As renewables markets mature, renewables investors are looking to new markets for their next source of growth.
In this series of e-briefings, we summarise the opportunities and risks for international investors in the developing renewables markets of South East Asia. The renewables sector in South East Asia is nascent (with some notable exceptions). However, the commitments made by Asian countries at COP 21 indicate that renewables enjoys broad support throughout the region.
Together with Vision & Associates and our other partners, we are pleased to outline for you some of the key issues involved in developing a renewables project in Vietnam.
1. Market Readiness
Historically, hydropower has been a major part of Vietnam’s power mix, although Vietnam also has excellent wind and solar potential - Vietnam has one of the world’s highest annual hours of sunshine.
Vietnam’s solar and wind sectors remain under-developed and conventional power, together with hydro, is expected to remain important in the short-medium term. The solar and wind sectors remain underdeveloped because no FIT is currently available for solar and, although a FIT is available for wind, it is low by regional standards. We understand that the Ministry of Industry and Trade (MOIT) has proposed a new FIT for solar PV projects, which may incentivise new investment in the sector.
1.2 Statutory Framework
Although Vietnam does not have any standalone renewables legislation, Vietnam has adopted environmental protection legislation and accompanying regulations which will be relevant for renewables developers. These include the following:
- Environment Protection Law 2014, which contains general environmental protection measures
- law on Economical and Efficient Use of Energy 2010, which contains measures to promote the economic and efficient use of energy
- Power Law 2004 (as amended in 2012), which regulates all activities relating to the power industry, including as to generation, transmission and distribution. The Power Law outlines the permits and approvals required (including for project development and power operation licenses), as well as requirements for the power price tariff, connection and the PPA
- Decision No. 428/QD TTg, dated 18 March 2016, approving changes to the National Power Master Plan.
- Decision No. 2068/QD-TTg, dated 25 November 2015, of the Prime Minister, approving the renewable energy development strategy of Vietnam by 2030 with an outlook to 2050 (known as the “National Renewable Energy Development Strategy”)
- Decision No.1208/QD-TTg, dated 21 July 2011, of the Prime Minister, approving the Master Plan for National Electricity Power Development (known as the “National Power Master Plan” or “NPMP”) for the period from 2011 to 2020, with an outlook to 2030. The NPMP promotes the development of renewable energy, as well as power market liberalisation more generally
- Decision 1855/QD-TTg, dated 27 December 2007, of the Prime Minister, approving the National Energy Development Strategy of Vietnam up to 2020, with an outlook to 2050 (known as the “National Energy Development Strategy”)
Generally speaking, Vietnam’s current laws and policies are supportive of foreign investment in its renewables sector.
1.3 Targeted Capacities
The total installed capacity of power in Vietnam was around 34.1GW in 2014. According to the March 2016 revisions made to the National Power Master Plan, Vietnam aims to raise its total installed capacity to the following:
- total capacity of hydro (including small scale, medium scale and pumped storage) will be raised from 17 GW to 21.6 GW by 2020, 24.6 GW by 2025 and 27.8 GW by 2030
- total capacity of wind will be raised (significantly) from 140 MW at present to 800 MW by 2020, 2 GW by 2025 and 6GW by 2030.
- total capacity of solar (including ground mounted and rooftop) will be raised (significantly) from its current negligible level to 850 MW by 2020, 4 GW by 2025 and 12 GW by 2030.
1.4 Key Regulators
The key regulators in Vietnam’s power industry are the following:
- Electricity Vietnam (EVN), which is responsible for the transmission and distribution of power, and most of its generation
- Ministry of Industry and Trade (MOIT), which proposes laws, policies and strategies for the Vietnamese power market
- Ministry of Finance, which is responsible for all tariffs
- Ministry of Natural Resources and Environment, which develops energy and environmental protection policies
EVN has a monopoly in power transmission and distribution and is currently the sole purchaser of power in Vietnam. EVN is responsible for all grid connections and upgrades to the grid, although it is not clear whether Vietnam’s grid is in a state that can accommodate significant levels of new sources of intermittent power. Vietnam experiences frequent power shortages and blackouts.
A grid connection is required before EVN will enter into a PPA. The connection point must be agreed between the project developer and EVN, and located at a point which is permitted by provincial planning requirements.
EVN purchases all power from renewables projects.
A Feed-in-Tariff (FIT) is currently available for wind and waste-to-energy projects only, although we understand that MOIT has proposed a new FIT for solar PV projects. All FIT payments are made from the Vietnam Environment Protection Fund, are payable in Vietnamese Dong (VND) and are currently set at:
- the VND equivalent of 7.8 US cents/kWh for wind; and
- the VND equivalent of 10.05 US cents/kWh for solid waste-to-energy.
Other renewables projects may be eligible for a tariff on an “avoided cost” basis.
Vietnam has signalled that it intends to adopt a FiT regime for solar PV. However, the formal regulations have not yet been released by the Government.
The solar FiT rate was expected to be released in June 2016 but that has not yet occurred. The reason for the delay is unclear. However, we understand that the relevant regulation has been submitted to the Prime Minister for signature and market participants are expecting the rate to be released shortly.
It is not clear what revised FiT rate has been submitted for signature. We understand from recent reports that the rates will likely be:
- non-rooftop solar – approximately 0.112 USD/kWh
- rooftop solar – between 0.167 USD/kWh and 0.180 USD/kWh
In any event, once the FiT rates have been adopted into law, EVN will be required to purchase the entire capacity from grid-connected solar projects.
International participants in Vietnamese projects will also be interested in whether the Government intends to address Dong/US$ convertibility issues in its latest proposals. We understand that some periodic adjustment between the Dong and the US$ is likely in the new regulation.
1.7 Other support mechanisms
Various incentives may be available to renewables developers including: capital and tax incentives, import tax exemptions, corporate income tax exemptions and certain exemptions from land levies. The current incentives for solar PV projects may be increased if the MOIT’s proposal referred to above is adopted in Vietnam.
1.8 Power Purchase Agreements
Power Purchase Agreements (PPAs) may only be entered into with EVN. PPA payments are made in VND and Vietnamese law will apply. A PPA may be subject to arbitration, including foreign arbitration (Vietnam is a signatory to the New York Convention) or the Vietnamese courts.
The Vietnamese Government has historically guaranteed EVN’s obligations under certain PPAs.
Contractual rights under a PPA are assignable to project lenders.
2. Project Considerations
2.1 Content Requirements
There are no local content requirements in the Vietnamese power sector, although in practice, provincial requirements may differ.
2.2 Land Requirements
In Vietnam, all land is owned by the State and a project company may be granted a land-use right only. Foreign investors may obtain land-use rights (typically through a lease or sub-lease) and those rights may be transferred, leased, subleased, donated or mortgaged. However, there may be restrictions on foreign lenders taking security over land in Vietnam.
2.3 Consents and Permits
A variety of consents and permits are required by a foreign renewables investor. The principal consents required are the following:
- EVN consent
- investment registration certificate
- agreement with EVN as to the connection point and metering design
- PPA with EVN
- approval of Environmental Impact Assessment Report
- land lease
- construction permits
- power operation permit
Renewables developers are likely to be subject to a range of taxes in Vietnam, although, as noted earlier, a range of incentive-based concessions are also available. In addition, Vietnam has entered into a number of double taxation agreements and foreign developers should check whether any such agreement applies and reduces their tax exposure in Vietnam.
3. General Investment Considerations
3.1 Foreign Ownership
There are no foreign ownership restrictions on Vietnamese companies. Vietnamese companies can be 100% foreign owned.
3.2 Incorporating Companies
Incorporating a company in Vietnam is a process that typically takes up to 60 days and requires a series of registrations with various Government agencies A project company may be either a limited liability company (LLC) or a joint stock company (JSC). An LLC may be either a single medium LLC or a multi member LLC.
3.3 Selling or Pledging Shares
Generally speaking, shares in a project company may be sold or pledged to a lender, although restrictions apply to the disposal of shares in certain types of companies.
3.4 Availability of Debt Finance
A list of the institutions active in Vietnam’s power sector and the types of borrowings available for renewables developers are set out below:
- renewables developers may be eligible for preferential investment credits from the Vietnam Development Bank, the National Scientific and Technological Development Fund or the Environmental Protection Fund
- official development assistance (known as ODA) may be available from the Vietnam Government
- various foreign banks are active lenders in Vietnam, although all loans with a tenor exceeding 12 months must be registered with the State Bank of Vietnam
- the local banking sector will only lend in VND
3.5 Other Considerations
Foreign developers should be aware of the following legal considerations (and seek appropriate advice):
- Vietnamese law on tendering places restrictions on the participation of foreign bidders in power projects which are subject to Government tender
- foreign shareholders need to comply with certain requirements set out in Vietnam’s forging exchange regulations in order to repatriate dividends from the country
Eversheds would like to thank Vision & Associates, International Finance Corporation, Wind Prospect and Ernst and Young for their contribution towards the e-briefing.