Vietnam's solar pioneers await international capital

With less than nine months to go to meet the deadline for eligibility for Vietnam's solar feed-in tariff regime, the market is bustling with activity – but so far it is being dominated by regional developers and finance, reports Aaron Woolner

Vietnam's nascent wind energy market may be stuck in the doldrums, but its solar PV sector is glowing white-hot. Around 20 PPAs have already been signed by producers with state-owned utility Electricity Vietnam (EVN) – the latest to come to light was inked just two weeks ago – and market sources indicate that there are many more projects at various stages of development.

Recent months have seen construction start on two projects that both claim the title of southeast Asia's largest solar energy development – Singaporean firm Sunseap's 168MW Ninh Thuan project, and then Thailand-based B.Grimm Power's two Dau Tieng solar developments, which will have a combined installed capacity of 400MW.  

According to Angus Mitchell, Ho Chi Minh City-based partner at regional law firm DFDL, the reason for this "frenzy" is developers are looking to get projects online and grid connected ahead of the 21 June 2019 deadline for the current solar feed-in tariff of 9.35 US cents per kWh. 

Mitchell says, "There has been a frenzy of activity in the Vietnam solar sector in the last 10 months as both local developers and foreign sponsors look to do deals, so they can get equity and then quickly secure land rights and commence construction so as to reach the commercial operation date ahead of the FiT deadline in June next year. The practical window to break ground in order to meet this deadline hasn't yet closed – but it's getting near."

Market drivers

One developer looking for viable projects is Milan-based Limes Renewable Energy, which has a number of solar and wind developers in the pipeline globally. Until now its experience has mainly been in Europe and Latin America, but the group set up shop in Vietnam 12 months ago and its managing director, Cristiano Spillati, says it is in now in discussions with 620MW worth of solar projects in the country. 

Importantly for Spillati, it is the confluence of economic fundamentals – meeting the increasing power demands of an economy that has grown on average by 6.26% annually between 2000 and 2018 – and investor appetite for new market opportunities that makes the Vietnam solar sector attractive. 

The need for investment is recognised by the Vietnam government. In 2016, it approved the Revised National Power Development Master Plan (PDP VII), which set out its plans for the country's energy mix by 2030. PDP VII aims to increases renewable energy's current negligible contributions – total solar power production stood 8MW in 2017, according to the International Renewable Energy Agency, for example – to 7% of total energy in 2020, and above 10% in 2030.

Of this, solar is set to be a major component. Vietnam's Ministry of Industry and Trade is targeting 850MW of new solar power production by 2020, 4GW by 2025 and 12GW by 2030. 

International capital

Spillati points to the recent non-recourse financing of the Dam Nai wind farm as a landmark for renewables projects in Vietnam and one that can be replicated in the solar market, potentially opening up Vietnam to international investors. But that remains to be seen; while there is flurry of activity in the Vietnam solar sector, so far none of it has been financed by global investors.

Take the Srepok 1 project, a 50MW solar development by Ho Chi-Minh City-based Dai Hai Power.  Financing for the VND 1.2 billion (£39.2m €44.7m US$51.4m) project came from state-owned Vietcombank. Meanwhile BIDV, which is funding Dam Nai, is also apparently active in the solar sector. 

Sources of finance from outside Vietnam have so far been been restricted to multilateral lenders and regional fund managers, such as the IFC and Singapore-based Armstrong South East Asia Clean Energy Fund, which took 16% and 20% stakes, respectively, in developer Gia Lai Electricity (GEC) in July 2016. 

GEC is a subsidiary of state-owned conglomerate TTC which holds interests across real estate, energy, agriculture, education, and hospitality, and currently has a number of solar projects under development such as the 48MW installation in Thua Thien Hue province, and a 49MW solar farm in Binh Thuan. 

Other foreign investors into Vietnam's solar sector include B.Grimm Power, which in addition to constructing its own projects, also acquired an 80% stake in the 257MW Phu Yen solar power plant for US$32.5 million (£24.7m €28.2m) in August this year [2018]. Market sources suggest the financing for this and other developments, such as Sunseap International's Ninh Thuan project, will have come from either their own equity, or from existing domestic banking relationships. 

The reasons for this are twofold: time and money, according to Baoqing Miao, director at financial advisory boutique Voltiq, which is to set up an office in Singapore later this year. 

"We have seen in the market investors taking their projects forward on an all-equity basis, firstly because of the speed pressure – particularly for projects needing to meet the FiT deadline," says Miao.

"Secondly, taking local finance might be very expensive while international non-recourse debt financing is not ready yet and will take a long time to close, so they would opt for an all-equity solution and see what happens once the project has been constructed." 

This view was backed by Limes' Spillati who said that the "vast majority" of capital backing the expansion of the Vietnam solar industry was regional. This is either from the traditional Asian financial centres of Hong Kong and Singapore, plus private equity and commercial banks in Thailand and the Philippines looking to build on their success in this sector in their domestic markets. He says there are also a smattering of Malaysian private equity firms looking at Vietnam. 

PPA risk

The explanation for this regional domination of financing for the solar market is the same as for the slow start to the wind sector in Vietnam: doubt over a PPA regime that only allows deals to be struck with EVN, which despite being a state-backed entity doesn't come with a sovereign guarantee. The PPA setup also allows the utility to terminate deals with just 12 months' notice.

But whereas global investors may baulk at the potential risk this entails, regional banks and private equity players are still willing to participate in the market, says Spillati. 

"The vast majority of capital is regional because these players don't view Vietnam country risk in the same way as American or European investors do," he explains.

"They don't believe the PPA risk is significant and are coming into the the market with their own finance, with commercial banks in Thailand and the Philippines willing to provide the debt. Combined, this makes it easier for them to get projects underway compared to some global firms." 

Spillati says that some international investors are still interested in the Vietnam solar market, despite the issues around Vietnam country risk and PPAs, and that his firm has an MoU in place with an unnamed large European utility which is looking to develop projects in the communist state.

In any case, he says the willingness of regional developers, banks and private equity firms to invest in the Vietnam solar market at this stage means they will dominate, at least in the medium-term. 

"There are some international equity investors looking at Vietnam and I think this interest will grow, but in my opinion the Vietnam solar sector is a regional play: investors from Asia will lead this market in terms of equity for the next 10 years," he says.

'High returns'

All sources inspiratia spoke with confirmed that EVN had never defaulted to a foreign supplier. And with Vietnam needing US$100 billion (£76bn €87bn) of investment to meet its predicted power needs – according to a 2016 report from the Vietnam Business Forum – the utility has strong incentives to create good relations with international investors in order to finance this expansion.   

The report said that the Vietnam government's current power development targets requires an estimated investment of around US$6.9 billion (£5.2bn €6bn) annually on average between 2015 and 2020, rising to US$11.4 billion (£8.7bn €9.9bn) a year between 2020 and 2030. The report contrasted this with EVN's annual investment in generating capacity of just US$2.3 billion (£1.7bn €2bn) in 2013 and US$2.8 billion (£2.1bn €2.4bn) in 2014. 

EVN may have never failed to pay a foreign creditor but when state-owned shipbuilder Vinishin defaulted on its US$4.4 billion (£3.3bn €3.8bn) debt pile to local and international lenders in 2010, the government refused to step-in. Vinashin managed to repay the majority of its debts, but it wasn't until 2013 that international lenders managed to agree the restructuring of the US$600 million (£455.3m €521.1m) syndicated loan to the embattled shipbuilder. 

EVN is not Vinashin, and in any case according to DFDL's Mitchell, the current wave of investors into Vietnam's solar sector are there partly because of the risk – and correspondingly high potential returns.

He says sponsors are assuming two things: "EVN, notwithstanding its relatively weak balance sheet, has a good credit record. They have paid bills in the past and this is something they can point to when holding discussions with investors. 

"And secondly these groups are what I would term 'pioneer investors'. Their idea is to get in first, make it happen and when the market develops and becomes more secure, these projects can then be sold into institutional investors which have a lot more cautious risk profile."

This view was confirmed by Miao, who says that investing in emerging markets was by nature risky and with competition increasing in mature markets, such as the EU or the US, putting cash into Vietnam's solar sector still made sense. 

"You always have to take risk in these kind of propositions and if you are looking at a safe reliable investment then go to an OECD country like Germany where you will probably get a return of around 5-6%," he says.

"But if you are prepared to take on the Vietnam country risk the compensation is that you can get a much higher return on your equity."