Wind power project developers were buoyed in April by the news that Vietnam's Ministry of Industry and Trade (MOIT) had submitted Official Letter no. 2491/BCT-DL ("MOIT Proposal") to the government, proposing to extend Vietnam's existing Wind FIT (discussed in more detail below) until December 31, 2023. In addition, the MOIT Proposal recommends that the MOIT be mandated to propose a new feed-in-tariff that would apply to projects achieving their commercial operation date (COD) after November 1, 2021, but prior to December 31, 2023. Furthermore, the MOIT is proposing that Vietnam moves to a competitive tender and auction scheme post-2023, something that is already under discussion for the solar sector as we highlighted in our recent article on solar in Vietnam.
The MOIT's proposal to extend the existing Wind FIT beyond its current November 1, 2021 expiry date comes as welcome news for investors looking for certainty regarding the future of their wind projects in Vietnam. With over 3,000 km of coastline and a monsoonal climate, Vietnam is considered a prime candidate for wind energy development. The Revised Master Plan1 envisages 800 MW of wind-generated capacity being installed by 2020, reaching 2 GW by 2025, and increasing to 6 GW by 2030.
In this article, we will provide an overview of some of the key projects in this sector. We will then revisit the wind regulatory framework (which was discussed in our earlier article) and address some recent regulatory developments and highlight some of the key challenges faced by the industry in Vietnam.
COVID-19 Impact
The impact of the COVID-19 pandemic is affecting industries across the globe, and the renewable energy sector is no exception. Recent analysis published by Wood Mackenzie indicates that up to 150 GW of wind and solar projects across Asia Pacific could be delayed, or cancelled, over the next five years in the event that a coronavirus-induced recession extends beyond 20202. Interruption in the supply chain as a result of force majeure claims under equipment supply contracts (for example, for wind turbines) is likely to affect the ability of projects under development achieving COD by the November 2021 deadline for the existing Wind FIT. This has created a degree of uncertainty among developers, so the MOIT Proposal is a welcome boost for those projects impacted by COVID-19.
Key Projects
Currently, the largest operating wind farm in Vietnam is the Bac Lieu Phase II project, with a capacity of 83.2 MW, which achieved COD in 2015. The largest wind farm currently under construction is Bac Lieu Phase III, an offshore development with a capacity of 142 MW and 71 wind turbines.3 The Bac Lieu projects are being developed by Vietnamese developer Cong Ly Construction-Trade-Tourism Company.
In 2019, the Vietnamese government approved the preparation of a feasibility study in respect of a proposed offshore wind farm project in an area off the cape of Kê Gà in Binh Thuan province, South Vietnam. In the event that the project completes it would be, at the time of writing, the world's largest offshore wind farm with a capacity of 3,400 MW. United Kingdom (U.K.) renewable developer Enterprize Energy is leading the project, along with Vietnamese partners Petroleum Equipment Assembly & Metal Structure (PVC-MS) and Việt Nam-Russia Oil and Gas Joint Venture ("Vietsovpetro") being engaged to undertake design, construction and installation of the offshore infrastructure, as well as connection to the transmission grid. If the project proceeds, the first 600 MW is scheduled to come online in early 2023, with the remaining phases becoming operational in 2026. The developer has stated that total investment in this project is estimated at US$11.9 billion.4
The Vietnamese market presents a significant opportunity for wind turbine and related equipment manufacturers, and two major players have recently announced the award of substantial contracts. In April, Siemens Gamesa Renewable Energy S.A. reported that it would supply 25 SG 4.5-145 wind turbines (as well as after-market services) to the 113 MW Hoa Thang 1.2 wind farm, one of the largest in Vietnam, located in Binh Thuan province. The project, which is due to achieve COD in 2021, is expected to generate enough electricity to meet the needs of 240,000 Vietnamese households.5 Meanwhile, GE Renewable Energy has been awarded a contract to supply 11 2.4 MW-166 turbines (in addition to technical advisory services) to Phuong Mai Wind Power JSC in order to support the development of the Phuong Mai 1 wind farm in Binh Dinh province. The Phuong Mai 1 wind farm is targeting generation by the first half of 20216.
GE has also been selected to supply its new 5 MW-158 Cypress turbines (the largest onshore turbines in GE's portfolio) to the second phase of the Mui Ne project, in Binh Thuan province, which has a potential capacity of between 170 and 200 MW7. The Mui Ne Project is being developed by AC Energy (the energy platform of Philippine conglomerate Ayala Group) and Singaporean-based renewable project developer The Blue Circle. Construction of the 40 MW first phase of Mui Ne is due to complete in the first half of 2020, with Vestas being awarded the supply and installation contract for 10 of its V150-4.2 MW wind turbines8. The Blue Circle was also responsible for developing the first foreign-owned wind power plant in Vietnam, the 40 MW Dam Nai project.
In central Quang Tri province, Japanese renewable power producer, Renova Inc., announced on May 11 that it had entered into a joint venture with local power producer Power Construction Joint Stock Company to develop three onshore wind projects with a combined capacity of 144 MW. The projects are scheduled to commence construction in May 2020 and be operational by the end of October 2021. These developments are Renova's first international renewable energy projects outside of Japan, where it currently has 600 MW of photovoltaic and biomass power plants either in operation or under construction and approximately 700 MW of offshore wind projects under development9.
Regulatory Overview
The feed-in tariff currently applicable to wind energy projects in Vietnam (the "Wind FIT") was initially implemented by Decision No. 37/2011/QD-TTG ("Decision 37"). On September 10, 2018, the government issued Decision No. 39/2018/QD-TTG ("Decision 39"), which provided for an increase in the Wind FIT and separate Wind FITs in respect of onshore and offshore wind projects as follows:
- Onshore – VND 1,928 /kWh (US$ cents 8.5/kWh); and
- Offshore – VND 2,223 /kWh (US$ cents 9.8/kWh).
The Wind FITs set out in Decision 39 apply to all on and offshore wind projects achieving a COD prior to November 1, 2021. The lack of clarity regarding the status of the Wind FITs has created a level of uncertainty for wind projects such as the Kê Gà project, which is not expected to achieve COD until 202710, meaning that the MOIT Proposal, if accepted, will help to give investors confidence that the Vietnamese wind market remains an attractive investment opportunity.
The first standardized power purchase agreement for wind power projects in Vietnam ("Model Wind PPA") was issued with Circular No. 32/2012/TT-BCT ("Circular 32"), which set out the regulations relating to the development of wind power projects. A key aspect of Circular 32 was the requirement for the General Directorate of Energy to establish a list of wind power projects to be permitted for development over the next five years and submit the same to the MOIT for approval. It is, therefore, critical for prospective developers to ensure that their projects are shortlisted prior to entering into firm development commitments. The terms of the Model Wind PPA caused concern among international developers, as well as the local business community. We examine these issues in detail below, but, in summary, it was widely perceived that the risk allocation in the Model Wind PPA fell short of international expectations, and could severely limit access to project financing from international lenders. With the government's position (as set out in the relevant legislation) being that only minor amendments are permitted to the Model Wind PPA, developers have found themselves bearing risks associated with grid connectivity and transmission as well as uncertainty regarding termination payments, change in law and dispute resolution procedures.
The Vietnamese government attempted to address certain of these concerns by issuing Circular No. 02/2019/TT-BCT ("Circular 2") in 2019, which amended the Model Wind PPA and specified the procedure for the negotiation and execution of PPAs for wind power projects in Vietnam. Certain of these amendments have been welcomed by investors, such as the removal of limitations on the liability of Electricity Vietnam (EVN) in the event that the PPA is terminated due to EVN's default. In the table below, we highlight some of the key provisions of the Model Wind PPA that have been the focus of concern for investors and lenders alike.
Issue |
Model Wind PPA |
Obligations of the Off-taker |
EVN remains, for all intents and purposes, the sole off-taker of all electricity generated by renewable sources in Vietnam. The Model Wind PPA does not contain any "take or pay" provisions providing for a compensation mechanism in the event that EVN fails to take electricity produced by the relevant project. |
Government guarantees |
No sovereign guarantee in respect of EVN's payment obligations meaning developers are exposed to potential EVN payment default risk. Typically, developers (and lenders) would expect to see EVN's payment obligations supported by a form of government guarantee or some other mechanism to mitigate risk in respect of payment default on the part of the off-taker. |
Compensation in the event of EVN's default |
Article 4 (Compensation for Damages) of the Model Wind PPA (as amended by Circular 2) states that a party in default is liable for "direct actual losses borne by the affected part due to the breach" and the "direct benefits which the affected party is entitled if there are no such violations." Note that the burden of proof lies with the aggrieved party to demonstrate the losses and direct benefits to which it would be entitled. The amendment effected by Circular 2 can be viewed as an attempt by the government to alleviate investor concern regarding EVN's limitation of liability, as the original version stated that EVN would only be liable to compensate the seller based on the value of the actual power output of the seller within the preceding one-year period. This provision raised concerns over EVN's limited liability, particularly if the default occurred early in the PPA's 20-year term. |
Commissioning risk |
Circular 2 amended the Model Wind PPA to state that projects that achieved COD prior to November 1, 2018 (i.e., prior to introduction of the wind feed-in tariffs implemented by Decision 39), could re-sign the relevant PPA in order to take advantage of the current wind feed-in tariffs. Although this is a positive step, only a limited number of wind projects had achieved COD prior to November 2018. Note also that, under Article 8 (Breach, damage, compensation and suspension of Agreement performance), a 3 month delay in achieving the agreed COD (as defined in Appendix D of the Model Wind PPA), will, subject to certain exceptions, be considered an event of default. The exceptions are where the delay was due to force majeure (please see further details below), due to a change in the COD in accordance with Article 4 of the Model Wind PPA or due to "cases of extension of investment process specific in the current regulations". The Model Wind PPA contains a right for the seller, under Article 4 (Operation of the power plant), to request an amendment to the COD. Circular 2 has further clarified that amendment to the COD pursuant to Article 4 will relieve the seller of any liability for failure to achieve the originally intended COD. |
Force majeure |
The Model Wind PPA previously provided developers with more comprehensive force majeure protection than is set out in the model solar PPA. For example, acts of government, non-issuance of licenses, nationalization and expropriation of assets were included in the definition of force majeure. However, Circular 2 has significantly narrowed the definition to the extent that it now reflects the model solar PPA. Conversely, Circular 2 does contain greater protection for investors in the context of payment obligations that arose prior to the force majeure event occurring. The amended Article 6(4) (Consequences of force majeure events) states that a "violating party" shall be "exempted from liability related to the failure to perform obligations under the Agreement due to force majeure events, except the obligations related to the due payments specified in this Agreement." The amendment to Article 6(4) does appear to provide some clarification on the status of outstanding payment obligations and provides developers with a degree of protection against abuse of the ambiguity in the original drafting. |
Change in law
|
The Model Wind PPA does not contain any change in law or stabilization provisions. However, the Investment Law provides general assurances for investors regarding change in law. |
Step-in rights for lenders
|
The Model Wind PPA contained a definition of "lender," as well as a specific step-in right in the event of breach of contract. Circular 2 has removed these provisions in their entirety. With this in mind, we note that Circular 2 states that the parties may only amend the Model Wind PPA to "clearly state the responsibilities and powers of the parties" but that its "basic contents" must remain unchanged. Failure to secure step-in rights for lenders will almost certainly render the Model Wind PPA unbankable (in the traditional sense), particularly in the context of international project financing. |
Exchange rate risk |
The Model Wind PPA does not include any indexation of the wind feed-in tariffs to the Consumer Price Index (CPI) as a means of addressing inflation risk. The Model Wind PPA applied the VND/USD exchange rate published by the Joint Stock Commercial Bank for Foreign Trade of Vietnam ("Vietcombank"). Circular 2, however, has replaced the Vietcombank rate with that published by the State Bank of Vietnam, reflecting the exchange rate being applied to solar power projects. |
Dispute resolution and governing law |
The Model Wind PPA originally set the General Directorate of Energy as mediator for the resolution of disputes, followed by escalation to the process set out in Circular 40, but this has now been amended by Circular 2. Vietnamese law governs the Model Wind PPA and does not contain any express provisions on the right to agree to international arbitration proceedings as the mechanism for dispute resolution. This is likely to be a key concern for international developers. Article 9 (Settlement of Disputes) of the Model Wind PPA provides the parties with a period of 60 days within which to resolve a dispute, with a right to escalate to the Power and Renewable Energy Agency (under the MOIT) for "support", in the event that the parties are unable to reach agreement. In the event that an agreement is still not reached, or if either party fails to comply with an agreed resolution, then either party may request for the dispute to be resolved in accordance with the provisions of Circular No. 40/2010/TT-BCT ("Circular 40"). Circular 40, published by the MOIT, sets out the procedure for resolution of disputes in Vietnam's electricity sector. The Electricity Regulatory Authority of Vietnam (ERAV) sits as the dispute resolution body; however, in instances where a party does not agree with ERAV's decision relating to a PPA (or a contract for the provision of auxiliary services), then that party has the right to initiate legal proceedings in the courts of Vietnam for final determination. |
In addition to the provisions highlighted in the table above, the Model Wind PPA does not contain clauses addressing project insurance, anti-bribery and corruption, nor does it contain a waiver of sovereign immunity, all of which are considered key areas of concern for investors and lenders. Collectively, these issues created a general perception that Vietnam would struggle to attract investment for its fledgling wind sector.
Access to Project Finance
Given the reservations held by international banks and financial institutions regarding the terms of the Model Wind PPA, it is, perhaps, unsurprising that the vast majority of current wind power projects have been developed by local sponsors, supported by finance obtained either through development or local banks. The Vietnam Development Bank and the Bank for Investment and Development of Vietnam (BIDV) have been active in funding a number of projects across the country. However, inability to secure project financing remains a key obstacle hindering the development of Vietnam's wind sector. The difficulty in accessing project finance has led developers to seek innovative solutions to address their funding requirements. The following are examples:
- Risk converging: The 30 MW Huong Ling 1 project utilized a structure featuring a local bank guarantee provided to an offshore bank, who, in turn, received a further guarantee from the Export Credit Agency of Denmark (EKF)11.
- Risk taken by developers: The first phase of the 40 MW Dam Nai project developed by Blue Circle took an entirely different approach. Blue Circle provided full equity financing for the first 6 MWs of the project and were then successful in obtaining project financing from a combination of local and international banks for the remaining 34 MW12.
- Risk splitting: Certain international banks are also discussing on-lending models where they take the local bank risk and the local bank takes the risk associated with the PPA, the rationale being that local banks do not perceive EVN default under the PPA as a material risk factor. In this scenario, the international bank would channel funding through a local bank on the basis of guarantees provided by the local banks. However, the most common form of project financing for wind developments currently in Vietnam is a local bank financing the project on a corporate balance sheet basis13.
Conclusion
The timing of the MOIT Proposal comes at a point where the future of Vietnam's wind sector is at a critical junction. In the event that the government rejects the MOIT Proposal, then uncertainty among investors and developers may increase, and continued development of Vietnam's wind power resources may well be delayed. The wind sector has already faced challenges following the government's decision to suspend the addition of energy projects to Vietnam's national power master plan in light of the explosive growth in renewable generation that has created challenges for the country's electricity grid. While the suspension has now been lifted, but this has apparently created a backlog of 4,400 MW of wind projects awaiting approval—nine times Vietnam's installed onshore and offshore capacity of 490 MW in 201914. Qiao Liming, Asia director of the Global Wind Energy Council, recently stated that the Vietnamese government needed to extend the Wind FIT by at least a year, as well as fast tracking the approval process for projects to be included in the power master plan15.
The concerns highlighted above have been echoed by the MOIT in a report released in early May 2020. In the report, the MOIT states that Vietnam may not be meeting its development potential in the wind sector. The MOIT claims that, as of March 2020, an additional 78 wind power projects, capable of producing 4,880 MW, had been added to the national power master plan. Of these, 11 are currently operational and a further 31 are still under development and expected to be completed over the remainder of 2020 and 2021.
However, as many as 250 wind power projects remain at the proposal stage, with delays in obtaining approvals being particularly prevalent in the context of offshore wind developments given national defense and security considerations. Chairman of the Bình Thuận Wind Power Association, Bùi Văn Thịnh, commented that there are a "lack of policies to develop offshore wind power"16. The backlog in project developments is almost certain to be exacerbated by the COVID-19 pandemic, and investors, both prospective and committed, will be hoping that the MOIT Proposal is promptly accepted by the government. However, given the delays in obtaining project approval, there is likely to be widespread support for the existing Wind FIT to be extended beyond November 1, 2021.
Footnotes
1 Decision 11/2017/QD-TTg.
2 reNews.Biz, "COVID-19: 15-GW of Asia-Pacific renewables 'at risk,'" April 22, 2020.
3 ASEAN Wind Energy 2020, "Wind Projects Portfolio in Vietnam."
4 Ibid.
5 NS Energy, "Siemens Gamesa to supply turbines for 113MW wind farm in Vietnam," March 27, 2020.
6 reNews.Biz, "GE inks Phuong Mai supply deal in Vietnam," April 15, 2020.
7 AC Energy, "Largest Wind Turbines in Asia to power Vietnam."
8< span> The Blue Circle, "Arrival of Vestas V150-4.2MW Wind Turbines in Cam Ranh," February 25, 2020.
9 Renewables Now, "Japan's Renova takes part in 144 MW wind portfolio in Vietnam," May 11, 2020.
10 Eco Business, "Gusty growth: Vietnam's remarkable wind energy story," November 19, 2019
11 Global Wind Energy Council, "Focus On: Project Financing in Vietnam," May 23, 2019.
12 Ibid.
13 Ibid.
14 Eco-Business, "Vietnam has only weeks left to get its wind market back on track," March 23, 2020.
15 Ibid.
16 Viet Nam News, "Investors concern about wind power development," May 11, 2020.
Originally published by Akin Gump, on June 2020
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