In the newly issued Power Development Plan VIII (PDP VIII), the direct power purchase agreement (DPPA) mechanism is said to be implemented on a pilot basis. The DPPA mechanism could offer an alternative for renewable energy projects to sell electric energy. However, PDP VIII stops short of providing broad strokes of what the DPPA mechanism will look like. That said, before the PDP VIII was issued, in 2022, a draft decision of the Prime Minister (Draft Decision) on a pilot scheme (Pilot Scheme) for the DPPA mechanism was circulated for public opinion collection. Such a scheme offers a look into the possible structure of the DPPA mechanism under PDP VIII. In this article, we will discuss the basic structure of the DPPA mechanism and some key points in a DPPA.
Under the Pilot Scheme, the DPPA mechanism is financial/synthetic DPPA and works as follows:
1. the renewable energy generator will enter into a DPPA in the form of a forward contract (hợp đồng kỳ hạn) with a customer, under which the customer will guarantee a fixed price for the energy produced by the renewable energy project (see 3) and in return, the generator will transfer the “environmental attributes” created by the project to the customer;
2. though the name DPPA suggests there is a sale of electric energy between the generator and the customer, under the DPPA mechanism, the generator won’t physically deliver electric energy to the customer; that is why it is called financial/synthetic DPPA. Instead, the generator will sell all of the generated electric energy to EVN in the wholesale electricity market under a template power purchase agreement provided in the Draft Decision. The power companies of EVN will then sell electric energy to the customer at retail prices. Such electric energy may not necessarily come from the project; and
3. if the price that the generator sells its energy in the wholesale electricity market (Floating Price) is lower than the fixed price, the customer will pay the generator the shortfall. If the Floating Price is higher than the fixed price, the generator will pay the generator the excess.
Regarding the DPPA between the generator and the customer, the Draft Decision requires basic building blocks to be included in such an agreement. Thus, the generator and the customer will have a lot of room to design the contractual relationship between them. What to contemplate in the DPPA may vary depending on the specific renewable project, but here are some of the key points that both the generator and the customer may consider when entering into a DPPA are:
1) The subject matter of the DPPA – As mentioned, under a financial/synthetic DPPA, there will be no physical delivery of electric energy and no transfer of title to electric energy from the generator to the customer. The focus will be the transfer of the environmental attributes from the generator to the customer in exchange for the guarantee of a fixed price for the energy produced by the generator. However, Vietnamese law is not clear whether “environmental attributes” could be considered as property which is capable of being transferred under a contract.
2) Term of the DPPA - the generator and the seller will have to consider how long the DPPA will last. The DPPA could last for the entire economic life of the plant, which could range from 10 to 20 years.
3) Project development - where the DPPA is negotiated and concluded before the construction of the renewable energy project, the DPPA may deal with the following points:
a) the deadline for the commercial operation of the project (the Commercial Operation Deadline) and the remedy available to the customer if the commercial operation is not achieved by the target Commercial Operation Deadline;
b) where Commercial Operation Deadline is missed, the date on which if the project is still delayed (the Long Stop Date), the customer is entitled to terminate the DPPA;
c) the remedy available to the customer if the commercial operation is achieved, but the actual capacity of the plant is lower than the capacity;
d) the extension of the Commercial Operation Deadline and the Long Stop Date due to things that are not within the control of the generator.
4) Transfer of environmental attributes - how, when, and in what amount the environmental attributes will be transferred from the generator and the customer?
5) Settlement - what is the fixed price for a unit of energy produced by the generator? And what is the formula to calculate the settlement amount that one party may pay to the other? In the simplest form, such a formula might look like the following: in respect of a settlement period, the settlement amount equals to the product of (X) (i) the fixed price minus (ii) the price that the EVN pays the seller for the energy delivered to EVN during such period and (Y) the amount of energy that the seller delivers to EVN during such period.
6) Availability commitment – the remedy available to the customer if the availability of the plant is less than the guaranteed availability;
7) The allocation of risks in case of changes in law.