Circular No. 18/2020/TT-BCT ("Circular 18") 1 was recently issued by Vietnam's Ministry of Industry and Trade, and provides regulations on the development of solar power projects to guide the Prime Minister's Decision 13 issued in April 2020. Circular 18 is effective from 31 August 2020 and supersedes Circular 16 on the same subject matter.2
Circular 18 introduces updated template power purchase agreements ("PPAs") as well as revised regulations for the development of i) grid-connected solar farms; and ii) rooftop solar power systems.
Despite rapid growth and significant investment potential, the Vietnamese renewable energy market and associated regulatory regime remains highly complex and constantly evolving.
Developers, lenders, and prospective investors are encouraged to consider the key amendments discussed below:
Background - The Second Solar Feed-in-Tariff
As introduced under Decision 13 (extending Decision 11), the second feed-in-tariff regime ("FiT 2") provides for a preferential feed-in-tariff mechanism for a 20 year contractual term as under an executed PPA with Vietnam Electricity ("EVN").3
This applies to solar power projects (i.e. grid-connected, floating, and rooftop) which achieve a commercial operation date ("COD") prior to 31 December 2020.4
Within this context, developers are racing to complete projects prior to the 2020 deadline in order to enjoy FiT 2.
When Does Circular 18 Apply?
Circular 18 specifically applies to the following solar power projects:
- 1 July 2019 - 31 August 2020: Where a solar power project (grid-connected or rooftop) achieved COD from 1 July 2019 - 31 August 2020 (i.e. the effective date of Circular 18), the seller and the purchaser must amend any pre-existing executed PPA to ensure that the terms of such agreement are consistent with the terms of the template PPA issued with Circular 18. 5 This is significant because it means that projects that were financed, built, and commissioned on the basis of a specific executed PPA now face changes to the fundamental underlying contract terms. See further below for some headline comments on the new template PPA.
- Prior to 1 July 2019: Where a solar power project (grid-connected or rooftop) achieved COD prior to 1 July 2019, such executed PPA shall continue to be valid and need not be amended to reflect the revised template PPA issued with Circular 18. 6
New Project Development Regulations
1) Grid-Connected Solar Farms
Circular 18 provides that the total area for construction of a grid-connected solar project (land or water surface area) must not exceed 1.2 hectares per MWp.7 While this base number is unchanged from the previous regulations, Circular 18 clarifies that this area excludes power transmission lines or road access, but does include the actual power plant and transformer station. 8
Further, the basic design dossier of the project must include details of the project's location, solar radiation potential, impact on the electricity systems in the local area, load dispatch information, and design for connection to the SCADA system.9
Importantly, from a commercial perspective, Circular 18 overturns the previous minimum 20% equity ownership threshold under Circular 16, 10 thereby enabling developers to secure the bulk of project financing by way of debt funding.
2) Rooftop Solar Systems
Circular 18 provides that where a proposed grid-connected rooftop solar system has a capacity of no more than 1 MW, it is not necessary to obtain a formal power generation license.11 This is consistent with current regulations, and reaffirms the position under Circular 36 from the Ministry of Industry and Trade.12
Rooftop solar developments with a 1 MW capacity or less (AC capacity) or a 1.25 MWp capacity or less (DC capacity) must still nevertheless register their proposed connection with EVN, including details of location for installation, output scale, and proposed connection point.13
Additionally, after receiving EVN's opinion on the project's transmission capabilities, the developer must then enter into an interconnection agreement (with EVN or the relevant grid owner), obtain approval on the proposed sale of electricity, install metering equipment, and carry out technical testing, amongst other requirements.14
The above requirements are all subject to very strict deadlines (often less than 5 working days) and it is highly recommended to seek the formal support of legal counsel to ensure such agreements are negotiated and executed in a timely manner, thereby preventing material transaction delays.
Significantly, the template PPA for rooftop solar projects issued with Circular 18 does not need to be used in cases where the developer sells power to a party other than EVN. In those cases, the parties are free to agree terms and prices consistent with general Vietnamese contract law.
New Template PPA
1) Grid-Connected Solar Farms
- Mandatory use of template PPA: The use of the template PPA for grid-connected solar farms is mandatory.15 Parties may negotiate to include additional supplemental clauses which serve to clarify the rights and obligations of the parties, although in practice EVN may be reluctant to do so.16 Any supplemental terms must remain consistent with the terms of the template PPA, and parties are prohibited from making substantive alterations. 17
- Force majeure: The previous template PPA excused a defaulting party from broadly performing their obligations should a force majeure event arise. Whilst the new template PPA provides for the same, it specifically limits the ability of a defaulting party to avoid payment of monies owed up to the date of the force majeure event. Such clarification is welcomed and presumably more significant in the context of Covid-19.18
- Change in law: The new template PPA does not provide for a specific change in law clause. This is inconsistent with global best practice, and potentially leaves developers and lenders in a vulnerable position should an adverse change in law circumstance arise. Given Vietnam's constantly evolving legislative landscape, particularly in relation to renewable energy, the potential protection provided by a change in law clause is significant, and thus would be very attractive to prospective foreign investors.
- Offtake obligation: The new template PPA no longer obliges EVN to contractually agree to purchase the entire yield generated from the solar farm. Legally, this seems inconsistent with the previous obligation on EVN to purchase the entire output generated by the solar farm under Decision 13.19 Commercially, this creates significant concerns for developers and lenders alike, and may negatively impact forthcoming bankability assessments with regards to anticipated project revenue.
- Curtailment: The new template PPA provides EVN with broad curtailment rights. Specifically, where the solar farm does not conform with relevant power regulations; during times of installation or repair; when EVN is carrying out inspection on portions of the grid which are connected to the farm; when EVN's gird systems are broken; or when EVN's power grid requires support to recover following a breakdown. 20 Such broad curtailment rights in favor of the purchaser will again negatively impact on bankability assessments, creating considerable uncertainty for financiers.
- Termination payments: Of particular concern is that where the seller opts to terminate the agreement due to the purchaser's default, the new template PPA provides that the termination damages amount will be calculated up to the time of termination, rather than based on the remainder of the 20 year contractual term. 21 The previous template PPA under Circular 16 provided no such restriction. The incoming clause will therefore create significant concern for those projects already operating under pre-existing PPAs which now need to conform with the terms of the new template. Furthermore, under Circular 18, the non-defaulting party assumes the burden of proof in establishing loss as a result of the defaulting party's actions. 22 Such risk allocation greatly favors the purchaser and will again negatively impact forthcoming bankability assessments.
2) Rooftop Solar Systems
The template PPA for rooftop solar system projects is largely the same as the template provided under Circular 5,23 albeit with the following noteworthy amendments:
- Mandatory use of template PPA: The use of the template PPA for grid-connected rooftop solar systems is mandatory.24 Parties may negotiate to include additional supplemental clauses which serve to clarify the rights and obligations of the parties.25 Any supplemental terms must however remain consistent with the terms of the template PPA. 26 As noted above, the template is not mandatory where the power buyer is not EVN.
- Continued silence: The template PPA still does not provide for specific change in law, termination compensation, grid unavailability, or tariff indexation provisions, thereby continuing to place an unfavorable risk allocation against the developer.
- Dispute resolution: Concerns continue to exist with regards to the transparency and flexibility of the provided dispute resolution process under the template PPA. Where parties are still unable to resolve their differences post-mediation, it appears that the final body responsible for resolving the dispute will be EVN or its parent entity (as the relevant "higher level power unit of the power purchaser"), thereby potentially greatly favoring the purchaser.27
- Late payment interest: The new template PPA introduces greater flexibility with regards to late payments. Parties are now free to include a late payment interest clause in an amount as agreed between the parties, in accordance with the Commercial Law 2005.28 The previous template PPA under Circular 5 limited the calculation of late payment interest to an amount based on the State Bank of Vietnam's monthly interbank interest rate.
- Metering system malfunction: Where the power metering system malfunctions (e.g. fire, damage), there is now an obligation on the seller to promptly notify the purchaser of such malfunction. The seller and the purchaser must then agree on the output of power during this time of malfunction, measured according to output based on the previous week, month, or year.29
Vietnam's solar power market and associated regulatory regime continues to constantly evolve. The latest piece of regulation, Circular 18, is effective from 31 August 2020 and introduces updated project development requirements as well as a revised mandatory template PPA.
Significantly, those solar power projects which achieve a commercial operation date of between 1 July 2019 - 31 August 2020 will need to revise their pre-existing PPAs to ensure conformity with the updated regulations under Circular 18.
Please do not hesitate to contact us should you have any further queries or wish to discuss how the incoming Circular 18 may impact your current or proposed solar power development.
1 Circular No. 18/2020/TT-BCT, dated 17 July 2020, Ministry of Industry and Trade ("Circular 18").
2 Circular No. 16/2017/TT-BCT, dated 12 September 2017, Ministry of Industry and Trade ("Circular 16").
3 Decision No. 13/2020/QD-TTg, dated 6 April 2020, Prime Minister of Vietnam ("Decision 13").
5 Articles 6(1)-(3) and 9(2), Circular 18.
6 Article 9(1), Circular 18.
7 Article 4(3), Circular 18.
8 Article 3(2), Circular 18.
<9 Article 4(2), Circular 18.
10 Article 10(3), Circular No. 16/2017/TT-BCT, dated 12 September 2017, Ministry of Industry and Trade.
11 Article 5(4), Circular 18.
12 Article 3(2), Circular No. 36/2018/TT-BCT, dated 16 October 2018, Ministry of Industry and Trade ("Circular 36").
13 Article 5(2), Circular 18.
14> Article 5(2), Circular 18.
15 Article 1, Circular 18.
16 Article 6(3), Circular 18.
17 Article 6(1)-(3), Circular 18.
18 Article 5(3), Model Grid Connected Solar Farm PPA, Circular 18.
19 Article 4(1), Decision No. 13/2020/QD-TTg, dated 6 April 2020, Prime Minister of Vietnam.
20 Article 7, Model Grid Connected Solar Farm PPA, Circular 18.
21 Article 7(5), Model Grid Connected Solar Farm PPA, Circular 18.
22 Article 7(4)(b), Model Grid Connected Solar Farm PPA, Circular 18.
23 Circular No. 5/2019/TT-BCT, dated 11 March 2019, Ministry of Industry and Trade ("Circular 5").
24 Article 1, Circular 18.
25> Article 6(3), Circular 18.
26 Article 6(1)-(3), Circular 18.
27 Article 6(2), Model Rooftop Solar System PPA, Circular 18.
28 Article 4(3)(b), Model Rooftop Solar System PPA, Circular 18.
29 Article 3(2)(c), Model Rooftop Solar System PPA, Circular 18.
Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.