The government of Vietnam has issued the long-awaited Decree No. 80/2024/ND-CP (Decree 80) on corporate power purchase agreements, which entered into force on July 3 2024. In this article, our lawyers examine the legal implications of these significant developments for renewable energy projects in Vietnam. By Pham Ba Linh, managing partner and head of energy, project finance and infrastructure, Lexcomm Vietnam LLC
Corporate PPAs have significant potential for growth in Vietnam. Discussions about the introduction of corporate PPAs in Vietnam have been very much on the agenda over the past years following the termination of favourable feed-in tariff programmes previously afforded to investors.
Decree 80 is landmark legislation with an overarching aim to create a legal framework to foster corporate PPAs that enable eligible large corporate offtakers to purchase power from a renewable energy generator (RE Genco) in Vietnam. This is in line with the government’s concerted efforts to accelerate the green energy transition towards its COP26 commitments to achieve net-zero carbon emissions by 2050.
Contract structures
Decree 80 introduces two types of contract structures for corporate PPAs in Vietnam: i) physical PPA, off-grid/private wire and ii) synthetic PPA, grid-connected.
* Physical PPA – In a physical PPA structure, a RE Genco will sell power directly to a corporate offtaker through a private wire behind the meter under the terms of a PPA, with the tariff to be agreed upon by the parties. With a physical PPA, a physical connection is required, and there is physical delivery of electricity from RE Genco to the corporate offtaker.
Figure 1
* Synthetic PPA – A synthetic PPA structure through the national grid involves the following contracts:
a) A RE Genco sells power to Vietnam Electricity (EVN) (EPTC/NLDC) in the Vietnam wholesale electricity market (VWEM) at the spot market price which is determined in accordance with VWEM regulations under the terms of a power purchase agreement (VWEM PPA);
b) A corporate offtaker purchases power from a local power corporation being a subsidiary of EVN (or an authorised power retailer) under the terms of a power purchase agreement (Retail PPA); and
c) RE Genco and the corporate offtaker enter into a forward contract (or contract for difference) under which the parties agree to hedge price fluctuations against an agreed strike price for a contracted electricity quantity.
With a synthetic PPA, there is no physical delivery of electricity from RE Genco to the corporate offtaker.
Figure 2
Decree 80 sets out eligible types of renewable energy sources in a physical PPA structure, including: solar, wind, small hydropower, biomass, geothermal energy, wave power, tidal, ocean current, and other forms of renewable energy sources; and rooftop solar systems.
In a synthetic PPA structure, solar and wind sources only are available for corporate PPAs.
Market participants
A physical PPA structure is straightforward with market participants being RE Genco and eligible large corporate offtakers with required consumption of a minimum of 200,000kWh of electricity per month.
Meanwhile, a synthetic PPA structure may involve multiple market participants, including: RE Gencos of solar and wind projects with a minimum installed capacity of 10MW; eligible large corporate offtakers; EVN; EVN power corporations EVN PCs; electricity system and market operation units (NSMO); electricity transmission units; and authorised electricity retailers.
Sale of excess power to EVN
In a physical PPA structure, in addition to a contracted quantity of power sold to corporate offtakers in corporate PPAs, RE Genco may sell excess power to EVN. Such sale of excess power to EVN is subject to negotiation of the parties over tariff and other contractual terms of a separate PPA.
Spot market price in the VWEM PPA
Decree 80 provides that the spot market price in VWEM PPA is the full market price formed by each trading cycle of the spot electricity market, which comprises separate capacity and energy components.
However, there is a lack of clarity in VWEM regulations issued by the Ministry of Industry & Trade of Vietnam on how capacity charge and energy charge are determined.
Power price in the retail PPA
Decree 80 sets out two possible scenarios on the power price to be paid by a corporate offtaker to EVN PCs in the retail PPA:
* If RE Genco supplies more power to EVN under VWEM PPA than corporate offtaker’s consumption in the same trading cycle, the power price in the retail PPA covers the pass-through of the spot market price, other costs for transmission, distribution, retail, and other services, and clearing costs; and
* If RE Genco supplies less power to EVN under VWEM PPA than corporate offtaker’s consumption in the same trading cycle, the power price in the retail PPA covers the pass-through of the spot market price, other costs for transmission, distribution, retail, and other services, and clearing costs for the same amount of power sold by RE Genco to EVN, and the retail price does apply for the shortfall of supplies.
Strike price in the contract for difference
In the contract for difference, the parties agree that:
* RE Genco, as seller in the VWEM PPA, agrees to pay the corporate offtaker (as purchaser in the retail PPA) the difference when the spot market price is above the agreed strike price; and
* Corporate offtaker, as purchaser in the retail PPA, agrees to pay RE Genco (as seller in the VWEM PPA) the difference when the spot market price is below the agreed strike price.
Regulatory approval process for participation
Decree 80 sets out the steps to be taken for participation in corporate PPAs.
Physical PPAs
Step 1 - RE Genco conducts procedures on master planning, investment, construction, and power operation licence for projects, works, and grids;
Step 2 - RE Genco and corporate offtaker negotiate, agree, and sign a physical PPA; and
Step 3 - Corporate offtaker submits to local people’s committee a written report on the execution of a physical PPA with RE Genco and gives notice to EVN PC.
Synthetic PPAs
Step 1 - Corporate offtaker submits written request to NSMO for participation in corporate PPAs;
Step 2 - NSMO sends the dossier to EVN PC as seller in the retail PPA;
Step 3 - NSMO requests EVN as purchaser in a VWEM PPA to confirm the execution of a VWEM PPA with RE Genco;
Step 4 - EVN PC confirms corporate offtaker’s request;
Step 5 - EVN confirms the execution of a VWEM PPA with RE Genco;
Step 6 - NSMO confirms to corporate offtaker the participation of corporate PPAs;
Step 7 - the relevant parties execute VWEM PPA, retail PPA, and the contract for difference;
Step 8 - RE Genco and corporate offtaker confirm to NSMO on satisfaction of conditions for participation in corporate PPAs; and
Step 9 - NSMO reviews the documents and notifies relevant parties of the official date of participation in corporate PPA.
Next steps
Looking forward, Decree 80 provides significant investment opportunities for RE Gencos and corporate offtakers in respect of both physical and synthetic PPA structures. Especially notable was the growing significance of synthetic PPA structure, and we expect this trend to continue to grow in popularity.
However, clarity must be sought from competent Vietnamese authorities on certain key policy issues, including: determination of the spot market price to be paid by EVN as purchaser in the VWEM PPA; determination of the power price to be paid by corporate offtakers as purchaser in the retail PPA, including clarifications on wheeling charges and other associated costs to be passed through by EVN to corporate offtakers; and alignment with PDP8’s approved power master planning for solar and wind power projects, including clarifications on allocation of installed capacity in PDP8 for solar and wind power projects that apply to corporate PPAs.
Also, while commercial lenders may be willing to provide financing for corporate PPAs where corporate offtakers are creditworthy, it remains to be seen if RE Gencos and corporate offtakers may negotiate and achieve robust bankable terms of the VWEM PPA and the retail PPA with the counterparty being EVN, as purchaser in the VWEM PPA, and EVN PCs, as seller in the retail PPA, respectively.
To see the digital version of this report, please click here.
To purchase printed copies or a PDF of this report, please email leonie.welss@lseg.com
