NEW VIETNAM REGULATION ON WIND POWER PROJECT– WELCOMING BUT STILL ROOM FOR IMROVEMENTS

Circular 02/2019/TT-BCT is the latest and most comprehensive regulation on wind power project development in Vietnam. Dr. Le Net, Mr. Le Thanh Hieu and Ms. Vo Phuong Thao, lawyers at LNT & Partners provide their analysis of the changes, specifically whether the changes made by Circular 02 will be sufficient to tackle market criticisms of past regulations and attract further investments in Vietnam’s wind energy market.

Vietnam has a golden combination for developing wind power projects. The country has a booming economy which fuels increasingly higher energy demand. It also has vast geographic advantages, with over 3.000 Km2 of coastline, a high yearly average windspeed of 6m/s, with some region reaching 8-9m/s a year.

Yet by June 2018, Vietnam only had 7 functional wind energy projects with total capacity of 190 MW, falling far short of the Country’s maximum potential. It is submitted that the three barriers to wind power projects in Vietnam, especially larger-scale projects are (1) overcapacity of electricity lines in key regions such as Ninh Thuan and Binh Thuan, (2) low power buying price affecting the financial viability of the projects, especially in comparison with other countries in the region, and (3) international non-bankability of the mandatory Model Power Purchase Agreement (Model PPA).

The Ministry of Industry and Trade aims to rectify these issues and attracted further investments with Circular 02/2019/TT-BCT (“Circular 02”) which entered into effect from 28 February 2019. Circular 02 is the latest regulation on the implementation and development of wind power project in Vietnam, replacing both Circular 32/2012/TT-BCT and Circular 06/2013/TT-BTC, previously the key Vietnamese regulations in this industry.

Under Section 3 Article 4 of Circular 02, The Ministry of Industry and Trade (“MOIT”) will firstly review the application for supplementation of wind power projects to the power development planning scheme. This review will be conducted after consultation with relevant Ministries and Sectors. After reviewing, the MOIT will send an official dispatch to the Provincial People’s Committee to request the Provincial People’s C­­­­ommittee to make necessary revisions and submit a complete application. The complete application will be appraised by the Electricity and Renewable Energy Authority, who will then subsequently submit documentation to the Minister of Industry and Trade for a final review of the Project.

The new procedure for supplementing wind power projects can be summarized as follows:

Figure 1. Procedure for supplementing wind power projects pursuant to Decree 02/2019/TT-BCT
(Source: Self-synthesis)

Additionally, the mandatory contents of the feasibility study report on wind power project have also been clearly set out.

Besides from the more detailed procedure, some key changes regarding the requirements and conditions for the operation of wind power projects are also include in Circular 02. Notably, this Circular no longer requires signing of the connection agreement as a perquisite condition to the construction of the wind power project. Instead, the condition for construction of wind power projects under Circular 02 only includes (1) the approval of application for the construction design and environmental, (2) the PPA and (3) financing documents, as conditions to the construction of the wind power project. In addition, productivity of wind farm (which shall not be lower than 90% in the expired Circular) is no longer the compulsory requirement under Circular 02. 

In exchange, some conditions have been tightened, that is land area for used is now limited to 0.35 ha/MW, which is remarkably lower than the previous threshold allowed by the expired Circular (0.5 ha/MW).

The procedural framework under Circular 02 has the advantage of being highly detailed, is much more specific and is in line with other sets of law (i.e. Law on Planning and Law on Investment). This should appeal to Investors, who are likely to appreciate the increased procedural clarity. 

Additionally, one of the main reasons slowing the growth of wind power projects in Vietnam is the overcapacity of electricity lines in key regions such as Ninh Thuan and Binh Thuan. Thus, Circular 02 no longer requires the signing of the connection agreement as a perquisite condition to the construction of the wind power project. In addition, the Government has recently approved MOIT’s proposal to speed up development of electricity line and power stations projects in key areas such as Ninh Thuan and Binh Thuan to release capacity of replaceable energy projects by 2020. It is believed that these measures will increase the speed by which wind power projects are approved and implemented.

Regarding the buying price, the power purchase price from wind power project under Circular 02 is 8.5 Uscents/kWh for onshore wind power projects and 9.6 Uscents/kWh for offshore projects. Circular 02 therefore maintained the same price under the recently enacted Decision No. 39/2018/QD-TTg. This buying price is still relatively low when compared to countries in the region such as Thailand (up to 20 Uscents/kWh) or Philippines (up to 29 cents/kWh).

Nevertheless, evidence shows that the pricing under Decision No. 39 and now Circular 02 have positively affected the market. In late January, early February 2019, the MOIT reported receiving at least 3 Project Supplementation Requests with over 1.000 MW in total planned capacity, notably the USA- Bac Lieu wind farm project with proposed capacity of 608 MW. Also, on 27 March 2018, the Enterprise Energy Group EE announced a $11.9 billion Ke Ga offshore wind farm with a total capacity of 3,400 megawatts (MW). The detailed proposal was already submitted to the MOIT and the project is estimated to start launching by the end of 2022.     

Finally, Circular 02 stipulated a substantially revised model Power Purchase Agreement (Model PPA). The PPA is a crucial to the bankability any power Project. The terms of the PPA are amongst the most crucial concerns of international lenders, as the PPA is the key document for securing payment streams for projects. Under Circular 02, use of the Model PPA is still mandatory required, and parties are still forbidden from making revisions which are contrary to the provisions of the Model PPA.

Previously, the Model PPA under Circular 32/2012/TT-BTC was widely accepted to be non-bankable internationally. Specifically, the Model PPA under Circular 32/2012/TT-BTC was was heavily criticised as failing to adequately allocate dispatch risk by not imposing a take-or-pay provision on the Purchaser. This risk arises most crucially where the purchaser cannot receive power due to a breakdown in the electricity grid, in which case the purchaser would not be bound to make payment.

Other key issues affecting the international bankability of the Model PPA under Circular 32 include (1) lack of protection for projects in the event that EVN, who is the sole purchaser under the PPA, terminates the agreement; (2) lack of provisions allocating politics-related force majeure events; (3) no freedom to choose dispute resolution method; and (4) Vietnamese law being the mandatory applicable law.

Representative of Thuan Binh Wind Power JSC., which owns Phu Lac wind farm, shared that the company currently has four wind power projects in operation. However, deadlocks have put three of them on hold, as one project does not have access to the national power grid resulting in ineffective operation, one project is financially foreclosed by lenders, and one project is in dispute between investor and contractor. Only Phu Lac project is in operation.

Meanwhile, wind power companies also have problems with guarantee mechanism. “Foreign organizations are willing to lend us, but requires a domestic bank to guarantee the loan, which means we have to pay the cost. This is extremely difficult for the wind power project which has to save every single dollar”- said Thuan Binh JSC’s representative.

The Model PPA under Circular 02 has not made any attempts to rectify these criticisms. Specifically, the new Model PPA still fails to (1) adequately allocate dispatch risk, still (2) lack any outstanding debt settlement mechanisms in events of termination by EVN; (3) it is still impossible to choose arbitration as the dispute resolution method; (4) and Vietnamese law is still mandatory governing law. It is therefore predicted that Circular 02 of Model PPA will still unlikely to be internationally bankable, unless some kind of guarantee mechanisms are in place, which can be difficult and costly to acquire.

In conclusion, the changes brought about by Circular 02 were generally positive. We especially welcome the new procedural framework and lessening burden on implementation of wind energy power project. Nevertheless, it cannot be understated that Circular 02 did not adequately deal with non-bankability of Model PPA, which we believe is a critical issue. Circular 02 alone is therefore an inadequate measure for wind energy project development in Vietnam to truly take off. However, when adding the efforts of the Government and EVN to construct more electricity transmission lines and power stations, and the reaction of Investors to the increased pricing, we believe that it is possible to expect that 2019 will be a year of positive developments in the wind power project industry.

By Dr Net Le, Mr Le Thanh Hieu, Ms Vo Phuong Thao – LNT & Partners

This article is featured in the April issue of the Vietnam Investment Review.

Disclaimer: This article is for information purposes only. Its contents do not constitute legal advice and should not be regarded as detailed advice in individual cases. For legal advice, please contact our Partners.

A bold move by the Vietnamese Government in the field of solar power projects

The development of the power sector, while prioritizing the production of renewable energy sources, forms a crucial part of Vietnam’s National Power Development Plan. On the 11th of April 2017, the Vietnamese Prime Minister, by issuing Decision 11/2017/QD-TTg on the mechanism for encouraging the development of solar energy in Vietnam (“Decision 11”), formalized some of these objectives.

Solar power as a primary focus of the Vietnamese Government

Unlike other alternatives to fossil fuels, solar power is a type of renewable energy that is encouraged by the Government.

The development of alternative sources of energy first began with the National Master Plan for Power Development in 2011 when the Prime Minister issued Decision 1208/QD-TTg. With the implementation of Decision 11, solar energy has gradually become a priority among power sources.

Decision 11 provides regulations for solar power projects, including rooftop projects and grid-connected projects. Rooftop projects are solar power projects that have their solar panels mounted on the rooftop or integrated into the construction of a building. Rooftop projects are connected directly to the buyer’s power grid. Grid-connected projects are those solar power projects, other than rooftop projects, connected to either the national power grid or the buyer’s power grid.  Under Decision 11, only grid-connected projects must conform to the National Development Plan for Solar Power or to the Provincial Development Plan for Solar Power. The Ministry of Industry and Trade (the “MOIT”) develops the National Development Plan, and the Prime Minister approves it. On the other hand, the provincial-level People’s Committee establishes the Provincial Solar Power Development Plan, and the MOIT approves it. This is one of the first steps to prepare and implement a Solar Power project. The detailed procedure is described in a flowchart presented at the end of this article.

Decision 11 provides an important incentive to encourage the development of solar power projects. Decision 11 mandates that Vietnam Electricity (EVN) and its authorized subsidiaries must buy all the electricity produced by every Vietnamese solar power project. Furthermore, Decision 11 also puts forth some important provisions regarding the price of electricity. Decision 11 fixes the purchasing price at US$ 00.0935/kWh, equivalent to VND 2.086/kWh for grid-connected projects. This price was set according to the exchange rate between VND and USD announced by the State Bank of Vietnam on the 10th of April 2017. The MOIT will determine the price to sell electricity for each power purchase agreement based on the present exchange rate. With respect to rooftop projects, projects must be implemented using net-metering with two-way electricity meters. In a trading cycle, if the amount of electricity generated from rooftop projects is greater than the consumed amount, the surplus will be carried forward to the next trading cycle. Every year, the MOIT will announce prices for electricity produced by rooftop solar power for the following year based on the exchange rate on the last day of the year.

According to Decision 2256/QD-BCT (dated 12 March 2015) of the MOIT, EVN’s average electricity selling price was US$ 00.0714/kWh, equivalent to VND 1.622/kWh. Therefore, the price provided by Decision 11 is significantly higher.

In addition, Decision 11 also states that the MOIT will provide a template for power purchasing agreements. Those agreements will be limited to twenty years, but could be extended.

Other incentives to be clarified

Decision 11 also encourages the development of solar power projects by providing attractive incentives. Those incentives are related to: capital mobilization; import duties; the corporate income tax (“CIT”); and land acquisition and rent. However, most of these incentives are too general and should be clarified. This lack of clarity can be seen when examining each incentive individually.

First, regarding capital mobilization, Decision 11 merely states that organizations and individuals involved in the development of solar power projects may raise domestic and foreign capital to carry out solar power projects in accordance with effective law.

Second, regarding import duties, Decision 11 provides that with respect to goods imported as fixed assets, solar power projects are exempted from import duties. Besides that, with respect to other materials, components, and semi-finished products that cannot be manufactured domestically, the import duty incentives for solar power projects must be determined in accordance with the present provisions in the Law on Import and Export Duties.

Third, regarding CIT, Decision 11 provides that the CIT exemptions and reductions granted to solar power projects shall be the same as those granted to projects eligible for investment incentives in accordance with effective regulations.

Fourth, regarding land incentives, grid-connected solar power projects, transmission lines, and substations shall be eligible for exemptions from, or reductions on, land levies, land rents, and water surface rents. Those exemptions or reductions shall be in accordance with current regulations on investment incentives. Depending on plans approved by the competent authorities, the People’s Committees of the provinces shall facilitate land arrangements for investors to execute solar power projects. Provision of compensation and site clearance shall be carried out in accordance with effective land regulations.

Therefore, because most of Decision 11’s incentives refer to other laws and specific incentives are not mentioned, the above-mentioned solar power project incentives remain unclear.

In addition, Decision 11 produces a conflict in the use of terms used by previous laws and regulations dealing with investment incentives.  In fact, while Decision 2068/QD-TTg approving the development strategy of renewable energy stated that renewable energy includes solar energy, and Decree 118/2015/ND-CP on Guidelines for some articles of the Law on Investment (“Decree 118”) classifies solar power projects as a business line eligible for special investment incentives (rather than a business line eligible for investment incentives), Decision 11 considers solar energy projects as a business line eligible only for investment incentives. Thus, Decision 11 may limit the chances for solar energy projects to benefit from the incentives applied to business lines eligible for special investment incentives. For example, under Decree 118, if the solar power project is treated as a business line eligible for investment incentives, the investor is entitled to only a 25% reduction of the security deposit required for project implementation. However, if the solar power project is treated as a business line eligible for special investment incentives, the investor may be entitled to a 50% reduction of the security deposit required for project implementation.

The MOIT has drafted a circular related to the development of solar power projects. However, the draft circular does not clarify the incentives, including investment incentives.

Conclusion

Decision 11 is an innovative move by the Vietnamese Government to help it meet its international obligations under the 2015 United Nations Climate Change Conference. Vietnam’s issuance of this decision demonstrates Vietnam’s intention to develop its economy without compromising environmental protection. However, while Decision 11 is a big step in the right direction, some of its important provisions, especially regarding investment incentives, need to be further clarified (or even modified) in order to remove any sources of confusion or disincentives. Otherwise, Decision 11 might only be a symbolic gesture without real effect.

Process flowchart for the implementation of a solar power project

By Net Le, Thu Nguyen and Cuong Le, LNT & Partners

Disclaimer: This article is for information purposes only. Its contents do not constitute legal advice and should not be regarded as detailed advice in individual cases. For more information, please contact us at info@LNTpartners.com or visit the website: Http://LNTpartners.com