Vietnam’s new direct electricity trading decree will boost renewables investment

The recently issued Decree on the Direct Power Purchase Agreement (DPPA) allows renewable energy generating companies (GenCos) to directly sell renewable energy to large electricity consumers without intervention by Vietnam’s state utility Electricity of Vietnam (EVN). This can either be through ‘private wire’ arrangements – that is, not connected through the national grid and called ‘behind-the-meter’ arrangements - or through a ‘grid-connected model’ using a ‘contract for difference’ mechanism, or ‘virtual PPA’.

The ‘private wire’ model

Renewable energy sources considered eligible for the sale and purchase of electricity via private transmission lines include solar – including rooftop solar systems - wind, small hydro, biomass, geothermal, wave, tidal and marine current energy. The relevant GenCo would still require a generating licence.

Unlike the grid-connected model, the decree does not provide a standardised contract for this arrangement. Instead, the decree specifies that a contract using the private wire model should include:

• identification of the parties;
• purpose of use;
• standards and quality of services;
• rights and obligations of the parties;
• electricity price;
• method and duration of payment;
• responsibilities related to the investment; and
• terms of the construction, management and operation of the private transmission line.

Parties wishing to benefit from this scheme are free to agree the electricity sale price as well as any further terms.

Any surplus electricity produced by electricity generators and which is not taken by the buyer can be sold to EVN at the prevailing spot price regulated by the Vietnam Wholesale Electricity Market (VWEM).

Under the decree, ‘large power consumers’ – those that meet an average monthly consumption threshold or registered monthly consumption of at least 200,000 kWh - are required to report the DPPA to the relevant people’s committee at the provincial or municipal level, the competent local power company and the competent system operator on the execution of the DPPA.

A consumer who purchases electricity through a DPPA may still purchase electricity from the national grid.

The ‘grid-connected’ model

To qualify for direct transactions through the national grid, renewable projects must have a capacity of 10 MW and above, as well as still requiring a generating licence.

Consumers wishing to participate in direct transactions through the national grid must meet the ‘large power consumer’ threshold on monthly electricity consumption. While the threshold set is lower than the 500,000 kWh threshold set out in the draft decree which was submitted to the government for approval earlier this year, the average monthly threshold of 200,000 kWh contained in the decree will mean participants will still, in the main, be consumers using electricity at an industrial scale.

Under the grid-connected model, electricity generators will sell their entire electricity output to EVN at a spot price regulated by the VWEM in line with a standardised power purchase agreement. The form of this is annexed to the decree and specifically notes that Renewable Energy Certificates (RECs) belong to the GenCo.

In addition, large power consumers will enter into a standardised retail power purchase contract with EVN or a local power company to receive electricity from its local power company at the retail price, which is equal to the spot price plus other costs such as transmission and distribution services. The form of retail power purchase contract is also annexed to the decree.

Electricity generators and large power consumers will also enter into a standardised forward contract - also known as a contract for difference - the form of which is attached to the decree and details the agreement between the parties. This will include the duration of the agreement, the strike price, the committed electricity output, and the settlement of the difference between the strike price and the spot price by the GenCo and the large power consumer. 

Large power consumers wishing to use this model will need to register for participation and will be subject to approvals.

Ultimately, allowing corporate or direct power purchase agreements in Vietnam has the potential to unlock a vast source of private capital that will allow Vietnam to attract further investment into renewable energy projects in the country without the state offtaker, EVN, taking all the risk.

Challenges remain within the country as there is still a substantial amount of grid upgrading required to ensure that the resources-rich south can provide energy to the industrial base in the north. In addition, issues regarding curtailment risk, availability guarantees, and the pricing risk under the VWEM amongst others will need to be considered.

Co-written by Bryan Chapman of Pinsent Masons.