Decree 115: A new piece of the regulatory puzzle complicates greenfield project development

Previously, apart from public-private partnership investment projects, there was no legal requirement that greenfield power generation projects must undergo competitive bidding for investor selection, nor was there any guidance on how to conduct such a process. Decree 115 addresses both gaps.

Ongoing political scrutiny and investigations of Vietnam’s power sector over the past several years has led the government to require competitive bidding for selecting investors in power projects. In principle, tenders should promote fairer competition and transparency, allowing the government to choose the preferred bidder with the most competitive proposal. In practice, transparent implementation of bidding criteria and selection will determine whether these reforms will further these policy goals. The past three decades of market practice attracting foreign and private capital for electricity generation projects in Vietnam suggest that regulators and interested bidders may need to carefully navigate the tender process to bring projects to success.

Everyone goes to tender

Except for offshore wind and self-consumption projects, all greenfield renewable energy projects and gas- and LNG-to-power projects under the national power development plan which (i) have not been officially awarded to any investor as of the effective date of Decree 115 as evidenced by the investment policy approval or the investment registration certificate specifying the approved investor, and (ii) attract more than one interested investor based on the results of the expression-of-interest process, will be subject to a tender process for investor selection.

There is no requirement that coal-fired projects will be subject to tenders, which may stem from Vietnam’s commitment to not mandate new coal-fired projects. Although offshore wind projects are also exempt from tender under Decree 115, the ongoing policy debate over the draft Electricity Law indicates that a customised competitive bidding process for offshore wind projects may be adopted.

Busy regulators

Decree 115 provides that the Ministry of Industry and Trade (“MOIT”) will select investors for projects subject to investment policy approval by the National Assembly or Prime Minister, which applies to projects that will have material environmental, social or land use impacts. The provincial People’s Committees (“PPCs”) will select investors for other power projects in their respective provinces.

Previously, interested investors in Vietnam would study and propose potential power projects to local governments, which, once included in the national power development plan, would be directly awarded to the project proponents. Most of the initial project preparation work was done at the cost and risk of the interested investors. Under Decree 115, project preparation, including the preliminary feasibility study and environmental impact assessment of a potential project, will be the responsibility of MOIT or the PPCs as authorised state agencies (“ASAs”). There may be a learning curve as the ASAs develop capacity to handle this new responsibility.

While investors in large-scale power projects typically spent hundreds of thousands to several millions of dollars on project preparation, Decree 115 caps the budget available to ASAs for preparing a request for proposal (“RFP”) at around US$8,000. Engagement of third-party consultants by ASAs is permitted, but in principle another competitive bidding process will be required for consultant selection because the service fees are paid from state capital. Service fees will also be regulated, which may pose additional challenges for ASAs in selecting competent consultants since the fee cap is well below market rates.

The tender process and its detailed rules will add significantly more duties, and in many cases, political and compliance risks, to the government officials acting as ASAs, on top of their various other routines responsibilities as provincial or industry regulators.

Anxious bidders and sponsors

Decree 115 prescribes the typical steps in a bidding process, including: (i) expression of interest; (ii) prequalification; (iii) official bidding with submission and grading of technical and financial proposals from interested bidders; and (iv) selection of preferred bidders and negotiation of project contracts. Certain steps may be waived or combined depending on specific project requirements, as decided by the ASAs.

Several details will likely cause concern among potential investors:

1. Time is of essence. Developing a technically adequate RFP may take months or even years, as evidenced by previous tender processes in Vietnam. With hundreds of power projects in the pipeline under the national power development plan, the tender process if not efficiently administered may add years to the project development timeline. Serious investors who previously were willing to bear significant costs to study and prepare for a project may hesitate, given the uncertainty of whether they will be awarded the project.
2. Quality of RFPs. Limited resources available to ASAs for preparing and developing the RFP may cause concern about the quality of information provided. If the RFP is not carefully developed, then serious investors who need sufficient information to prepare detailed bids may be deterred from bidding, while less serious investors may submit unrealistic proposals, leading to commercially unfeasible outcomes, poor project quality or abandonment of the project at an early stage.
3. Foreign investment not preferred in smaller projects. Foreign bidders will not be invited to express interest in projects with a proposed total investment capital below VND800 billion (approx. US$32 million).
4. Model PPA dilemma. The power purchase agreement (“PPA”) must be included as part of the RFP. This, combined with requirements that the final project contract negotiation cannot revisit the proposals made in the winning bids or alter the “fundamental content” of the bids, will require serious bidders to carefully consider the commitments they make in their proposals. A bidder proposing material changes to the model PPA in its bid may undermine its competitiveness, but accepting the model PPA (which is widely considered un-bankable) may expose the bidder to significant risks during future project development and operations, in particular the risk of being unable to secure financing. Conversely, less capable or knowledgeable bidders may commit to all the requirements of the RFP to secure the project, regardless of the commercial feasibility of their commitments, with the hope that they can renegotiate and obtain approval for increased costs in the future through political dynamics and relationships.
5. Price cap. Decree 115 gives industry regulators such as the MOIT the authority to set technical and financial criteria for evaluating bids. However, Decree 115 also specifically mandates that the tariffs proposed by bidders must not exceed the cap set by the MOIT. Current legislation on electricity price and the well-established practice of PPA negotiation in Vietnam clarify that the price caps applicable to electricity prices of power projects shall only apply to the electricity price of projects in the project’s base year (i.e., the year when the feasibility study report of the projects is approved by the MOIT), with the possibility of future increases during the operating life of the project.  However, in recent tariff negotiations for “transitional renewable energy projects” (which had PPAs signed with EVN but were subject to renegotiation due to missed feed-in-tariff deadlines often as a result of unanticipated difficulties during the COVID era), EVN insisted on applying the electricity price cap throughout the operational life of each project, imposing losses on investors. If EVN were to continue this approach it would be even more concerning for large-scale offshore wind or LNG-to-power projects, where market conditions can change rapidly and long-term market risk will be unacceptable to investors and their finance parties.
6. Restrictions on transfer. Transfer of equity interests in project companies before commercial operation will now require prior approval from the Prime Minister or the Chairman of the PPC, depending on the project. The proposed transferees must have sufficient technical and financial capabilities, and the transfer process must be specified in the project contracts. These restrictions are in addition to other existing investment law requirements. Investors seeking flexibility to exit a project should carefully consider those restrictions, as large-scale power projects in Vietnam have historically taken between 8 to 10 years to reach commercial operation.

Moving forward

In times of uncertainty, it is wise to learn from past experience. To successfully implement the tender rules and facilitate the development of essential energy projects in Vietnam, regulators and bidders should consider the following factors:

1. Future legislation, including the Electricity Law and regulations implementing Decree 115, should avoid universally rigid requirements and expressly grant ASAs broad discretion to design specific tender processes, including bidding criteria and grading systems, and ideally circumstances where tenders can be avoided, to allow for timely development of projects to satisfy rapidly growing electricity demand. A one-size-fits-all approach, and especially an arbitrary cap on tariffs throughout the project lifecycle, is unlikely to be feasible. 

2. When evaluating the financial criteria for selection of investors in a project, policymakers should consider granting themselves flexibility to:

   1. reevaluate the practice of assessing financial capacity based solely on a bidder's equity capital recorded in its financial statements, which unfairly disadvantages infrastructure and energy funds because their equity capital is only contributed by limited partners after investment decisions have been approved;

   2. reconcile the pricing restrictions under Decree 115 with the full discretion allowed under legislation on direct PPAs for corporate off-takers and generation companies to freely negotiate tariffs in direct PPAs;

   3. permit bidders to present in their bids multiple pricing options based on different input assumptions, as a single, firm pricing commitment may be unrealistic; and

   4. recognise that if renewable energy and LNG-to-power projects in the future are required to directly participate in the spot market, then bidding criteria purely based on the bid tariff will eventually become irrelevant, because pricing ultimately will be determined by the market.
3. To avoid unqualified bidders and ensure efficiency, selection of a preferred bidder at the expression-of-interest or prequalification phase may be possible by prescribing prequalification criteria that can only be satisfied by serious bidders which have actually spent time and resources to prepare for development of the project. Extra grading points should also be given to such serious investors during the bid appraisal process. Higher bid bonds could also deter less serious bidders.

During this transitional period in Vietnam's power sector, expecting legislation to prescribe detailed processes for every project may be unrealistic and lead to delays not only because policymakers need to carefully consider how to address a wide range of scenarios but also due to challenges in implementation of prescriptive requirements which are often require time for stakeholders to fully understand and translate them into action. Flexibility in both the law and its implementation will be key to addressing the fast-changing needs of the market. In implementing Decree 115, Vietnamese regulators and investors should treat the tender rules as guidance on procedural requirements, and policymakers should leave room for flexibility to address changing circumstances as they arise.

Authored by Ngoc Nguyen.