In brief

Following the Prime Minister's issuance of new Decision No. 131 on the new FiTs for solar power, the Ministry of Industry and Trade of Vietnam (MOIT) released the first draft of a new Circular ("Draft New Circular")2 replacing current Circular No. 16 and providing for detailed guidelines on the development of solarpower projects in Vietnam. The Draft New Circular includes revised draft templates for solar power purchase agreements ("Draft New PPA"): one for grid-connected solar farms and another for grid-connected rooftop solarsystems. However, compared to the current solar PPA templates, the Draft New Circular makes some minor updates and clarifications. However, this still leaves certain key risk allocation issues unresolved, which may have an impact on the bankability of solar farms and rooftop solar systems.

Please note that the proposed amendments under the Draft New Circular are still in draft form. Members of the private sector can recommend further improvements, revisions and supplementations to the Draft New Circular and its model PPAs.

If you would like to discuss the potential impacts of the Draft New Circular to your specific project, necessary steps going forward, as well as opportunities for investment in solar or other renewable power projects in Vietnam, please do not hesitate to contact us.

In more detail

The Draft New Circular basically inherits the same rooftop solar PPA template for selling power to EVN's grids, as currently provided under Circular No. 05/2019/TT-BCT dated 11 March 2019 of the MOIT.

We set out below the proposed amendments and key issues of the model PPA for solar farms.

Offtake obligation and curtailment by the purchaser

Under the Draft New PPA, the MOIT proposes to remove the general but important offtake obligation of Vietnam Electricity (EVN), as the State-owned utility and power purchaser, to purchase the entire power output generated from solar power projects. In this respect, under the new Decision No. 13 ,Article 4.1, EVN as power purchaser is responsible for purchasing the entire power output generated from grid-connected solar power projects in accordance with the regulations on operating the national power systems and power industry technical regulations and standards, and to prioritize load dispatch to exploit the entire capacity of and generate power output from solar power projects. As such, the proposed removal of the Draft New PPA may not only be inconsistent with the new Decision No. 13 but also creates contractual uncertainties from a power developer/seller's perspective, noting curtailment risks and limited transmission capacity.

Similar to the current solar PPA, the Draft New PPA provides that EVN as the purchaser has the right to curtail in certain circumstances, some of which are beyond the reasonable control of the power seller/developer, without clear risk allocations and references to specific compensation or payments to the seller/project developer.

Specifically, the New Draft PPA specifies that EVN as power purchaser is not obligated to purchase or take power in, among others, any of the following scenarios:

  • The power purchaser installs equipment, or it repairs, replaces, inspects or examines power grids directly related to interconnections to the power seller's power plant.

  • The power purchaser's grid systems connected to power grids at the connection point suffer a breakdown/ incident.

  • The power purchaser’s power grid needs support to recover from a breakdown/incident in accordance with the regulations on operating the national power systems and the power industry technical standards and regulations.

As in the current PPA, the Draft New PPA obligates the power purchaser to make payments to the power seller only for electricity output that the power purchaser has received. There is no concept of deemed commissioning or deemed power to allow for certain compensation payments if the power plant facility or a section of it is ready/available but EVN fails or delays to construct relevant grids for connections or is otherwise unable to take in all power output produced.

Compensation upon termination of the PPA

Under the Draft New PPA, if the power purchaser's default results in the power seller's termination of the PPA, the termination payment amount will be limited to the value of the power seller's actual generated electricity output during the past one year until the time of the termination of the PPA.  This creates risk allocation concerns from a power seller's perspective that such limited termination payment may not be able to cover the power seller's investment costs, outstanding debts, as well as expected return on equity capital. This provision may cause concerns over EVN's limited liability upon early termination of PPA, especially in the early years of the 20-year PPA term, as well as over any risks of delayed energy payments or default of other PPA terms by EVN.

The Draft New PPA provides that upon termination of the PPA, the non-defaulting party can make a claim to the defaulting party for compensation of direct and actual damages. The non-defaulting party must prove any such damages caused by the defaulting party and any direct benefits that the non-defaulting party would have been entitled to in cases where there is no such default by the defaulting party. However, due to the lack of predictability in determining termination payments for compensations, protections for investment costs, and outstanding debts of the power seller/project company, this clause still leaves risk allocation concerns as to the level and amount of risks lenders and sponsors will assume, given the current developing status of the renewables market.

On a related note, last year, the model PPA for wind power under Circular No. 02 removed the provision on EVN's limited liability. For solar power, however, the Draft New PPA has yet to make a similar removal compared to the current solar PPA of Circular No. 16.

Consequences of force majeure events

Under the previous model PPA, taking the required measures following the occurrence of a force majeure event, shall exempt the defaulting party from liability relating to failure to discharge its obligations under the PPA.

The Draft New Circular's revised model PPA clarifies that such exemption from liability will not include "liability in relation to payment of amounts due under the PPA before the point of time when such event of force majeure occurs."  This clarification hopes to partially reduce the risk of the power purchaser making a force majeure claim to delay energy payments.

In addition, if a force majeure event is prolonged, the Draft New Circular's revised model PPA adds a requirement that the parties shall meet and use reasonable efforts to find and agree on appropriate and reasonable solutions through good-faith negotiation. This requirement hopes to partially reduce the risk of unilateral termination of the PPA by either party due to force majeure events.

However, the Draft New Circular remains silent as to payment compensation protection for the seller in force majeure circumstances. There is also no distinction between political force majeure and natural force majeure for this purpose.

Dispute Resolution

The Draft New PPA keeps the provisions on dispute resolution unchanged, similar to the current solar PPA.

Specifically, the Draft New PPA details the procedure for resolving disputes over the PPA as follows:

  • In case of a dispute between the parties to the PPA, the party who raises a dispute must notify the other party in writing of the dispute and its demands.

  • The parties will negotiate to settle the dispute within 60 days from the date of receipt of the notice of the party who raises the dispute.

  • The dispute resolution process related to the settlement of energy payments shall be conducted within 15 days from the date of receipt of a notice of the claiming party.

  • If the parties fail to reach an agreement, the parties may send a request to the competent State authorities for support in the parties' dispute resolution process.

  • If the parties still fail to reach an agreement after the mediation by the competent State authorities, then the dispute shall be resolved in accordance with the procedure of Circular No. 40/2010/TT-BCT dated 13 December 2010 of the MOIT.

In addition to the resolution of disputes by the above mechanisms through the State agencies, the Draft PPA adds another option, namely "another dispute resolution body to be agreed by the parties". However, this wording in the PPA may allow EVN to refuse any negotiation for other forums for dispute resolution. In practice, certain limited developers can manage to negotiate with EVN to mention onshore/local arbitration, e.g., Vietnam International Arbitration Centre, on a case-by-case basis.

However, the Draft PPA does not provide for offshore/foreign/international arbitration, making it difficult for foreign-invested investors to negotiate it for larger-scale renewables projects.

Other key issues under the Draft PPA

The Draft New Circular's revised model PPA proposes other revisions to metering equipment and procedures, invoicing and payment timeline extensions in favor of EVN, late payment interest, operational requirements, and outages to make them more aligned with the actually executed PPAs currently applied by EVN.

However, the Draft Circular remains silent on certain support policies that investors may expect; nor does it address certain key issues in the Draft New PPA, including:

  • Though the tariff is converted to USD based on the current exchange rate under new Decision No. 13, the Draft PPA does not include any indexation of the FiT by way of escalation in accordance with the Consumer Price Index (CPI) or any other provision to address inflation risks.

  • No provision addresses the risk of changes in law and/or tax, in the form of supplemental tariffs or otherwise, after the date of the PPA in such a way as to diminish the economic returns of the transaction for the seller.

  • There is no provision for any form of government guarantee, assurance or support to enhance the creditworthiness of EVN as the sole off-taker/purchaser.

Although a number of issues exist, the MOIT continues to propose this Draft New PPA as a non-negotiable template. Specifically, the Draft New Circular imposes the compulsory application of this PPA template to all grid-connected solar PPAs. It only allows the parties to the PPA to supplement the PPA to clarify the rights and obligations of the parties, but not to change the basic contents of the PPA template. In addition, compared to the current regulations, the Draft New Circular adds that any such supplemental contents must be consistent with the contents of the model PPA.

Requirements for the development of solar power projects

The Draft New Circular provides for, among other things, the following requirements for solar power projects:

  • The ratio of the area of land and water surface used for a specific term must not exceed 1.2 ha per MWp. For this purpose, the Draft New Circular defines "the area of land and water surface used for a specific term" of a grid-connected solar farm as the total area for constructing facilities such as power plants and substations, excluding power transmission lines and access roads to power plants.

  • The equity capital ratio of grid-connected solar farms may not be lower than 20% of the total investment capital.

    by Frederick Burke,Chi Lieu Dang,Thanh Hai Nguyen