Vietnam's Direct PPA Pilot Scheme | Energy Market Update – February 2022
Background and Current Legislative Status
Vietnam's Ministry of Industry and Trade (MOIT) is seeking to implement a direct power purchase agreement (DPPA) pilot scheme which, for the first time, will enable renewable energy generators to directly sell clean electricity to private offtakers under virtual or synthetic PPAs. Under current electricity regulations in Vietnam, Electricity Vietnam (EVN) has a statutory monopoly over the transmission, distribution, wholesale and retail of electricity and is also the sole offtaker in the market.
The pilot scheme is expected to run for two years from 2022-2024 and support Vietnam's transition in the liberalisation of Vietnam's wholesale and retail electricity markets. It is anticipated that DPPAs will be introduced into the market on a permanent basis from 2025 onwards.
The MOIT has prepared several draft legislative instruments since 2020 providing regulatory guidance on the proposed scheme with extensive comments and feedback from various government departments and market participants over the past two years. The MOIT's May 2021 draft circular (Second Draft Circular)1 and October 2021 report (Report No. 94)2 (which is in the form of a draft prime ministerial decision) are the two most current draft legislative documents on the pilot scheme. Together, they provide an insight into the program's likely structure and conditions.
No specific launch date for the pilot scheme has yet been confirmed by the Prime Minister, though, pursuant to the guidance released by the government on 11 January 2022,3 the MOIT will need to prepare a new draft DPPA decision and implementing circular reflecting the content of Report No. 94 for further stakeholder consultation. This new draft decision and circular is expected to be issued in Q1-Q2, 2022.
Key Elements of the Pilot Scheme
1. Scale: The maximum capacity of the pilot scheme is 1,000 MW. This limit is intended to accommodate issues around grid insufficiency and allow policymakers sufficient time to prepare uniform legislation to introduce DPPAs on a permanent basis after the conclusion of the pilot scheme.
2. Participation Timeline: Generators and offtakers will be required to submit applications to participate in the scheme within 45 working days from the date the MOIT DPPA electronic registration portal opens.
The MOIT will review applications and select successful participating generators and offtakers within 45 working days from registration on the electronic portal closing.
Generators must formally execute all project documentation and achieve plant commercial operation within 270 working days from the date when the list of selected pilot scheme participants is announced by the MOIT.
A single joint application must to be submitted by the generator and offtaker (i.e. co-applicants).
3. Selection Criteria - Generators: Report No. 94 does not provide specific selection criteria for participating generators. Further guidance is expected to be announced in the form of an implementing circular to accompany the prime ministerial decision.
The previous Second Draft Circular proposed that generators be limited to grid-connected solar4 or wind power projects with a proposed installed capacity greater than 30 MW per site and prior relevant power development plan approval.
Generators, as part of the application process, must have already procured a binding in-principal agreement to sell electricity to an offtaker (i.e. Contract for difference (CfD) or virtual/synthetic PPA).
Generators must also provide financing documentation (i.e. written evidence of the generator's financial capacity and/or lender financing arrangements) at the time of the application.
4. Selection Criteria – Offtakers: Report No. 94 does not provide an extensive selection criteria applicable to participating offtakers, other than to require offtakers to have in place a binding in-principle agreement to purchase electricity from a renewable generator. Again, further guidance is expected to be announced in the form of an implementing circular to accompany the prime ministerial decision.
The Second Draft Circular previously limited offtakers to industrial manufacturers who purchase electricity at a voltage of 22 kV or greater, though this restriction is not reflected in Report No. 94.
Under the Second Draft Circular offtakers could only participate in the DPPA pilot scheme if they committed to purchasing from the generator at least 80% of the total power that they would have otherwise purchased from EVN within a given year. Report No. 94 however no longer contains this requirement.
5. Tariff Mechanism and Contractual Structure:
a) Generator PPA (Generator and EVN): Generators are required to sell electricity to EVN/ Vietnam Wholesale Electricity Market (VWEM) at the spot price pursuant to MOIT wholesale electricity market regulations.5
The current standard form EVN PPA template for utility-scale wind and solar projects (which provides for a 20 year contractual term) will apply.6 It is understood that, as is currently the case, there will be very limited ability for generators to deviate from the standard form EVN PPA.
b) Offtaker PPA (EVN and Offtaker): Generators cannot directly sell physical electricity to private offtakers. Instead, offtakers will be required to enter into a separate PPA with EVN and purchase from EVN physical electricity at the retail spot price. This is a deviation from the approach proposed in the Second Draft Circular whereby the offtaker would instead pay EVN the VWEM spot price plus DPPA charges (e.g., transmission and administrative costs).
c) CfD/Virtual PPA (Generator and Offtaker): Each offtaker is required to enter into a CfD/virtual PPA with the generator, mainly for the purpose of documenting a pre-agreed electricity purchase price. Appendix 3 of the Second Draft Circular sets out in limited detail the following key terms to be included in the CfD/virtual PPA, and it is understood that the offtaker and generator can negotiate such additional terms as they see fit:
(i) the term of the CfD/virtual PPA must be for a minimum period of 10 years, but not exceeding 20 years from the plant's commercial operation date (being the term of the standard form solar/wind PPA between EVN and the generator);
(ii) a pricing mechanism whereby a specific strike price is agreed between the generator and offtaker. There is no restriction on what this price could be, though at any given time the strike price is:
- (A) higher than the spot price, the offtaker must pay the generator the difference; or
- (B) lower than the spot price, the generator must pay the offtaker the difference;
(iii) the generator's obligation to provide the offtaker with a bank guarantee securing its obligation to complete construction of the power plant.
(iv) the offtaker's obligation to provide the generator with a bank guarantee securing its payment obligations; and
(v) such other terms as agreed between the generator and offtaker.
Proposed DPPA Contractual Mechanism
Going Forward
Vietnam's DPPA pilot scheme provides renewable energy developers with an opportunity to access Vietnam's renewable electricity market and provide clean power to large commercial enterprises seeking to meet corporate sustainability targets. This is achieved by implementing for the first time CfDs/virtual PPAs which will allow participants to adopt more sophisticated pricing mechanisms for hedging against fluctuating spot prices. We expect the draft prime ministerial decision and implementing circular, which should be released later this year, to provide further clarity on this significant new development in the Vietnam power sector.
- MOIT, Second Draft Circular Providing Regulations on Implementation of Pilot Direct Power Purchase Between Renewable Energy Generators (GENCO) and Consumers, May 2021.
- MOIT, Report No. 94/BC-BCT, 29 October 2021.
- Office of Government of Vietnam, Document No. 229/VPCP-CN, 11 January 2022.
- Solar power plants: 1 MWp is equal to 0.8 MW.
- MOIT, Circular No. 45/2018/TT-BCT, 15 November 2018 (as amended).
- Please see: Circular No. 18/2020/TT-BCT (re solar plants) and Circular No. 02/2019/TT-BCT (re wind plants).
