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|Vaibhav Saxena and Tran Thi Ha Phuong, lawyers at Vietnam International Law Firm|
Electricity demand in Vietnam is increasing by about 10 per cent per year, putting remarkable pressure on the power industry to ensure a stable supply for economic development and ensuring demand and supply balance. At present, Vietnam’s energy mix is reliant mainly on traditional sources such as hydroelectricity and thermal power which are on the verge of saturation and conventional sources like coal are being discarded by the world due to their hazardous impact on the environment. Though LNG is not a zero-carbon-footprint club member, it is better than most other thermal power sources.
In March 2016, the Revised Power Development Plan (RPDP7) was approved for the 2016-2030 period (it is under further revision and PDP8 is expected in 2020). Under RPDP7, gas thermal power, which includes normal gas thermal power, besides LNG power, is targeted to achieve 44 billion kilowatt-hours in 2020, 76 billion kWh in 2025, and 96 billion kWh in 2030. The total capacity of gas-fired power plants is targeted to reach 9 million kW in 2020, 15 million kW in 2025, and 19 million kW in 2030, respectively.
Besides, RPDP 7 highlights the aim of developing the system of LNG warehouses and import ports in the provinces of Son My and Binh Thuan for the purpose of providing further gas facilities with proper terminals for different power centres such as Phu My and Nhon Trach which happen to be the ice breakers in LNG power generation.
As a matter of laws and practice in Vietnam, large power projects, excluding renewable power projects, are normally developed under (i) an independent power producer (IPP); or (ii) a public-private partnership (PPP) investment project, commonly in the form of a build-operate-transfer (BOT) one. An IPP project is wholly funded by the private party without using any capital from the state budget, while a PPP project is based on the co-operation between a state party and a private party. Compared to an IPP project, the BOT mechanism is preferred for its distinct characteristics providing for security through various guarantees and incentives from the government. In other words, the government is traditionally witnessed to grant a Government Guarantee and Undertaking (GGU) to the investors and the project company of BOT power projects, mainly including (i) material supply; (ii) off-take of products; (iii) all payment obligations and all financial commitments; and (iv) right to conversion of payment by Vietnam Electricity (EVN) from VND to USD and foreign remittance of USD.
LNG Power plant project invested in the form of PPP with total investment capital of more than VND2.3 trillion ($100 million) is qualified for investment incentives. The investor shall enjoy different investment incentives, which can be briefly illustrated as follows:
In case the LNG Power plant project is invested in the form of IPP, such IPP shall only enjoy the above investment incentives if it has a total investment capital of more than VND5 trillion ($217.39 million), which requires approval from the PM.
LNG power project does not have a specific model PPA like solar or wind power projects and stands quite open for negotiation to have a PPA that can catch up with international standards. However, in accordance with Article 1(2a) of Circular 56, the template PPA incorporated in the said circular is applicable to LNG power projects. Circular 56 does not apply to IPP projects in the form of BOT. The template PPA under Circular 56 includes the following notable points:
Gas has an important role in Vietnam’s future energy landscape, with LNG importation now being a key feature of Vietnam’s energy policy. As per the master plan on development of Vietnam's gas industry to 2025, with outlook up to 2035, the development of the gas industry is based on the principle of cost-effective and reasonable use of domestic natural resources; on developing the import of LNG in parallel with exploiting new domestic gas sources to supplement diminishing [depleted] gas sources in order to maintain unhindered capacity to supply gas to consumers.
An importer of LNG must satisfy all conditions under Article 6 of Decree 87, including (i) Being a company incorporated in accordance with the laws of Vietnam; (ii) Owning or having a wharf lease agreement with a lease term of five years minimum, and these wharves must be included within the Vietnamese port network/system; (iii) Owning gas tanks or having a gas tank lease agreement which meets all safety regulations; (iv) Satisfying conditions for fire prevention and fighting; and (v) Having LPG bottles or a contract for leasing LPG bottles satisfying all the conditions for circulation on the market by business entities exporting and importing LPG and trading bottled LPG. If business entities import LNG via pipelines, in addition to satisfaction of the conditions prescribed in (i), (ii) and (iii) above, they must have gas transporting pipelines and gas supply stations which satisfy all conditions for safety, and fire prevention and fighting. The importer shall be issued with a certificate for business entity importing LNG upon fulfilment of all required conditions.
Besides the advantages such as huge power consumption, increasingly supportive government rhetoric for promoting greater gas use, cheap labour cost, and so on, foreign investors diving into the LNG power sector in Vietnam may face lots of challenges including (i) high LNG investment cost; (ii) the developing regulatory framework for LNG-to-power in Vietnam may bring in uncertainties; (iii) dealing with state-owned enterprises is an arduous task sometimes due to their way of functioning and limited exposure for the investor to do due diligence; and (iv) Vietnam does not have enough domestic gas resources and it has to import fuel to run LNG power plants, that will add up to costs.
The regulatory framework in Vietnam's LNG sector needs to be refreshed to support better investment opportunities for foreign investors. Furthermore, Vietnam needs to maintain a balance between economic goals and energy security so that Vietnam does not face power shortages in the future while at the same time as a matter of economic independence for the country it is advisable for a sovereign nation to build ample reserves of LNG in Vietnam and avoid basing its power generation model that depends majorly on imported fuel. Better policies can provide comfort to the investors to establish LNG storage facilities in Vietnam and the country will benefit by having ample fuel on its ground to satisfy its energy needs in the future.
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