Changes in Vietnam’s model wind PPA could put investment in new projects at risk

Bình Thuận Province, Vietnam Photo by Tony Pham on Unsplash
Bình Thuận Province, Vietnam Photo by Tony Pham on Unsplash

While the country has a goal of installing 6 GW of wind power capacity by 2030, government guarantees that thermal energy project developers have enjoyed may not be available for wind power projects.

Vietnam’s revised National Power Development Master Plan has emphasized the role of renewable energy sources in alleviating Vietnam’s electricity deficit and has targeted an increase in wind power generation to 2,000 MW by 2025 and 6,000 MW by 2030.  The Vietnamese government now provides several incentives to foreign investors in wind power projects including 100% ownership, free transferability of equity, lower rates of income tax, exemption form or lower rates of property taxes and levies and customs duty relief on importation of equipment.

This article explains the recent changes made by the Ministry of Industry and Trade (MOIT) to the model power purchase agreement (PPA) applicable to grid-connected onshore and offshore wind power projects in Vietnam.  

PPA term is now flexible

In order for construction to commence, a developer must first execute a PPA with Electricity Vietnam (EVN).  It is mandatory to use the prescribed form of PPA, which was recently revised, for the sale and purchase of electricity from grid-connected wind power projects in Vietnam.  Although this is not immediately clear from the current legislative language, it would seem that substantial amendments to the standard form of PPA are not be permissible. 

The term of the PPA is 20 years from the commercial operation day (COD) extendable by the parties’ mutual agreement.  This is an improvement to the position under the previous standard form PPA (henceforth referred to as the “original PPA”) which had a fixed 20-year term. 

Higher feed-in tariffs

EVN is obliged to purchase all the electricity generated by any grid-connected wind project at the prescribed tariff.  For offshore and onshore wind projects which reach COD between 1 November 2018 and 1 November 2021, the tariff has been increased to VND 2,223 (equivalent to 9.8 US cents) per kWh) and VND 1,928 (equivalent to 8.5 US cents) per kWh, respectively.  Although the revised tariffs are an improvement over the previous tariffs, they are still low compared to wind power tariffs offered by other South Asian countries. 

Greater currency risk

The tariff for wind power projects is calculated and paid in Vietnam Dong (VND) and is indexed to the exchange rate for United States Dollars (USD) announced by the State Bank of Vietnam on the date on which the invoice is issued by the power generator to EVN.  Risk of fluctuation of the USD/VND exchange rate between the date of the invoice and the date of payment, however, remains as payment could be delayed for up to 25 business days from the date of receipt of an accurate and valid invoice by EVN and even longer if there are disputes. 

In the original PPA, the tariff was indexed to the USD/VND selling rate announced by the Vietnam Foreign Trade Bank (which has been historically more favorable to a purchaser of USD) at the time of payment.  Also, the fact that the rate was referenced to the payment date (rather than the invoice date) reduced currency risk for the wind farm developer and its lenders.

Consistent with the original PPA, neither the availability of USD nor remittance of USD revenue outside Vietnam are guaranteed. 

Wind farm owner carries transmission risk

All transmission risk under the revised PPA is transferred to the generator.  EVN is only obliged to purchase the power output if it is delivered to the delivery point.  EVN is not required to purchase power when the grid is under repair, inspection or testing, breaks down, needs support to recover after a breakdown or is not operated in accordance with applicable regulations or technical standards. 

If the transmission facilities beyond the delivery point are not available or functional, it may not be technically feasible for the wind farm to generate electricity.  As wind power projects cannot be considered to be “available for dispatch” like coal or gas-fired power projects, it may not be possible to structure wind power tariffs on a “take-or-pay” basis and, consequently, a “take-and-pay” type structure may have to be considered.  In these circumstances, the allocation of transmission risk becomes very important. 

Reduced force majeure protection

The definition of force majeure in the revised PPA is narrower compared to the definition in the original PPA.  The new definition is also exhaustive with only a limited number of events being specified as force majeure.  Events of a “political” nature which were previously included as force majeure events have been deleted from the revised PPA.  Specifically, non-issuance of licenses or approvals to the developer of the wind project, expropriation, acts of the Vietnamese authorities which affect the developer’s performance of its PPA obligations etc. are no longer force majeure events.  If the force majeure continues for more than one year, either party is entitled to terminate the PPA.  The developer is not entitled to receive any compensation is in these circumstances.

No change in law protection

The revised PPA does not include any provisions regarding change in law and developers of wind projects will need to rely upon the investment guarantee protection provided under the Law on Investment in the event of an adverse change in law.

Improved termination compensation

Compensation is payable to the developer of the wind farm if the PPA is terminated by the developer for EVN’s breaches but in no other circumstances.  The amount of compensation is equal to the aggregate of the proven loss sustained by the developer directly attributable to EVN’s breach and the value of the proven direct benefit which the developer would have received but for the breach. 

Although, this is an improvement of the position under the original PPA where the compensation was limited to the value of electricity generated during the previous year, it is still well short of what international investors and their financiers would expect particularly considering the risks to which they are subject. 

No step-in rights

The original PPA included step-in rights for lenders but the revised PPA has deleted these. 

Dispute resolution

Like the original PPA, the revised PPA has retained Vietnamese law as the governing law but now allows for dispute resolution to be “pursuant to relevant provisions of law.”  As Vietnam is a signatory to the New York Convention on Recognition and Enforcement of Foreign Arbitral Awards 1958, it would be possible for international developers to negotiate provisions for international arbitration under the aegis of a neutral tribunal such as the Singapore International Arbitration Centre.

Offtaker credit support/EVN risk

Last but not the least, EVN’s creditworthiness remains a concern among international developers and financiers but the government guarantees provided to developers and financiers of large scale, thermal power projects in Vietnam implemented under the BOT model are unlikely to be available for renewable energy projects unless they are considered to be of national importance by the government.

Although Vietnam is poised for a renewable energy boom spurred by the increasing demand for energy, financing for wind power projects in Vietnam is currently limited to Vietnamese banks, multilaterals and a few ECAs.  The MOIT is expected to introduce policies for a reverse auction process to procure the installation of wind power capacity from November 2021 following the example of other APAC countries such as India, Indonesia, Kazakhstan and Pakistan all of which have implemented such auctions for bringing wind power into the energy mix. 

It is hoped that the new policy will address some of the bankability issues that have so far limited foreign investment in this important sector of Vietnam’s economy.  

Lead image: Bình Thuận Province, Vietnam Photo by Tony Pham on Unsplash

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Shri Maski is a partner in Mayer Brown’s Banking & Finance practice in Tokyo. Shri focuses on project financings and has advised sponsors, lenders (including European and Asian export credit agencies) and public authorities on projects across sectors such as energy, mining and infrastructure (including PFI/PPPs). Prior to joining Mayer Brown, Shri worked at leading international law firms in Japan, the United Kingdom and the Middle East. Shri has lived in Japan for over five years and has completed secondments to the Japan Bank for International Cooperation in Tokyo and the Export Import Bank of Korea in Seoul, where he advised on project and finance documentation for transactions in Australia, Southeast Asia, Europe and Latin America.

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