The Ministry of Industry and Trade of Vietnam (“MOIT”) has just released a draft circular guiding the project development and agreement template of purchase and sale of power for the solar power projects (“Draft Circular”). The Draft Circular follows Decision 11 on mechanisms for encouraging the development of solar power in Vietnam (“Decision 11”) which was issued by the Prime Minister last month.
The most important aspect of the Draft Circular is the proposed template power purchase agreement for solar energy projects (“Draft Solar PPA”) which is being introduced by the Vietnamese government to bolster domestic renewable power generation and successfully compete regionally for investment in the renewables sector. Once finalized, solar power investors will have to use the Draft Solar PPA in order to sell their electricity generated in Vietnam, with only minor changes expected to be permitted during contract negotiations.
The Draft Solar PPA specifies a feed-in-tariff rate (“FIT”) of VND 2,086/kWh (excluding value added tax; equivalent to 9.35 US cents/kWh) as previously specified in Decision 11 for (i) grid connected solar power projects; and (ii) any residual power generated as compared with consumer power by rooftop solar projects (power price to be adjusted by exchange rate fluctuations to the US dollar at the time of payment).
Much like the template PPA for Grid-Connected Wind Power Projects adopted by the MOIT in 2012 (“Template Wind PPA”), the Draft Solar PPA provides that Vietnam Electricity (“EVN”) will purchase electricity from solar power producers at the specified FIT rate for a term of 20 years.
Notably, there are situations listed under the Draft Solar PPA (as with the Template Wind PPA) where EVN is not obliged to purchase power generated under the agreement, such as:
- when the solar power producer does not comply with Vietnamese regulations in its operations;
- when EVN is in the process of installing equipment, making repairs to or inspecting the solar power plant’s grid connection;
- when EVN’s transmission or distribution grid is experiencing problems; or
- where EVNs grid requires support to recover after an incident in accordance with the provisions of the operation of the national power system.
The transfer of risk by EVN to solar power producers, particularly in the event of transmission or distribution disruptions beyond the control of the solar producer will likely be viewed as a considerable risk requiring some sort of compensation mechanism in return.
As with the Template Wind PPA, the Draft Solar PPA provides that compensation is owed by any party who breaches its obligations under the PPA, with the compensation value to include the value of the direct, actual loss that the aggrieved party has incurred and the direct benefits to which the aggrieved party would be entitled if there was no such breach.
In the event of termination by the solar power producer due to breaches by the purchaser, the Draft Solar PPA attempts to limit the damages to be paid by the power purchaser to the value of actual power output of the seller for the year leading up to the termination.
With respect to the resolution of disputes, the Draft Solar PPA provides that either party to the contract may submit a dispute to the General Directorate of Energy for settlement through mediation. Where mediation is unsuccessful, either party can submit the dispute for resolution by the Electricity Regulatory Authority of Vietnam (“ERAV”) or chose to pursue litigation in the Vietnamese courts. Where mediation before ERAV is pursued, any party who disagrees with ERAV’s decision can bring the dispute before the Vietnamese courts. The option of international arbitration is not provided as a dispute resolution mechanism, which is likely to be viewed as problematic for some potential investors.
Protection against changes in law is not provided for in the Draft Solar PPA. However, given that change in law protections are already in place for investors under Vietnam’s investment regime, these protections would reasonably apply to foreign invested solar projects, even if such provisions are not explicitly spelled out in the Draft Solar PPA.
It remains to be seen what revisions, if any, will be made to the Draft Solar PPA by the MOIT. The growth of the wind power sector in Vietnam has demonstrated that, although there are bankability issues with the Template Wind PPA, as with the Draft Solar PPA which is nearly identical in form, financing has still been secured by incorporating potential risks into the financing costs of renewable energy projects.
DFDL Contact :
Regional Managing Partner
Hoang Phong Anh
Country Partner, Vietnam