Vietnam: new solar energy framework - 2020

The latest trend in households worldwide is breadmaking. The homemade breads are then no doubt enjoyed while rummaging through Albert Camus’ The Plague. It is not just bread shelves but also flour shelves in groceries that are running out quickly. This is because, in a crisis, one goes back to the basics. 

The Government of Vietnam has done a remarkable job to make sure the basics are abundant for Vietnamese during the coronavirus crisis. The basics of course, in the context of Vietnam, are rice and rice, in that order. 

But fresh air is not far behind. The Government knows that after the pandemic, new energy that does not depend on fossil fuels will return to the centre of any macro-economic symposium.

On 6 April 2020, the Prime Minister issued Decision 13/2020/QD-TTg (Decision 13) setting out a legal framework for the next generation of solar power projects.

New feed-in-tariff (FIT) 

Newer grid-connected projects that received investment policy decisions by 23 November 2019 and that achieve commercial operation date (COD) no later than 31 December 2020 will be entitled to the new FITs as follows:

This is not as generous as the former FIT regime (which was 9.35 US cents/kWh for grid-connected projects regardless of technologies) applicable to the first wave of solar projects that achieved COD by 30 June 2019. But it is still viewed as attractive by those who might qualify.

Projects in Ninh Thuan, the province with the highest number of solar projects in Vietnam thanks to its high radiation, have special treatment. Projects in Ninh Thuan (regardless of technologies) that achieve COD by 31 December 2021 will continue to apply the old FIT of 9.35 US cents/kWh with a capped capacity of 2,000MW. It is not clear who will keep track of and determine when the 2,000MW cap will be met. Sponsors would expect a transparent process to avoid unfair competition.

The FITs will be denominated in Vietnamese Dong based on the VND/USD exchange rate announced by the State Bank of Vietnam on the invoicing date and will apply for 20 years from the COD of the relevant project.

It took the Government nine months after the expiry of the older FIT regime to issue the new one, which will only be effective for half a year. Given the “lockdowns” in Vietnam, sponsors of ongoing projects may face difficulties satisfying the timing requirements for the new FIT. 

It may be the Government’s intention to open the new FIT regime only to projects which are already at the final stage of development but not newer ones, which would have to go through competitive bidding.

Future competitive bidding process

The FITs applicable to grid-connected projects that miss the above deadlines will be decided through competitive bidding. This approach is in line with international norms. It has worked well in India and Cambodia to significantly reduce the tariff for tendered projects. It will help the Government of Vietnam procure projects with competitive tariffs and better manage the national grid capacity.

Direct PPA for small-scale rooftop solar projects 

For the first time, the Government has permitted direct power purchase agreements (DPPAs) between project operators and electricity end-users. However, at this stage the door is only open to rooftop solar projects with a capacity of up to 1MW.

According to Decision 13, operators of rooftop solar projects with a capacity of no more than 1MW can sell electricity to individuals or organisations other than EVN and its subsidiaries. The parties to these DPPAs can agree on the terms of the DPPAs and the applicable tariffs.

To date, many small-scale rooftop projects are structured as lease arrangements in which the operators lease the rooftop solar systems to their customers and collect rent based on the energy generated by the system. While that structure is not prohibited by Decision 13, sponsors and financiers may look forward to a cleaner DPPA structure for implementing rooftop solar projects in the coming time.

The next steps

Various matters remain important after the release of Decision 13:

1. The market is waiting for a new model PPA for grid-connected solar projects. There is hope that the new template will resolve some of the major bankability issues in the old model PPA.
2. The Government will need to develop the competitive bidding process for future solar power projects sooner rather than later. Until the bidding mechanism is issued, new projects will face uncertainties, which may potentially delay their bankability.
3. Policies relating to DPPAs in larger-scale projects should be resolved. The discussion between businesses and the Government over the last three years suggests that the Government is struggling with how to balance between the undisputed benefits of DPPAs (e.g. increasing power supply, lowering investment costs while at the same time reducing the burden on the transmission infrastructure) and the need to control energy supply as part of the overall energy security policy.

The existential lesson

The pandemic teaches the existential lesson of valuing the basics when it is otherwise impossible to make sense of life’s absurdities. One of the basics that had been too long overlooked, in the headlong rush for growth, was fresh air. 

When this pandemic ends, one would naturally expect robust governmental policies to help renewable power development.