Power market prospects in Vietnam

Counsel Ngoc Nguyen and Gaston Fernandez, Vietnam office managing partner at Hogan Lovells International LLP

In 2021, Vietnam Electricity (EVN) confronted an unprecedented problem – supply redundancy. Last year, thermal plants experienced just over 1,000 outages compared to 150 in 2020, and about 1.3 billion kWh of solar energy was not dispatched. Curtailment was attributable to decreased power demand; booming growth of solar energy; and grid congestion.

In response, since September 2021 the National Dispatch Centre began publishing daily data on the estimated capacity to be dispatched nationwide. The gap between daily installed capacity and capacity to be dispatched continues to be material in early 2022. The curtailment combined with the unbalanced risk allocation under the model power purchase agreement (PPA) may continue to impede international project finance using traditional structures.

Long wait for power development plan

As 2021 ended, the long waiting period for the new national Power Development Plan VIII (PDP8) continued. The planning period of 2011-2020 covered by PDP7 has ended, but the PDP8 for 2021-2030 has yet to be issued.

The Ministry of Industry and Trade (MoIT) has released several versions of PDP8 for public consultation in the last 18 months. Changes in those versions reflect the efforts of the government in balancing economic growth and sustainable development. While Prime Minister Pham Minh Chinh made a welcome commitment during COP26 to reach net-zero emissions by 2050, the MoIT and EVN are concerned about the impact of an unstable baseload of renewable energy on the power system.

The prospects for offshore wind and liquefied natural gas-to-power (LNG) projects remain unclear in PDP8 drafts, although they are seen as essential to ensure sufficient supply due to the pressure for phasing out coal-fired projects and the unavailability of domestic gas.

In January, the prime minister requested the MoIT submit the final PDP8 within the first quarter of this year, which is rapidly approaching. This was not the first time a deadline has been set by the prime minister. Unexpected events may cause further delays.

Tariff uncertainty

The feed-in tariff (FiT) regime expired at the end of 2020 for solar energy and November 2021 for wind power. About 4,000MW of wind power, half of the total capacity of projects which had signed PPAs with EVN, did not meet the FiT deadline. Similarly, only 8,653MW out of 15,400MW of solar energy capacity approved in PDP7 qualified for FiT.

Under current legislation, projects that did not achieve commercial operation by the relevant tariff regime deadlines would be subject to tariff auctions. However, in a report to the prime minister in late January, the MoIT proposed a different approach: project companies that missed the deadline could negotiate the tariff with EVN within a prescribed price band.

Given the large number of renewable energy projects waiting for the new tariff regime and the amount of time it may take to develop an effective auction regime, this proposal of the MoIT would be a good initiative to help projects progress. The key question would then be how to ensure fair treatment amongst similarly situated projects.

In parallel, the MoIT is working on a hybrid direct PPA programme to allow power companies to better manage price volatility. According to the draft legislation on direct PPAs released by the MoIT in May 2021, power generation companies participating in the programme will sign a PPA with EVN to sell electricity at a tariff determined by the competitive power market, and a direct contract with its customers.

In this, the customers will agree to cover the difference between the spot price payable by EVN and a fixed price agreed between the power company and the customers. Many solar projects and their customers have expressed interest in the pilot scheme, but it remains unclear when the official legislation would be released.

The key to the success of both tariff schemes will be the development of a new pricing framework that could best accommodate the fast-changing conditions of the renewable energy market in Vietnam and the global and regional supply chain. In early March, the MoIT released a draft circular on the tariffs for wind and solar projects limiting a project’s internal rate of return at 12 per cent, which has long been the standard limit imposed by the government across different public infrastructure sectors in Vietnam.

Return to bidding

After the Vietnamese government awarded Nghi Son 2 power project to Marubeni and KEPCO in 2013, no other major privately invested power project in Vietnam was procured through a competitive bidding process. In Nghi Son 2, it took five years from the launch of the tender to the award of the project to the selected sponsors, an additional four years to conclude the project contracts and another one year to reach financial close. Fear of reliving that 10-year process in future projects may have undermined investor interest in competitive bidding thereafter.

The reemergence of competitive bidding requirements in the last two years in Vietnam was a result of the heightened interest in the Vietnamese power market in the context of significant legal uncertainty during the transition to the PDP8. Many provincial people’s committees launched request-for-proposal (RFP) processes to select investors in LNG-to-power projects even when there was no specific tender requirement in the law or any guidance on how to undertake the tenders.

Competitive bidding is also proposed for the development of future offshore wind projects. It is intended that the competitive bidding process will create fair opportunities amongst all market players and allow the government to select the most capable investors that can deliver projects in the most efficient way.

The precedent in Vietnam suggests that in addition to good intentions, many other factors are also required for a successful bidding scheme. These include a consistent policy on power development, which will give both the authorities and investors clarity about the future of the industry and the projects; an RFP process that focuses more on substance than prescriptive formalities; a scoring system that looks beyond price comparison; marketable template project contracts; and collaboration and consistency from authorities in the post-tender licensing process. It would take time to formulate a new tender regime that incorporates all those elements and gains market confidence.

A proven successful practice in the power market in Vietnam to help projects progress while the legal framework was nascent has been to first focus on potential projects of national importance, use that experience to build a good precedent and then develop the official legal regime applying lessons from the experience.

Private investment in transmission facilities

The proof-of-concept approach was recently demonstrated in reforms to the electricity transmission sector, which historically was exclusively the responsibility of the state acting through EVN. This has placed an undue burden on EVN to mobilise financing for upgrading the overloaded grid nationwide. The pressure has become more intense in the last two years with the rise of renewable energy.

To pilot a new approach, in 2020 the government allowed Trung Nam Group, a major Vietnamese infrastructure developer, to build power transmission lines in the south-central province of Ninh Thuan. After completion, the works were transferred to EVN for operation.

Following the success of the project, the legal regime has caught up. Private investors can invest in transmission lines as of March 1 when the amendment to the Law on Electricity took effect. The new legislation has been long-awaited by sponsors, who were willing to share the burden with the government to quickly connect their plants to the grid. It may also facilitate Vietnam’s export of power in the coming years.

Next, the MoIT will need to develop guidance on the allocation of responsibilities between EVN and investors in the operations of privately-owned transmission lines.

The Vietnamese people have a proud history of resilience and optimism. Against the challenges of 2021, the power sector was still one of the busiest industries for mergers and acquisitions, and creative financing structures were also accepted by lenders despite the bankability hurdles of Vietnamese projects described above. Tens of thousands of megawatts of offshore wind and LNG-to-power capacity also entered the development pipeline across the country. Despite delays, the prudence of the government in the policymaking process was demonstrated through its genuine efforts to listen, change, and promote development.

For investors arriving in Vietnam with both ambition and patience, 2021 was a good time for learning and reflecting. One can be confident that legal developments to come from now will provide investors with confidence and security to resume their plans with stronger and bolder actions in the Year of the Tiger.