In brief

The Ministry of Industry and Trade of Vietnam (MOIT) recently issued new Circular No. 18 ("Circular No. 18"),1 replacing Circular No. 16 and providing for detailed guidelines on the development of solar power projects in Vietnam. This followed the Prime Minister's Decision No. 132 on the new FiTs for solar power. Circular No. 18 enters into effect on 31 August 2020, and provides new guidelines on the development of grid-connected solar power farms and rooftop solar systems. Moreover, it introduces new forms for power purchase agreements ("New Model PPAs"): one for grid-connected solar farms and another for grid-connected rooftop solar systems, clarifying and updating the earlier templates ("Previous Model PPAs"). While some of the changes made will be seen as positive developments by investors and lenders, a number of critical risk allocation issues and drafting uncertainties remain. The key changes and issues are summarized below.

Next steps

If you would like to discuss the potential impacts of Circular No. 18 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

Part 1: Updated development guidelines

Requirements for the development of solar power projects

Circular No. 18 provides for, among other things, the following requirements updated 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, Circular No. 18 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 basic design application dossier of a solar power project must be in compliance with the current regulations and requirements arising from the following:
    • The location specifications, irradiance potential of the solar project
    • The impact assessment of the interconnection plan on safety and stable operation of the electricity systems in the local area
    • The designs and connection to SCADA systems or dispatch information

Requirements for the development of solar rooftop systems

Circular No. 18 provides for a capacity threshold of 1 MW with an updated registration requirement. Specifically, if the capacity of a solar rooftop system is no larger than 1 MW (i.e., the unit of AC capacity) and 1.25 MWp (i.e., the unit of DC capacity), the solar rooftop system will be exempted from a power generation license requirement.

In addition, Circular No. 18 requires the following procedures for the development of a grid-connected rooftop solar power system, which is relevant to the "in-front-of-the-meter" model in case power developers or consumers sell power to EVN's grid.

  • The power seller must register with the power purchaser (EVN) with regard to certain information, including the installation location, capacity scale, electrical lines, and proposed grid connection point.
  • Within five working days from EVN’s receipt of information, EVN must provide a response on the capability to connect and transmit the registered capacity of the rooftop solar system onto the grid of EVN.
  • The power seller and EVN will then enter into an interconnection agreement, connecting the seller’s rooftop solar system to EVN's grid. In case the rooftop solar power system of the power seller is connected to a grid not being a property of EVN or not a grid of the electricity distributer or retailer, the power seller and EVN will enter into a grid connection agreement with the owner of the relevant power grid. The time limit to enter into such a grid connection agreement is no later than five working days from the date EVN receives an application dossier for power connection and a written approval of connection from the grid owner (if any).
  • The power seller is required to send an application for selling electricity from the rooftop solar power system, including a written request for electricity sale; technical documents on solar PV panels and DC-to-AC inverters; power electrical lines; transformers (if any); manufacturing certificate; and certificate of equipment quality.
  • The parties to the PPA will carry out a technical test, install metering equipment, and execute the PPA within five working days from EVN’s receipt of application for selling electricity.

These steps could be carried out in the above order or in parallel, subject to specific conditions and technical requirements in each rooftop solar system on a project-by-project basis.

Part 2: Model PPA for solar farms

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

Offtake obligation and curtailment by EVN

Under the New Model PPA, the MOIT removed 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 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 removal of the EVN's offtake obligation from the New Model PPA may not only be inconsistent with Decision No. 13 but also creates contractual uncertainties from a power developer/seller's perspective, noting the existing curtailment risks and limited transmission capacity that developers are facing.

In addition, critically for developers and lenders, EVN has rights to curtail plant output in certain circumstances, some of which are beyond the reasonable control of the power seller/developer. Developers will be relying on a commitment from EVN to purchase all (or at least a certain minimum amount) of the electricity that is generated so that they, and their lenders, can be assured of a certain revenue should the plant operate as anticipated.

Specifically, the New Model PPA specifies the following scenarios where EVN's curtailment, without certainty on specific payment of compensation for reduced electricity output, is permitted:

  • Installation of equipment, repair, replacement, inspection or examination by EVN of power grids directly related to interconnections to the power seller's power plant
  • Breakdown to EVN's grid systems connected to power grids at the connection point
  • EVN’s power grid needing support to recover following breakdown

The challenge to developers and their lenders is therefore the uncertainty that the plant may be capable of generating electricity but EVN has no clear obligation to take that electricity or pay for the electricity that would have been delivered but were not by reason of any of the circumstances existing.

Compensation upon termination of the PPA

A compensation payment on termination, commonly referred to as the 'buy out' amount, is the essential commercial means that developers (and their lenders) use to manage the risk that should the PPA be terminated without fault on their part, they will not be left with a stranded asset worth only its 'scrap' value (given that without the PPA, there is no right to sell to another purchaser (assuming one existed)). Although there may be the possibility of transitioning to direct power purchase agreement (DPPA) mechanisms (whether onsite / physical "behind-the-meter DPPA or off-site virtual / financial DPPA) with private power consumers, separate legal issues need to be considered.

In most Asian markets, this compensation amount is determined following complex formulae depending on the nature of the termination event. At the core of the formulae is the fundamental concept that the amount must include, in every termination scenario where such amounts are payable, the total amount owed to project finance lenders. Currently, unlike BOT large-scale conventional projects, for solar or other types of renewables projects, it is difficult for developers and lenders to negotiate with EVN on a project-by-project basis to entirely mitigate the relevant termination risks. Therefore, alternative measures need to be considered to address such risks.

Under the New Model PPA, if the power purchaser's default results in the power seller's termination of the PPA, the termination payment amount will be the damages (i.e., the actual and direct loss) incurred by the power seller accumulated until the “end of contractual term.” However, it is not entirely clear as to whether “end of contractual term” refers to the period of time until the early termination date of the PPA or until the end of the initial 20-year term of the PPA. Each interpretation may lead to different legal implications and have a major difference in terms of termination amount/compensation. For the time being, this still 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 the 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. This was difficult for international lenders to accept given the risk that the amount would not cover their outstanding amounts due under the financing agreements with the seller.

The New Model 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 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 liability limitation (which is equal to the revenue of the preceding year). For solar power, however, the New Model PPA does not remove an analogous provision from the previous solar PPA of Circular No. 16.

This is likely to remain a concern for some, if not most, developers and lenders looking at the solar power sector in Vietnam, on the basis that the burden of proof to demonstrate its losses is with the seller, as well as whether the damages recovered will be sufficient to cover at the very least the amount it owes to its lenders and its investment costs and anticipated returns.

Consequences of force majeure events

Force majeure is a key contractual 'tool' that allows a party to a contract to be excused from performance of its obligations because of the occurrence of an agreed event that is outside the parties' control. This concept has taken on greater significance with the COVID-19 crisis, with parties more focused on the scope of force majeure provisions.

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.

Circular No. 18'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, Circular No. 18'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.

Unfortunately, the New PPA does not clarify what happens in terms of compensation following termination for prolonged force majeure. The seller under the New PPA still has no clear entitlement to claim damages from EVN for termination due to force majeure. This is likely to remain an area of concern among developers and lenders given the lack of a specific entitlement to compensation for such termination and therefore the lack of cover for at the very least the amounts due to lenders.

Dispute resolution

The New Model PPA retains the dispute resolution provisions as the previous solar PPA.

Specifically, the New Model 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 state agencies, the model 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.

While in practice some projects have secured agreement of EVN to local arbitration (e.g., Vietnam International Arbitration Centre), it remains uncertain whether this will be possible for new projects, and more importantly whether this will be acceptable by international lenders financing a project. What is clear now is that EVN is unwilling to agree to offshore arbitration in its PPAs for private investment / IPP renewables projects.

Other key issues in the New Model PPA

Other changes introduced in the New PPA are generally seen as bringing the terms in line with EVN's practices. Thus, there are revisions dealing with metering equipment and procedures, invoicing and payment timeline extensions (which generally favor EVN), late payment interest, and operational requirements (including treatment of outages). These are all intended to provide clarity and consistency with how EVN addresses these issues in its existing PPAs.

While there have been some issues in the Previous PPA that have been helpfully addressed, Circular No. 18 does not address all the issues that developers and lenders have hoped for, including the following:

  • The risk of changes in law and/or tax not covered through an adjustment in the tariffs  ̶ The risk is that any additional capex or opex costs resulting from such a change will have to be covered out of the agreed tariff and therefore will adversely impact on the economic returns from the project. Developers may take the view that changes in law in respect of environmentally friendly technology may be unlikely, but it is a real risk regarding changes in taxes, given examples of this happening in Europe.
  • No provision for any form of government guarantee, assurance or support in respect of EVN's obligations

The use of the New PPA is mandatory on all grid-connected biomass projects and is non-negotiable in principle, although in practice EVN has been willing to entertain certain proposed changes that clarify the rights and obligations of the parties (without changing the commercial position as set out in the template).

Specifically, Circular No. 18 imposes the compulsory application of this PPA template to all relevant 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, Circular No. 18 adds that any such supplemental contents must be consistent with the contents of the model PPA.

Part 3: Model PPA for grid-connected rooftop solar systems

Circular No. 18 basically inherits the same rooftop solar PPA template for selling power to EVN's grids, as previously provided under Circular No. 05/2019/TT-BCT dated 11 March 2019 of the MOIT.  This model PPA is relevant to the "in-front-of-the-meter" model in case power developers or consumers sell power to EVN's grid.

Under the new rooftop solar PPA model, Circular No. 18 retains from the previous model certain risk allocation issues. For example, there is no provision on termination compensation, change in law or grid/transformer unavailability, or tariff indexation, among other things.

In addition, we note key changes in Circular No. 18 in the rooftop solar PPA model as follows:

  • Circular No. 18 provides a clarification on payment in case of malfunctions of power metering system. If the metering system malfunctions (e.g., being on fire, inaccurate or lost), the power seller must notify EVN promptly about the malfunction. The parties to the PPA shall make an incident minutes and an agreement on the output power released to EVN’s grid based on the output of payment period of the previous year or month or week.
  • For late payment interest provision, Circular No. 18 allows the parties to negotiate and agree on a late payment interest in accordance with the Commercial Law 2005. In the previous rooftop solar PPA model under Circular No. 05, the late payment interest is calculated based on a one-month average interbank interest rate at the time of payment, as announced by the State Bank of Vietnam. Hence, this change creates more flexibility for parties to agree on the PPA.
  • Circular No. 18 introduces a dispute resolution regime under which a similar approach as that under the solar power project PPA model with different time-limits is adopted. Specifically, the dispute resolution procedures under the rooftop solar PPA are 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 30 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 five 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, each party can send a written request to either "upper-level electricity authority of power purchaser" or the MOIT for assistance in resolving the disputes. Note that "upper-level electricity authority of power purchaser" means EVN or its affiliated or parent company, so it creates certain concerns over the dispute settlement process, which may favor the power purchaser (rather than power seller).

Transitional provisions

This FiT 2 Circular No. 18 takes effect on 31 August 2020 and replaces FiT 1 Circular No. 16 and Circular No. 05. However, Circular No. 18 provides for a transitional process for certain projects, specifically the following:

  • The whole or a part of a solar power project that has an executed PPA and approved COD before 1 July 2019 can be subject to the executed PPA.
  • In case of ground-mounted solar power projects (including the whole or a part of the projects) and of rooftop solar systems that has an executed PPA and an achieved COD from 30 June 2019 to the Circular No. 18’s effective date, the parties may agree to re-execute or make amendments and supplements to the executed PPA in accordance with the PPA models stated in Circular No. 18.