Up-scaling wind power - Potential and challenges in regulation

Vaibhav Saxena, consultant of Vietnam International Law Firm (VILAF)

Legal framework

Regulations on the wind power sector span across several different laws, for instance the Electricity Law, Land Law, Construction Law, and the Law on Environmental Protection. Generally, wind power projects qualify for investment incentives under the 2014 Law on Investment and more specifically investment credits under Decree No,32/2017/ND-CP dated March 31, 2017.

Decision No.37/2011/QD-TTg dated June 29, 2011 issued by the prime minister facilitates wind power projects in Vietnam and introduces the Feed-in Tariff (FiT) for grid-connected wind power projects.

Electricity of Vietnam (EVN) or its affiliates act as the sole off-taker of the entire power generated from the said projects (with certain exceptions). The financial mechanisms for tariff subsidies were given clearer guidance in Circular No.96/2012/TT-BTC dated June 8, 2012 issued by the Ministry of Finance.

On November 12, 2012, the Ministry of Industry and Trade (MoIT) promulgated Circular No.32/2012/TT-BCT providing regulations on project development and a mandatory Model Power Purchase Agreement (MPPA) for wind energy purchase and sale transactions.

Parties may supplement MPPA's content to clarify the responsibilities and powers of the parties without altering its basic structure. MPPA's term starts from the contract signing date to 20 years after the Commercial Operation Date (COD). Furthermore, Circular No.06/2013/TT-BCT dated March 8, 2013 issued by MoIT stipulates the contents, sequence, procedures for appraisal and approval of wind power development plans.

More recently, Decision No.2068/QD-TTg issued on November 25, 2015 provides for encouraging, promoting, and providing energy security by way of sustainable socioeconomic development. Decision No.428/QD-TTg dated March 18, 2016 certifies the ratification of the Revised National Power Development Master Plan VII (PDPVII) for the period of 2011-2020 with extended vision to 2030. PDPVII outlines the forecast of power demand, objectives and strategies regarding electricity output and utilization, specifically focusing on renewable energy sources.

FiT remains a key challenge

Wind power projects are entitled to a FiT at a rate of VND1,614/kWh (7.8 UScents/kWh, excluding VAT), subject to the VND/USD exchange rate. Part of this price, VND207/kWh (1.0 UScents/kWh) of which is subsidised by the Vietnam Environment Protection Fund (VEPF).

Otherwise, MoIT is responsible for inspecting and proposing price level adjustments at the delivery point and the subsidy amount, to submit to the prime minister for his consideration, deciding on the principle of gradually curtailing electric price subsidies when electric market price is accomplished.

The wind power projects, supported by this regulation, shall not apply the mechanism of FiT or price supporting of other current regulations. Moreover, these projects are permitted to apply a mechanism of clean development under the laws of Vietnam.

This FiT is considered too low to attract investors, as in fact, there was no new wind project application and approximately 50MW of wind power had been installed up until 2014. The government has been considering an adjustment of the FiT level ever since.

A study of GiZ in 2014, requested to be undertaken by MoIT, suggested the possibility of full-fledged development of the Vietnamese wind market once the FiT rate is amended to 10.4 UScents/kWh (onshore) and 11.2 UScents/kWh (near shore). For offshore wind, the GiZ analysis recommended a rate of 23 UScents//kWh.

Most recently, MoIT proposed to the PM an amendment to Decision 37’s FiT levels as follows: VND1.920/kWh (8.77 UScents//kWh, excluding VAT) for onshore projects and VND2.183/kWh (9.97 UScents//kWh, excluding VAT) for off-shore projects, based on SBV's exchange rate of $1 equivalent to VND21,896 (announced on January 4, 2016) and subject to fluctuation.

This potential increase may be the outset to fix one of the most notable issues with wind power development regulations.

EVN being the sole off-taker mandates monopoly in power transmission and distribution, rendering other concerns for investors, for example the necessary negotiation time with EVN on the PPA, as concluding several contracts with a single state-owned enterprise purchaser is likely to be time-consuming.

Clarity and comprehensiveness is neccesary for MPPA

The MPPA lacks clarity and comprehensiveness, particularly regarding the following points:

• Lack of a proper price index or any price escalation clause to cover inflation risks;

• The seller completely bears the burden of grid connection set-up, that is, investment, construction, operation, and maintenance of the connection equipment to connect the plant with the transmission grid and distribution grid, while several important factors are left unaccounted for (for example the distance from transmission line, higher costs of installation, and location, among others);

• Although Force Majeure (FM) is listed, neither specific classification nor political FM events are mentioned. To invoke FM, the invoking party must prove the FM event and inform its impact on the ability to perform obligations. MPPA stipulates that the seller may be exempted from liability in the case of a FM event but does not elaborate further on remedies (recovery of additional costs, deemed energy payment);

• The MPPA does not differentiate consequences of breaches based on discrepancies in breach timing as per the project schedule, considering that an early breach differs in nature from a late one;

• There is neither provision for the choice of foreign governing law nor explicit provision for international arbitration. The only two dispute settlement methods recognised in the MPPA are mediation and negotiation, otherwise the use of arbitration is permitted in accordance with Circular No.40/2010/TT-BCT (Circular 40) dated December 13, 2010 on order and procedures for settlement of disputes in the power market;

• The MPPA excludes important mechanisms on remedies, for instance Deemed Commissioning; Unforced Outage, and Liquidated Damages. It merely provides definition of COD enumerating various scenarios where COD will be deemed as achieved. Otherwise, the MPPA specifically states that failure of COD to occur within three months from the COD date, unless caused by a FM event, will be considered as a breach by the Seller;

• The fact that EVN is the sole off-taker/purchaser necessitates financing or additional assistance. However, the MPPA does not provide any guarantee to ensure/enhance the creditworthiness of EVN;

• The MPPA excludes clauses concerning the lender’s step-in-rights as well as separate PPA between EVN and the lenders;

• The MPPA lacks conditions for negotiation/hardship regardless of fundamental changes, such as radical changes in law or tax;

• As a result, sellers (contractors and investors) are generally skeptical about the investment’s bankability, as the contract standard form is generally non-negotiable due to its fixed structure despite ambiguous contents on vital security clauses which alarms the lenders.

Conclusion

Wind power projects in Vietnam are entitled to several investment incentives under the Law on Investment and other relevant policies, such as relaxing regulations on corporate income tax, import duty, investment capital, and government funding. The abundance of laws, bylaws, and related prerequisites further complicate legal guidance.

Therefore, investment into the wind power sector is now precluded by complicated legal framework and regulations scattered in different places. Thus, a comprehensive guideline is highly desirable. Wind energy is an essential mix in the PDPVII, and clear policies are awaited from the Vietnamese government to utilise its full potential.