Vietnam tussles with PPA issues after raising wind tariffs

Vietnam's government recently raised the feed-in tariff for both onshore and offshore wind projects. But as long as there are concerns over the bankability of PPAs in the market, international investor appetite will be limited. Aaron Woolner, inspiratia's Asia editor, reports

On 10 September [2018], Vietnam's government issued Decision No 39, increasing the previous feed-in tariff of US$0.078 per kWh to US$0.085 for onshore wind and US$0.098 for offshore. The PPA terms will apply for 20 years, and come into effect on 1 November. To be eligible, projects must be grid connected and in commercial operation by 1 November 2021.

Despite this increase, recent research by inspiratia shows that even after the revisions, Vietnam's wind FITs are still lower than its regional peers. In the Philippines, for example, tariffs are more than double Vietnamese levels. 

Vietnam's announcement was backed up by a Ministry of Industry and Trade (MOIT) report on 28 August that highlighted the need to increase the wind FIT to help developers gain commercial funding for wind power projects.

However, according to Fred Burke, Ho Chi Minh-based partner at the law firm Baker McKenzie, the real issue for developers isn't the tariff regime, but instead how bankable project PPAs are.

Currently, all PPAs have to be struck with Electricity Vietnam (EVN), which despite being a state-owned utility has not received sovereign guarantees from the Vietnam government, leaving developers facing potentially serious counterparty exposure.

"All the players we talk to say that the issue isn't the prevailing FIT is too low, rather the problem for the projects is instead the bankability issue," says Burke.

"This applies to a number of issues, not least the lack of sovereign guarantee – the government is unwilling to back EVN's commitments."

The Vietnamese government has tried to address this issue by revising the PPA structure first in 2016, and again 18 months later. But according to Burke, these revised PPAs included only minor changes and left most of the outstanding issues untouched, with the continued inclusion of a one-year termination clause for the offtaker a particular bone of contention.

"Those decrees were accompanied by template PPAs, and in both cases they remain unbankable in that the risk is too heavily on the sponsor and investor side," he says.

"Take termination risk; developers can only sell to the monopoly power provider and within the current PPA EVN has the option to curtail, or even terminate, how much power they buy from you in a project you may have invested US$150 million in."

Debt market

As a result, there have been few financing deals so far in the Vietnamese wind sector, but they are dripping through.

Astris Finance recently advised on raising debt for the US$45 million (£34.2m €38.3m), 40MW Dam Nai wind project being developed by a JV between Singaporean renewables firm the Blue Circle and Vietnam-based TSV Investments.

Astris said in a statement that the term loan had been raised "with no direct recourse against the sponsors and no credit enhancement solution", making it the first such non-recourse renewables financing in Vietnam.

The actual loan is denominated in Vietnamese dong and has been offered by what Astris says is "one of the largest Vietnamese banking groups". Market sources suggest the bank in question is BIDV, meaning that no international commercial lender has yet got comfortable enough with the PPA issue to back Vietnam wind projects.

So far, German development bank KfW's €35 million (£31.2m US$41.3m) loan to the Phu Lac wind farm in 2016 is the only non-Asian debt financing in the sector.  

Direct PPAs

This may change soon, however. While there has been no indication that the government is willing to make major concessions with respect to PPAs with EVN, in June the Electricity Regulatory Authority of Vietnam (ERAV) announced it was considering a pilot direct power purchase agreement project in the renewable energy sector. The ERAV will consider both physical and financial DPPAs.

There are strong market rumours that the government is poised to approve a pilot DPPA for 300MW of renewable capacity by the end of this year, and Baoqing Miao, Netherlands-based director at financial advisory boutique Voltiq, says that a successful test run could have a transformative effect on the market.

In addition to avoiding the bankability issues of the standard PPA template with EVN, corporate offtakers could have higher credit ratings than dealing directly with the government-owned electricity company. Fitch currently rates EVN at BB, in line with Vietnam's sovereign rating and below what is considered investment grade. In contrast, Heineken, which has a massive presence in the country, is rated BBB+ by S&P, effectively four notches higher.

According to Miao, who will head up Voltiq's new Singapore office when it opens in November, the net result could be an uptick in projects and fall in power prices. "With reduced offtake risk and more bankable PPAs, naturally we could expect a significant drop in PPA prices, and while this would see price margin compression for developers and investors, this would come with a correspondingly lower risk," he says.

Others are more sceptical. One person familiar with the Vietnam renewables market suggested the interests of EVN would take precedence over whether a DPPA regime emerges, given that it is a state-backed entity in a communist country.

"The current model is you sell to EVN and it then sells the power on to the end users," the source says.

"One wonders if EVN will be willing to give up what will presumably be their most profitable customers, in what is a very restrictive market to operate in."

New capacity

Whatever the end result, Vietnam needs to rapidly increase the amount of wind it has in order to meet the 2017 National Power Development Plan VII targets of installed capacity, which earmarks 800MW by 2020, 2,000MW by 2025 and 6,000MW by 2030.

According to MOIT, there are around 50 registered wind projects, yet only a fraction have have been implemented, and only four projects are currently generating electricity. Three of these are in in the southern province of Binh Thuan: Tuy Phong (30MW), Phu Quy (6MW) and Phu Lac (20MW). The largest is in Bac Lieu with a capacity of 99MW over two phases, to which a third phase is slated to be added.

These numbers will receive a much needed boost if the US$2 billion (£1.5bn €1.7bn), 800MW Phu Cuong nearshore wind farm in Soc Trang province finally comes online. The mega project, a partnership between Vietnam firm Phu Cuong Group, GE Renewable Energy and Mainstream Renewable Power, was originally given the go-ahead in 2016. According to a previous timeline, financial close was expected to happen in late 2018 and the first 200MW of capacity was due online in 2020.

It is not clear how the Phu Cuong is being financed, or even how close it is to getting done, but speaking to inspiratia in 2016 when the deal was originally signed, Mainstream's Andy Kinsella said the developer was looking at a range of funding options, including multilaterals, commercial banks and export credit agencies.

How and when that is achieved, and the subsequent make-up of the project's PPA, will be closely watched by international investors in a nascent wind market that quite clearly has huge potential for growth, but is still full of potential pitfalls.