The rules of the race to solar viability

08:00 | 11/01/2018
Vietnam is among the world’s fastest growing countries, and it is gearing up to emerge as a big market in the renewable energy sector, as the country shapes new policies to keep pace with its escalating demand for power. Managing partner Dang Duong Anh and associate Vaibhav Saxena of VILAF law firm describe the sector’s coming opportunities and challenges.

Legal framework

The solar power sector enjoys investment incentives under the Law on Investment 2014. The prime minister’s Decision No. 2068, dated November 25, 2015, provides for encouraging, promoting, and providing energy security. The prime minister’s Decision No. 428, dated March 18, 2016, lays down the revised national power development plan from 2011-2020, with a vision toward 2030. In April 2017, the prime minister’s Decision No. 11 was issued, with an effective period from June 1, 2017 to September 30, 2019, providing a mechanism for the encouragement of development in solar power.

Furthermore, on September 12, 2017, the Ministry of Industry and Trade (MoIT) released Circular No. 16, effective from October 26, 2017, on project development and a standard model power purchase agreement (PPA) applicable to grid-connected and rooftop solar power projects. Solar power producers are allowed to participate in the competitive power market, but with such participation existing PPAs should be terminated. Decision No. 168, dated February 7, 2017, allows renewable energy projects to participate in the competitive wholesale power market, but lacks guidelines on the pre- and post-selection process for such projects, which are crucial in ensuring security and stability to the investor from the risk of being dumped back into the power market.

Feed-in-tariffs

- Grid-connected solar projects with a solar cell capacity of more than 16 per cent or a solar module capacity of more than 15 per cent qualify for a feed-in-tariff (FiT) of VND2,086 per kilowatt-hour (kWh) – 9.35 US cents/kWh, keeping reference to the exchange rate of VND22,316 to the US dollar as announced by the State Bank of Vietnam on April 10, 2017, applicable for 20 years from the commercial operation date (COD), if COD is achieved by June 30, 2019.

- Rooftop solar projects are entitled to the same FiT as grid-connected projects. Rooftop projects shall implement the net-metering mechanism using bi-directional metre systems. Excess power carried forward to the next payment cycle shall be sold to Electricity of Vietnam (EVN) at the FiT rates stipulated in the PPA at the end of the year or upon its termination.

Vietnam’s growth and mounting power needs will make it a solar powerhouse if it can build a supportive framework Source: GIZ

Solar power master plans

- An investor can prepare a solar project which is already included in a provincial or national solar power master plan (SPMP), or a provincial or national power development master plan (PDMP). Master plans are applicable only to grid-connected power plans. For solar projects outside national and provincial SPMPs and PDMPs:

+ For projects of 50 megawatts (MW) or less, the MoIT shall approve their inclusion in the relevant SPMP.

+ For projects of more than 50 MW, MoIT will put a proposal for their inclusion in the relevant SPMP to the prime minister for his approval.

Off-take and PPA

- EVN will off-take all the electricity generated by solar projects. PPAs for these projects must be prepared as per the model PPA, though the parties are allowed to clarify their rights without amending the basic provisions therein.

+ PPAs signed prior or post June 1, 2017 to follow model PPA. PPAs have a fixed term of 20 years from COD, and an extendable or new contract can be signed.

Incentives

- Import duty

vExemption from import duty on goods imported to create fixed assets of solar projects, in addition to the import duty incentives for other renewable energy projects, including exemption within five years from the start of production for raw materials, materials, and components which cannot be produced domestically.

- Corporate income tax

+ 10 per cent for 15 years, extendable up to 30 years with the prime minister’s approval.

+ Exemption for the first four years, and 50 per cent reduction for the subsequent nine years.

- Land use fee/rental

+ Solar projects are entitled to a land use fee or rental incentives at par with a similar renewable project in the preferential investment sectors. Subject to the solar project’s location, it may be exempted from land use fee/rental on a single land lease document for a period ranging from three to 15 years, or for the whole term.

- Loans

+ The investors may seek a loan of up to 70 per cent of the solar project investment capital from the Vietnam Development Bank. The maximum loan term is 12 years, or as approved by the prime minister.

- Government funding

+ Government funding may be available for research and technology with respect to pilot projects.

Drawbacks

Some of the key issues are:

- Circular 16

+ The scope of the national/provincial SPMP has not been clearly indicated, for bifurcation and allocation of different solar projects with various scales/specifications to fall under national or provincial master plans.

+ No timeline provided for issuance or publicity of SPMP/PDMP.

- Model PPA

+ Lacks a price escalation index to cover inflation risks, and is silent on adjustment of the FiT following the VND/USD exchange rate fluctuation for grid-connected projects.

+ There is no recourse or remedy to the seller for securing an FiT of 9.35 US cents/kWh in case of grid unavailability for solar projects having achieved COD before June 30, 2019.

+ The burden of grid connectivity construction is imposed on the seller without taking into account factors like distance from the grid or installation cost.

+ Political force majeure and change in law events are excluded.

+ There is limited compensation equivalent to the previous year’s electricity generation price to the seller from EVN, without considering it to be an early/midterm breach as per the project schedule.

+ Vietnamese law is the governing law, to the exclusion of international arbitration and governing law.

+ Lacks important provisions on deemed commissioning, unforced outage, and liquidated damages. The model PPA provides definition of the COD at various stages where COD will be deemed as achieved. Furthermore, it states that if the COD does not occur within three months from the date of COD it will be a seller’s breach on the part of the seller.

+ No boost to increase creditworthiness of EVN being the sole off-taker.

+ Lacks lender’s step-in-rights and separated PPA directly between EVN and the lender.

Challenges

- Location

+ Ample sunlight and funds for ground clearance tasks are also huge obstacles, as in order to produce 1 MW of power, it requires 1.5 to 2 hectares of land.

- Finance

+ The credit institutions seek more security with a bankable PPA to offer funds to the investor. Vietnam lacks research facilities and a workforce trained in solar energy and standards on its exploitation, and most of the equipment has to be imported at a high cost. Thus, the production costs remain high, with a relatively low price for selling the energy.

- Mechanisms and policy

vSynchronised policy with clear guidance on the development and implementation scheme is needed. There is no guidance on FiT post June 30, 2019 – the expiry of Decision 11. Investors are concerned due to delays in approval by the MoIT, which affects the project development schedule, posing uncertainties in achieving COD in time to avail of the FiT of 9.35 US cents/kWh.

Conclusions

Although Vietnam has the advantage of being a tropical country when it comes to abundant solar resources, with the sun shining to almost its peak throughout the year, it remains to be seen whether or not the country will be able to tap into its full potential via necessary incentives and a supportive legal framework.

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