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Unlocking international finance for Vietnam’s renewable energy transition

To meet its goal of net-zero emissions by 2050, Viet Nam needs to massively increase its renewable energy capacity, particularly solar and wind. This will require substantial investment: the most recent iteration of Vietnam’s Power Development Plan 8 (PDP8) estimates an annual financing need of over $11 billion, much of which will be allocated for renewables. To date, almost all investment in Vietnam’s renewable generation has come from domestic and regional sources. Maintaining the rapid expansion of renewables, however, depends on Vietnam’s ability to unlock international investment.

(Photo: a wind power plant of Tai Tam group)

Viet Nam has done an impressive job tapping into local private investment to rapidly scale up solar from almost nothing in 2017 to more than 16,000 MW in 2022, far exceeding government targets. While it's not yet clear exactly how much solar and wind are included in in the final PDP8, they are clearly set to rise.

The question is how to pay for the large new amounts of renewable energy needed to achieve next-zero emissions by 2050. Most renewable energy projects in Viet Nam have been developed by domestic companies. Data from the Mekong Infrastructure Tracker shows that 58% of renewable energy projects in Viet Nam were developed entirely by Vietnamese companies. Another 27% were developed by a Vietnamese company with an international partner. Only 12% (or 13 projects) were developed without a Vietnamese project partner.

Mekong Infrastructure Tracker data suggest most of the foreign companies sponsoring renewable energy projects in Vietnam come from other countries in Asia, notably Thailand, Japan, and the Philippines. China is largely absent as a project developer or financier in Vietnam, although its companies are heavily involved in neighboring Cambodia and Lao PDR.

Infographic showing nationality of companies involved in Vietnam’s RE projects:

The problem is that Vietnamese banks and developers don’t have the financial capacity to meet future investment needs. Achieving net-zero can only be achieved if Vietnam mobilizes international funding. This requires reforms in investment policy. To unlock international support Vietnam needs to address the following regulatory obstacles:

  • Unbankable Power Purchase Agreement (PPA) terms. Since 2017, Viet Nam has offered a competitive Feed-in Tariff (FIT) for solar energy projects but Electricity Viet Nam (EVN)’s standard PPA for solar projects allocates too much risk to project developers. EVN can curtail purchases at any moment for an indefinite period of time. The lack of a purchase guarantee is out of line with global best practice and makes the risk profile unpalatable to many international investors. Vietnamese companies have been able to reduce the risk by engaging key political stakeholders in ways that international companies cannot.

  • Uncertainty over prices. Vietnam’s 2017 FIT provided a guaranteed price for projects that came online within a specific time frame. But there were two issues: the FIT was adjusted numerous times, often giving developers too little time to qualify for the new FIT, and there were sometimes long gaps without an official FIT. While periodic FIT revisions are understandable given how rapidly Vietnam’s solar market developed, uncertainty over which FIT would apply when a project comes online is a major risk.

  • Cumbersome permitting procedures. Registering a new project involves numerous departments from initial project approval to integration into the provincial level plans to land permitting, and so on. The process can be difficult to navigate for international investors without local connections.

  • Direct PPAs between private sellers and buyers have been slow to materialise. In 2020, government clarified rooftop solar policies, allowing companies to invest in solar to cut costs and help meet corporate emissions targets. This was an important first step. But rooftop solar alone is insufficient to meet long-term carbon reduction targets, and many companies want to purchase renewable energy directly from outside producers. Despite MOIT announcing plans for a pilot direct PPA scheme in 2019, movement has been slow.

Viet Nam has taken steps to address these issues: in January 2022 the National Assembly adopted Law No. 3 which gives private companies the right to invest in and operate electricity transmission lines. This should alleviate some of the uncertainty and risk involved in connecting renewable energy to the transmission network. The Ministry of Industry and Trade has announced a 2-year pilot direct PPA scheme starting in 2022.

(Photo: solar power factory in Vietnam)

But more needs to be done. The top priority is for the government to issue a revised PPA that is attractive to international investments. There is also a need to ensure that future permitting and pricing policies are transparent, clear, and include longer time horizons to avoid uncertainty.

As electricity demand continues to rise, direct PPAs could play a key role in decarbonizing Vietnam’s industrial sector. Industry is a major emitter of greenhouse gases and many international companies want to green their supply chains and meet their carbon emissions targets, which are often more ambitious than Vietnam’s official targets. Direct PPAs will incentivize these companies to invest in their own renewable energy generation and at the same time reduce demand on the national grid.

This is an important moment for Viet Nam to adopt regulations to attract much greater international financing. The Biden Administration’s Indo-Pacific Strategy prioritizes clean energy, but the U.S. Development Finance Corporation has yet to identify a flagship renewable energy project in Southeast Asia. Post-COP26, the Japan Bank for International Cooperation announced a decarbonization initiative for emerging economies in Southeast Asia as it works toward a net-zero emissions portfolio. Even China, historically a big funder of coal plants, issued guidelines in March 2022 on greening the Belt and Road Initiative by supporting low-carbon projects including renewables and energy storage. If it gets its regulations right, Viet Nam can unlock substantial new funding to power its renewable energy transition.


Bankability Concerns for PPAs

No "take or pay" obligation

Electricity Vietnam (EVN) is currently the only offtaker for electricity generated by power producers in Vietnam. The PPA terms currently do not require EVN to purchase electricity, and so if for any reason EVN is unable to take power--for instance, if they curtail production due to grid overload or are unable to take electricity due to grid maintenance--then the project developer has no alternative market available. A "take or pay" clause is common practice elsewhere and ensures that the offtaker or purchaser of electricity will pay something, even if they are not making use of the electricity--but the solar PPA does not include a "take or pay" clause. This places risk on the project developer.

No sovereign guarantee for EVN

EVN has historically run into cost-recovery and cash flow issues, due to the necessity of providing affordable electricity to consumers while also managing grid maintenance and investing in new power generation and transmission projects to meet rapidly rising demand. While EVN has since 2021 has achieved a positive credit rating, EVN has in previous years incurred significant financial losses and its creditworthiness has been an issue. The PPA does not provide a government guarantee for EVN's obligations to purchase electricity, meaning that if EVN defaults for any reason, the government of Vietnam does not guarantee that a project developer will get paid for their electricity. This places risk on the project developer.

Limited repayment in the event PPAs are terminated

In the event that EVN terminates the Power Purchase Agreement, the law has previously limited EVN's compensation obligations to the value of electricity generated during the previous year which is a relatively limited amount when compared against the potential debt that developers took on. This could be problematic if a PPA is terminated only a few years after the project becomes operational. A 2019 update does provide some restitution and expectancy damages, but the burden of proof of losses is on the project developer. The law specifically notes that in the instance of force majeure--a legal term for a situation where unforeseeable circumstances prevent one side from fulfilling a contract--that either side does have some relief, but it notes that acts of government are not expressly included as force majeure. This means that if EVN is unable to pay due to any force majeure event, there is limited recourse for project developers.

Developer responsibility for transmission costs

The PPA required developers to be responsible for the cost of connecting a new renewable energy project to the national grid. This involves not only additional investment in transmission infrastructure but also the necessary permitting and grid connection agreements. This incurs costs to the developer.

Inflation or exchange risks

The PPA did not index pricing of the feed-in-tariff to anything like the Consumer Price Index, which potentially leaves inflation risks. A 2019 update to the PPA terms did include adjustments for the VND/USD exchange rate on the date of invoice.

Government-led dispute resolution process

In the event of any disputes over the PPA, the Renewable Energy Department under the Ministry of Industry and Trade will handle dispute resolution. if the dispute is not solved, then the resolution would be shifted to the Electricity Regulatory Authority of Vietnam and then Vietnamese courts. This government-managed dispute resolution could be perceived as partial given that EVN is also a government body. Some solar PPAs have included alternative options, and so this

(Table contents are summarized from discussions with private sector stakeholders and also draw on commentary by legal experts)



Contact us if you are seeking for renewable energy projects (Solar / Wind / Hydro) in Vietnam:

SaoKhue Investment & Trade Promotion Corp



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