Context and current legislative status
On May 20, 2022, Vietnam’s Ministry of Industry and Commerce (MOIT) issued a revised draft decision on the Direct Power Purchase Agreement (DPPA) Pilot Project for Stakeholder Consultation (Draft decision of May 2022).1 Vietnam is seeking to implement a DPPA pilot program which, for the first time, will allow renewable energy producers to sell clean electricity to private buyers via a contract for difference (CfD)/purchase agreement. Virtual Electricity (PPA). Under this DPPA regime:
- the producer and Electricity Vietnam (EVN) will enter into a PPA under which EVN will purchase physical electricity from the producer at the spot wholesale price;2
- the buyer will buy physical electricity from EVN at the retail spot price (which is slightly higher than the wholesale spot price to take into account EVN’s transmission and administrative costs); and
- the producer and buyer will enter into a virtual CfD/PPA primarily for the purpose of documenting a pre-agreed electricity purchase price (usually referred to as a strike price). The buyer and producer are free to determine how this CfD pricing mechanism will work, but in simple terms, if at any given time the strike price is:
- higher than the spot price, the buyer will pay the difference to the producer; Where
- lower than the spot price, the producer will pay the difference to the buyer.
The MOIT has prepared several draft legislative instruments since 2020 on the DPPA pilot program, the two most recent being the draft MOIT circular of May 2021 (second draft circular)3 and October 2021 Report (Report No. 94).4 Together with the recently released May 2022 draft decision, these background documents provide an overview of the likely structure and terms of the DPPA pilot program.
No specific launch date for the DPPA pilot program has been confirmed by the Prime Minister, although based on the latest MOIT guidelines, it is now expected to start in the first quarter of 2023, with the final MOIT draft to be submitted to the approval by the Prime Minister in the 4th quarter of 2022.
Relevant changes under the draft decision of May 2022 (compared to the second draft circular and report n° 94)
- Removal of the requirement for the purchaser to commit to purchase at least 80% of the total power that it would otherwise have purchased from EVN in a given year
Under the second draft circular, buyers could only participate in the DPPA pilot program if they committed to buy from the producer at least 80% of the total electricity that they would otherwise have bought from EVN during a given year. Report No. 94 did not contain this requirement, and as such it also continued to be omitted from the May 2022 Draft Decision, providing buyers with greater flexibility on initial purchase commitments.
- Removal of the obligation for the producer and the buyer to each provide a bank guarantee as part of the virtual CfD/PPA
The second draft circular described, in limited detail, the key conditions to be included in the virtual CfD/PPA between the producer and the buyer, including the obligation to provide a bank guarantee guaranteeing the obligations to complete the construction of the power plant (for the producer) and the securing of payment obligations (for the buyer). This is no longer a requirement in the May 2022 draft decision, again providing greater flexibility in how parties handle financial structuring considerations.
- Removed the requirement that the duration of the virtual CfD/PPA be between 10 and 20 years
The second draft circular previously required that the duration of the virtual CfD/PPA be between 10 and 20 years from the date of commercial operation (COD) of the plant. This requirement no longer appears in the May 2022 draft decision.
- Participation Requirements – Generators
The May 2022 draft decision provides further details on participation requirements for producers. It now specifies that eligible generators include wind and solar power plants that:
- have reached the COD but have not done so before the expiry of the feed-in tariffs for wind and solar (1 November 2021); Where
- are currently under construction and included in the current power development plan and are able to achieve COD within 270 working days of the start of the DPPA pilot program.
Participating generators must also now demonstrate that their power plant capacity/output will not be adversely affected by grid constraints at the time of COD. This will naturally have an impact on the initial selection of the project site as some regions currently face greater network congestion than others, particularly in the central and south-central regions of the country.
- Pilot project capacity – 1000 MW
The May 2022 draft decision suggests that when the DPPA pilot program receives applications for a total capacity greater than 1,000 MW, the applications will be assessed based on the total volume of electricity purchased by each buyer. This appears to replace the previous minimum purchase participation threshold of 80% imposed on buyers, thereby indirectly encouraging buyers to commit to larger initial volumes.
The introduction of the DPPA pilot program is an important step on Vietnam’s path to a liberalized wholesale and retail electricity market.
Direct PPAs also play a broader role in their ability to help developing markets such as Vietnam in their transition to a decarbonized economy, by increasing the deployment of renewable energy assets while enabling commercial enterprises to better pursue their sustainable development goals.
Although the draft pilot program does not provide for the direct sale of physical electricity from a private producer to a private buyer (since physical sales must still be routed through EVN), it nevertheless introduces more sophisticated contractual and financial structures through to the use of CfDs that have been successful in foreign markets, thereby serving to generate wider interest from international players in the energy sector.
Vietnam has seen rapid deployment of solar (18 GW) and wind (4 GW) assets over the past three years, which has now resulted in significant issues related to grid congestion and shrinkage, requiring upgrades. wholesale upgrade of Vietnam’s transmission infrastructure. This is why the DPPA regime is limited to an overall capacity of only 1,000 MW.
The draft PDP8 acknowledges Vietnam’s current network overload and curtailment issues, with MOIT committing to build 86 GVA of additional capacity for 500 kV stations and nearly 13,000 km of transmission lines, requiring up to 32 billion dollars of investment until 2030.
Recent amendments to the Electricity Act which came into force in March this year suggest that investors in power projects are now allowed to build, own and operate transmission assets, which is a significant departure from the previous position according to which EVN holds a complete monopoly on the transmission, distribution and storage of electricity. However, at this stage it is still unclear how the changes will be applied in practice and market participants are eagerly awaiting the introduction of new clarifying guidelines.
If developers are allowed to finance, build and operate transmission lines, it could accelerate the upgrade of Vietnam’s grid system and alleviate existing overload and curtailment issues, opening the door for further expansion of the DPPA program. beyond the current cap of 1,000 MW.
Private sector participation in power transmission can also pave the way for generators to sell physical power directly to buyers when DPPA contracts are introduced to the market on a permanent basis after the conclusion of the pilot project in 2025. As mentioned above, this is currently not permitted under the DPPA regime which requires the transmission of all physical electricity to be routed through EVN.
Please refer to our previous Vietnam Energy Market Update February 2022 for a more detailed analysis of the DPPA pilot program offered here.
1 MOIT, Draft decision on the pilot mechanism for the direct sale-purchase of electricity between entities producing electricity from renewable energies and major electricity consumers, 20 May 2022.
2 Retail and wholesale electricity spot prices are periodically adjusted by EVN and published on the EVN website in accordance with Decision No. 24/2017/QD-TTg of June 30, 2017 and Decision No. 28/2014/QD-TTg of April 07, 2014.
3 MOIT, second draft circular providing regulations on the implementation of the pilot direct purchase of electricity between renewable energy producers (GENCO) and consumers, May 2021.
4 MOIT, report no. 94/BC-BCT, 29 October 2021.