This article was co-authored by Hugo Le Ridou, Reed Smith.
On 12 April 2019, the Ministry of Industry and Trade of Vietnam (MOIT) published the final draft decision of the prime minister, intended to replace the current Decision 11 promoting the development of solar power plant projects in Vietnam. The final draft of the decision has extended the duration of the second feed in tariff (FIT), from 1 July 2019 to 31 December 2021 (FIT 2 Deadline).
Whilst the first round FIT provided for a single 9.35 cents per kWh tariff, the draft decision, in its current form, has differentiated tariff levels according to the type of technology used on a solar project, and its location: the MOIT has divided Vietnam into four regions, based on irradiance levels. Projects completed in regions with lower irradiance will be granted a higher tariff, in an effort to encourage solar projects in Vietnam’s Northern provinces.
The final draft made a number of improvements to the draft decision compared to the second draft published on 22 February 2019, notably extending the commercial operation deadline to 31 December 2021 (FIT 2 Deadline) (in contrast with 30 June 2021) and increasing tariff rates for floating solar projects (compensating the relatively higher project costs).
Bankability issues surrounding the Standard Solar PPA
To accompany FITs, the MOIT issued the Standard Power Purchase Agreement for Solar Projects (Standard Solar PPA) in September 2017. The Standard Solar PPA is relatively short compared to conventional solar project PPAs, and departed from international market standards, raising a number of bankability issues, notably:
Practical solutions to the PPA bankability issues
Whilst such concerns are widely acknowledged, the general consensus remains that the FIT offers an attractive incentive to invest in Vietnam’s solar power industry, with the first round FIT having already generated significant market interest.
Although one project has been able to obtain amendments to the Standard Solar PPA to address some of the bankability issues, most project sponsors will not be in a position to obtain such concessions. In order to mitigate the bankability risks posed by the Standard Solar PPA and facilitate funding for the development of solar PV projects in Vietnam, several practical solutions have and are being explored:
With the exception of regional banks, to date international commercial banks have not participated in project finance lending to Vietnamese solar PV projects owing to the concerns raised above. One structure developed to insulate international commercial banks from EVN payment risk and allow participation in the market, includes lending by to a top tier Vietnamese bank secured against a Letter of Credit effectively guaranteeing EVN’s payments under the PPA as well as the full amount of project debt outstanding in the event of a payment default by the project company. The local bank would be granted rights of recovery over the project’s assets and cash flows up to the amount of debt which they are securing. Non-payment insurance would be procured to cover the Letter of Credit issued by the local bank.
The rationale for this structure is that the Vietnamese banks are eager to partner with sponsors, who are often key clients for the local banks, and are also better placed to assess project risk and manage local relationships.
There is consensus amongst lenders and insurers that insurance cannot replace a long-term solution to the bankability issues of the Standard Solar PPA. Some reservations regarding this insurance solution include the reliance by the bank on insurance without (i) strong knowledge of the asset, (ii) comfort on the contractual (PPA) structure, and (iii) any ability to play a role if the project performs badly. However, the cost of insurance is offset by the prospective rate of return offered by the FIT, allowing sponsors and lenders to explore such a strategy. One further mitigant considered is lending to local banks against a portfolio of projects and thereby mitigating risks such as curtailment of specific projects within the portfolio.
A similar product to the above is also being developed by multilateral banks however without the same level of risk transfer. The product contemplated would cover EVN non-payment risk but not shield international commercial lenders from the other underlying bankability concerns under the PPA.
To circumvent the need for project level bank financing, the EPC contractor can fund the development of the project and recover these costs out of the project revenue following commercial operation of the power plant. Where this structure is adopted, the contractor has applied a significant premium of approximately 20% - with the opportunity to supply its own modules and inverters to the project – with the anticipation of being repaid within the first few years of operation. EPC contractors have also accepted liability for commissioning of the project by the FIT deadline. Subject to appropriate transmission infrastructure being in place, the EVN risk of curtailment is potentially lower in the early years, before competitor projects come online and potentially lower tariffs are implemented. Despite the premium charged by the EPC contractor, who benefits from a very favourable position, the attractive FIT and fast growing energy demand in Vietnam (around 12% per year) are attractive enough to incentivise investment.
Some structures in other markets have seen the EPC contractor bear significantly more risk – they are provided with a minimal down payment from the owner (around 15% of project costs), with the remainder payable on commercial operation but only if the financing is in place or the power plant has been sold. In this case, the EPC contractor is entitled to project revenue and if not repaid, can enforce its comprehensive security package. However, Vietnamese law does not allow foreign persons to take security over land, which could prove to be a barrier for such a structure.
Despite the bankability issues of the Standard Solar PPA, the attractive FIT and strong growth of Vietnam’s energy needs should continue to spur investor interest, who can look to the solutions discussed to mitigate the project risks.
Looking ahead, Reed Smith are currently partnering with a leading intergovernmental organisation focusing on sustainable energy transition, as part of a team of international law firms, banks and other industry advisors to design a standardised suite of contracts for the development, financing, and procurement of solar energy projects. The suite aims to homogenise market practices, whilst providing for a balanced allocation of risk between parties, paving the way for lower feed-in tariff rates at a level of risk still acceptable for all parties involved.
The views expressed in this column are the author's own and do not necessarily reflect this publication's view, and this article is not edited by Asian Power. The author was not remunerated for this article.
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Bree is a partner at Reed Smith based in Singapore. She advises on energy and infrastructure projects globally with a focus on emerging markets.
Bree has lived and worked in Asia, the Middle East and Australia acting for sponsors/investors, governments, lenders, contractors and suppliers and understands the drivers and constraints of all parties on major infrastructure projects. She was previously seconded as acting Head of Legal East Asia for a rail group and works efficiently alongside in-house legal and commercial teams.
Bree advises across asset class including on power (conventional and renewable), energy efficiency, oil & gas, water & waste, transport and commercial property projects. As part of a multi-law firm and industry team, Bree is working with TWI and IRENA to develop a standardized suite of documents to de-risk and decrease project and transaction costs to accelerate the development of solar PV projects globally.
Asian Legal Business has named Bree Miechel one of the "40 under 40" for 2018, an award that recognizes outstanding legal professionals in the region. She is recognised by IFLR1000 Financial and Corporate Global rankings 2019 as a highly regarded project development lawyer and was shortlisted by Euromoney Asia Women in Business Legal Awards 2017 and 2018 as Best in Energy and Natural Resources.