Benefits of private PPAs
Corporate, direct or private renewable power purchase agreements (“PPAs”) have become increasingly popular worldwide as a way for companies with high electricity needs to reduce their long-term energy costs, as well as their carbon footprint. As Vietnam’s renewable energy market continues to grow in light of the recent introduction of a dedicated feed in tariff (“FIT”) and specific regulations for solar energy investments in 2017, the interest amongst project developers and consumers in implementing private PPAs has increased considerably. This has prompted questions on whether private PPAs are permissible under Vietnam’s current regulatory framework and how such direct sales of electricity can be implemented in practice.
Private PPAs make sense in many markets for a number of reasons. They offer large corporates an affordable and predictable power supply, as well as the opportunity to reduce carbon emissions and improve their corporate social responsibility credentials. From a developer’s perspective, private PPAs offer a means of managing off-take risk, diversifying revenue streams, improving the bankability of renewable energy projects, and developing additional demand in a specific market for renewable energy. Regulatory provision for private PPAs also provides governments with a mechanism to contribute to emission reduction targets and meet the energy demands of industrial and other large electricity consumers. However, private PPAs can pose technical challenges to state utilities in terms of grid integration, depending on the model adopted.
Barriers to implementation in Vietnam
Several barriers to the effective implementation of private PPAs currently exist in Vietnam. The Electricity Law does provide large electricity customers with the right to purchase electricity directly from generation entities pursuant to fixed term contracts, and contemplates the eventual formation of a competitive retail market under which those sales would take place by way of spot dealing. However, the establishment of a competitive retail market for electricity in Vietnam is still a number of years down the road.
A competitive generation market has been operating in the country since 2012. The next step in the implementation road map is to move from competitive generation (under which Vietnam Electricity (“EVN”) buys all electricity generated through the Electric Power Trading Corporation (“ETPC”) and re-sells it to regional power corporations for distribution), to a wholesale electricity market where generators will sell electricity directly to individual power corporations. In the longer-term, eligible large customers will be permitted to purchase electricity directly from generating entities. However, as it stands, renewable energy producers are currently restricted from participating in the competitive generation market and EVN is required to purchase all electricity produced from solar and wind energy projects.
A further barrier to implementing private PPAs is that the buying and selling prices for electricity in Vietnam must fall within price brackets fixed by the State. As such, buyers and sellers of electricity are not completely free to determine pricing, as should be the case in a private PPA arrangement between a renewable energy generator and an industrial consumer.
Additionally, electricity generators in Vietnam are subject to extensive licensing and permitting requirements, including requirements that electricity projects be earmarked for development in either the National or a Provincial Master Power Development Plan. Such requirements would likely apply equally to any generator producing power for a private consumer, rather than for EVN.
What is the alternative?
In light of the barriers to implementing private PPAs in Vietnam at present, the long-term leasing of rooftop solar facilities presents a viable alternative which many developers and industrial customers are now considering. This structure can be implemented by a developer either on an offshore basis (subject to certain restrictions on sending technical personnel to Vietnam) or through a Vietnamese-based company. Under the structure, a solar power developer designs and installs the facility (on its own or through a local sub-contractor), which is leased on an operational basis to the industrial customer in Vietnam. The developer retains title to the equipment to be installed and leased, while the industrial customer as rooftop owner is considered the electricity generator for regulatory and permitting purposes.
The industrial customer is excluded from any requirement to obtain an electricity generation license, provided that the electricity generated from the rooftop solar facility is used exclusively by the industrial customer. Any excess electricity produced from the rooftop solar facility, as measured by the facility’s net-metering mechanism, can also be sold to EVN without an electricity generation license at a feed-in-tariff of 9.35 US cents/kWh under a template PPA enacted under Vietnam’s new solar power regulations, provided that the rooftop installation has an installed capacity of less than 1 MW.
As an electricity generator, the industrial customer must be duly established in Vietnam and hold valid rights to the underlying land and the building on which the rooftop solar facility is installed. The industrial customer must also ensure that the lease agreement for the rooftop solar facility does not conflict with its pre-existing lease agreement with the relevant provincial authorities or industrial park developer. Certain technical details regarding the rooftop solar facility must also be reported to EVN, as required under Vietnam’s new solar power regulations.
Some experts have indicated that integration of electricity generated from solar rooftop facilities into Vietnam’s national grid can be done smoothly without affecting the grid’s operational capacity, although there are diverging views on the issue. With this in mind, and a new regulatory framework that supports the development of rooftop solar projects, the Vietnamese market presents considerable opportunities for developers with expertise in rooftop solar and large industrial players alike.
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The information provided in this article is for information purposes only and is not intended to constitute legal advice should be obtained from qualified legal counsel for all specific situations.