Overview of DPPA scheme in Vietnam and key issues for investors

The DPPA Decree allows two models of DPPAs: the physical DPPA model and the virtual DPPA model.

1. In the private line or physical DPPA model (“Physical DPPA”), the GENCO and the Large Consumers will enter a DPPA for the sale of electricity. There will be a private transmission line to transmit electricity generated from the GENCO’s plant directly to the Large Consumer’s facility. Any GENCO of renewable energy projects including solar (including rooftop solar), wind, small hydro with capacity of less than 30MW, biomass, etc. can participate in a Physical DPPA scheme.  The terms and conditions of the DPPA including technical requirements, volume commitments and pricing will be agreed between the parties at will.

2. The virtual or synthetic DPPA model (“Synthetic DPPA”) will comprise of three key electricity purchase arrangements amongst the GENCO, EVN and the Large Consumers. Only grid-connected wind and solar power projects with capacity of 10MW or more can participate in Synthetic DPPA scheme.

   1. The GENCO will generate and dispatch electricity to the national grid managed by EVN and enter into a PPA in a prescribed form with EVN for selling electricity to EVN.  The GENCO will be required to participate in the electricity wholesale market and compete with other power companies on pricing of the generation tariff. EVN will dispatch the power generated by the GENCO based on the spot price determined by the market.

   2. Large Consumers will enter into a PPA with EVN or its subsidiary in a prescribed form for buying electricity through the national grid based on the retail price determined in accordance with the DPPA Decree (“Retail DPPA”).  For electricity consumption of the Large Consumers that is not greater than the energy dispatched and paid for by EVN from the GENCO, the price payable by the Large Consumers to EVN will be the sum of: (a) the abovementioned spot price payable by EVN to the GENCO, (b) EVN’s fees for operating the grid (“Access Fees”), and (c) fixed costs to be announced by EVN from time to time representing other costs incurred by EVN in operating the national electricity system and purchasing electricity from power projects that do not directly participate in the electricity wholesale market such as build-operate-transfer projects and hydropower projects (“EVN Fixed Costs”).

   3. The GENCO will enter into a contract of difference (“CfD”) with the Large Consumers whereby the Large Consumers will agree to pay a strike price for a certain committed volume of energy benchmarked against the spot price payable by EVN on the market. If a GENCO enters CfDs with more than one Large Consumer, GENCO and all its Large Consumers must agree with each other on the allocation of the energy output actually generated by and dispatched from GENCO to the national grid amongst the Large Consumers for the purpose of determining the volume of electricity and corresponding retail price allocated to the relevant Large Consumers under the Retail DPPAs between the Large Consumers and EVN discussed in paragraph (B) above.  In no event shall the total amount of electricity purchased from EVN by all Large Consumers of a GENCO exceed the total energy output dispatched and generated from the relevant GENCO.

To participate in the DPPA Scheme, GENCO and Large Consumers must complete registration procedures prescribed in the DPPA Decree and comply with strict reporting requirements during operations.

Notable issues for investors in GENCO

The new DPPA Scheme presents new opportunities to developers and investors in renewable energy projects.  The Physical DPPA will allow the GENCO and the Large Consumers to have full discretion and control of the generation, transmission, sale and purchase of electricity. The Synthetic DPPA scheme will be useful for the GENCO to hedge the volatility of the spot price on the wholesale market.  In both cases, Large Consumers can satisfy energy transition requirements under the global climate change initiatives.

Besides those advantages, the implementation of each modality in Vietnam may face regulatory and market hurdles, which should be carefully considered by investors developing greenfield projects or acquiring existing operating assets.

1. 2.  
   3. Synthetic DPPA
      1. The Synthetic DPPA model will mostly benefit wind and solar projects that have achieved commercial operation and which are locked into a relatively low interim tariff due to missing the previous deadlines for applying the preferential feed-in-tariff (“FIT”) or as a result of alleged non-compliance during project permitting or confirmation of commercial operation commencement. For operating projects that have secured long-term PPAs with EVN, there would be no commercial incentive for those projects to terminate the existing PPAs and the applicable FIT to change to the DPPA scheme and be subject to volatility of the market price. Indeed, the drafters of the DPPA Decree acknowledged that the Decree was drafted with transitional projects in mind.
      2. However, to implement the Synthetic DPPA scheme, the government must promptly enact at least three important pieces of legislation including (1) the mechanism for renewable energy projects to participate in the electricity wholesale market including price band for renewable energy projects to raise its price to the market and determination of spot price; (2) Access Fees; and (3) EVN Fixed Costs. We understand that EVN and MOIT are prioritising the development of those regulations.  While it may not be challenging for the authorities to determine the economic and technical terms, the ongoing transition of power in the Vietnamese government and strict scrutiny of the power sector in Vietnam may result in delayed decision-making by the government.
      3. Commercially, both GENCOs and Large Consumers would be prudent when reviewing and negotiating CfDs due to the lack of precedents in Vietnam.   To date, no renewable energy projects have participated in the electricity wholesale market in Vietnam.  There is no official market price nor is it clear how pricing would work on the market to predict price trends, resulting in difficulty for the parties to reach an agreement on any strike price.
      4. The DPPA Decree includes a template CfD between GENCO and Large Consumers and allows the parties to negotiate and agree on deviations from the template. The provisions of the template CfD are relatively simple and primarily address the volume of electricity committed by the Large Consumer and corresponding strike price to be agreed by the parties at will. The template CfD does not include any operational or technical commitments or undertakings of the GENCO nor does it address financial capacity and commitments of the Large Consumers, leaving all those important issues open for discussion between the parties. The drafting of the CfD and the allocation of risks between the parties should also carefully consider the risk allocation under the PPA between GENCO and EVN (which primarily sets out technical standards and requirements applicable to the relevant power projects and address curtailment upon disruption events permitted under the grid code) and the Retail PPA between the Large Consumers and EVN (which primarily addresses retail pricing mechanism).  Without any guiding precedent in Vietnam, the parties should expect that the negotiation of the CfD would not be straightforward.
   4. Physical DPPA
      1. An investor wishing to develop or acquire a power project to participate in the Physical DPPA model may wish to look for green or brownfield projects rather than operating assets, which would give the GENCO and the Large Consumers broader discretion to determine and control technical and financial parameters of the project before engaging in a long-term offtake agreement.

      2. Several regulatory challenges may delay the development of a greenfield project which need to be carefully considered when an investor is making its investment decision:

         1. It is critical that the relevant project must already be in the national power development master plan for 2021-2030 (“PDP8”). Otherwise, the developers and investors must promptly take action to include the project in the revised PDP8 which is currently being discussed by the government.

         2. The private transmission line between the GENCO’s project and the Large Consumer’s facility would likely have to be included in the provincial socio-economic development masterplan or otherwise the provincial People’s Committee will not have the legal basis to allocate land to the GENCO for developing transmission lines.
         3. As of 16 September 2024, with the enact of Decree 115 on competitive bidding for selection of investors in land-use projects, the appointment of investors in new renewable energy projects will be subject to a competitive bidding requirement, which historically has been proven extremely challenging to successfully implement in the power sector in Vietnam. An investor acquiring an early-stage project should ensure that the due diligence process has confirmed that the sellers have legally secured the right to own or develop the project, otherwise such rights would be subject to significant uncertainty if a formal competitive bidding process is required.

Authored by Ngoc Nguyen.