulation.
- The SPPA provides only limited compensation for the electricity seller in case of termination/suspension of the contract due to a purchaser’s default or breach of the agreement.
- The SPPA states: “If the Electricity Seller is the affected Party and selects the suspension of performance of the Agreement, the compensation value is calculated by the value of the actual power output of the Electricity Seller within the previous one (1) year period counted up to the time of suspension of the Agreement performance.” (Art.7.5 Cir.16).
Comment: The SPPA provides no termination payment or compensation for the seller’s outstanding debts or expected return on equity capital in case of purchaser’s default.
Amendments to the agreement:
- Substantial amendments to the agreement seem to be not possible following Art.10.1 SPPA and Art.18.3 Cir.16.
- The Circular states: “It is compulsory for grid-connected and rooftop solar power projects to apply the SPPA for power purchase between the electricity purchaser and seller.” (Art. 17 Cir.16) And further lines out: “Electricity sellers and purchasers are permitted to supplement the contents of the SPPA to clarify each party’s responsibilities and rights without changing the basic contents of the SPPA issued with this Circular.” (Art.18.3 Cir.16)
Comment: The provision seems not to leave much room for amending the SPPA. However, the formulation is anything but clear and MoIT officials have already publicly stated that “case by case amendments” could be possible (in this case the official referred to the 1.2ha/MW requirement for ground-mounted PV power plants).
- Last but not least, one point that is missing in the SPPA and that many market stakeholders were hoping for is a government guarantee for EVN as the sole off-taker of the solar electricity.
Comment: Acknowledging that a government guarantee for large solar PV projects would have a beneficial effect on the bankability of the projects it has also to be accepted that not many governments in similar market settings are willing to grant a government guarantee for (still rather small) green power development projects. Further than that, Vietnam has reached its limits of state debts and has not much room for additional debts left.
Summarizing key challenges of the SPPA and solar support regulation
Regarding utility-scale PV projects developers are facing substantial challenges:
- Regarding utility-scale solar PV projects the outlined bankability issues of the SPPA are definitely the biggest challenge for investors. This applies in particular to international/offshore investors and financing institutions that are used to or demand international standard PPA’s.
- In this regard it was quite remarkable to hear recent public statements from MoIT officials that quite frankly stated that this FIT regulation with the SPPA is mainly addressing domestic investors and financiers to bring the first hundreds or thousands of Megawatts on the ground. For international investors – so the message continued – there could be another chance coming up with the next round of the support scheme (that quite likely could be a competitive auctioning scheme).
- Apart from that, the question remains if and how the domestic banks and lenders will be able to deal with the risks in the SPPA and the identified bankability issues. So far, public statements from Vietnamese banks were not clear on that.
- However, the upcoming months will show if and in what extend the huge pipeline of approximately 17 GW of utility-scale solar PV projects will reach financial closure (and get the required licences and state approvals in the first place).
- Looking at the whole picture shows a reluctant Vietnamese policy maker that is not inviting international (private sector) financing and investors on a large-scale but rather wants to develop the solar market in small steps with (initial) priority for domestic investors. Those local investors (often large and diversified business conglomerates) that oftentimes strive to become project developers themselves in the long run do need international support to design, finance and realize the projects. That for sure is an opportunity for international EPC and consulting companies that partner with companies of the emerging Vietnamese solar industry.
Regarding commercial and industrial rooftop projects I would be more optimistic for mainly two reasons:
- First, there is a large potential in the commercial and manufacturing sector for 100% self-consumption PV systems. With 6-8 years equity payback times in the South of Vietnam and many industry sectors that (at least generally) see added values in ‘going green’ with their production/services apart from potential financial benefits of a PV investment (energy bill savings) there is a good starting point for the development of this market segment.
- Secondly, the new net metering scheme has the potential to improve those investments cases that can generate surplus solar energy and sell it to the grid. The regulation at least for projects <1MWp seems to be quite manageable but of course, the market has to proof this to be true.
- On top of that, there is at least some more potential coming with the process of energy market reform. This might bring a competitive power market and an electricity wholesale market that allows access to renewables (at least in the medium-term post 2021/2022) as well as direct PPAs that allow for more attractive business and investment models from the off-taker’s perspective.
- Circular 16 (VN) with SPPA and net metering contract template (MoIT, in Vietnamese)
- Circular 16 (EN), unofficial English translation by German GIZ
- Presentation by the author on ‘Challenges for Solar PV Project Development in Vietnam’ at the Vietnamese-German Conference on Utility-Scale and Embedded Generation in Vietnam’s Industry HCMC, September 26th 2017.