Feed in-tariff regulations and getting wind power projects done (en)

Feed-in-tariff regulations and getting
wind power projects done
OLIVER MASSMANN - GILES T. COOPER
Partners
DUANE MORRIS VIETNAM LLC

AGENDA:
• Snapshot of wind power development in
Vietnam
• Regulations on feed-in-tariff: can wind
power be profitable?
• Tariff negotiations with EVN/PV Power
• Getting permits on time: how to handle
the red tape
GREEN GROWTH & INVESTMENT

Snapshot of wind power development in
Vietnam

• State policy on wind power:
 Clear intention to develop green power industry
 Master plan VII about energy development in Vietnam: To prioritize quick
development of electricity sources from renewable energy (wind power, solar
energy, biomass energy, etc.)
 Offered incentives and preferential treatment to the wind power industry
• Vietnam’s wind power potential:
 With 3,000-kilometre coastline and an average wind speed of 7 m/s,
Vietnam has greatest potential of wind power development in Southeast
Asia: 8.6% territory in comparison with 2.9% of Laos, and just 0.2% of
Cambodia and Thailand
 Total estimated potential: as high as 713,000MW – 510,000 MW on land and
203,000 MW on islands
 Wind power potential in Vietnam is 200 times more than the capacity of
Son La, largest Southeast Asia hydropower plant and more than 10 times total
projected capacity of Vietnam’s power generation in 2020

• What is current status of wind power projects?
 As of May 2012, 67 wind power projects in Vietnam
under development
 First wind power plant in Binh Thuan Province was
completed in April 2012 and in June 2013, another one in
Bac Lieu commenced operations
 The others are generally behind construction and
implementation schedule

• What is behind the delays?
 Lack of finance for project implementation
 No comprehensive regulatory framework on wind power
 Hindrance of complicated administrative procedures
 Delays relating site clearance and access

Regulations on feed-in-tariff: can
wind power be profitable?

• Non market based pricing mechanism in Vietnam’s
energy market:
 Current pricing mechanism: NOT reflective of the actual
production and distribution costs with reasonable returns on
investment for investors
• Feed-in-tariff (FIT) mechanism for wind power
projects:
 FIT mechanism not yet developed in Vietnam
 Insufficient regulatory background: Decision No. 37/2011 of
the Prime Minister (PM) and Circular No. 96/2012 of the
Ministry of Finance

• How FITs should work!
Prices are regularly reviewed
for new projects and reduced to
encourage technical innovation
and reflect falling costs
Government sets the
feed-in tariff for
suppliers feeding RE
into the grid
Renewable systems
are built all over the
provinces
Local distributors
/utilities allow grid
access and pay the
set price to RE
operator
Incremental costs
are passed on to the
customers

• How does FIT mechanism work in Vietnam?
 EVN has take-or-pay obligations towards wind energy
developers
 EVN or authorized affiliated units receive subsidy via the
Vietnam Environmental Protection Fund
 Subsidy formula: Amount of electricity price subsidy (VND) =
Rate of electricity price subsidy (VND/kWh) x Power output
purchased (kWh)
 Rate of electricity price subsidy and term of tariff subsidy
will change from time to time based on PM decision

• What is current purchase price of wind power in
Vietnam?
 Power purchase price for on-grid wind energy projects:
7.8 US cents/kWh (excluding VAT)
 Electricity price subsidy: 207 VND/kWh (1 US
cents/kWh) subsidized from Vietnam Environmental
Protection Fund for all electricity EVN purchases from
wind energy plants
 Term of tariff subsidy: 20 years (i.e. term of wind energy
Power Purchase Agreements (PPAs))

• Fiscal and financial incentives for wind power projects:
 Corporate income tax incentive rate: 10% for a period of 15 years to
newly-established enterprises investing in power plant projects
 Possibility of 10% tax rate being extended up to 30 years: if the
projects are classified as large scale projects, using high or new
technology and in special need of investment
 Exemption of import duties: for equipment and machinery imported
to create fixed assets of the RE projects
 Special encouraged projects: exemption/reduction of land use
fee/rental (depending also on the location of the projects)
• Can wind power be profitable with current tariff?
Comparison of FITs for wind power
Vietnam Thailand Philippines
7.8 US$ cents/kWh 18 US$ cents/kWh 19.5 US$ cent/kWh

• Can wind power be profitable with current tariff?
 Current average retail electricity tariff of Vietnam is 6,8 UScent/kWh.
However, still lower than electricity tariff of other Asian countries
•
•
• Recent FIT proposal for Bac Lieu Wind Power Plant:
 The MOIT proposed new FIT for the PM’s approval: For first 10
years: 11.5 UScent/kWh and next 04 years: 9.8 UScent/kWh
 While the developer expects from 10.2 to 12 UScent/kWh

•Recommendation: The Government cannot continue
subsidizing EVN as currently and will have to adopt a FIT
mechanism for wind power in particular and renewable
energy in general
•Solutions to finance wind FITs: “Cross-industry"
financing?
How does it work?
 Example of Germany: taxing heavy industry which cause
much pollution with a special environmental tax, proceeds
from this are used to subsidize FIT for wind and other
renewable energies

Tariff negotiations with EVN/PV Power

• Why negotiate tariff with EVN and PV Power?
 The power purchaser under standard PPAs is EVN or authorized
dependent entities
 The investor has to obtain agreement of EVN on power purchase
prior to licensing procedures
 EVN monopoly in energy market: EVN acts the single buyer,
distributor and transporter
 PV Power’s involvement is new hope for a more diversified energy
market
• Dominance of EVN in the energy market:
 Leads to lack of private investment in energy sector which may
result in energy deficiency, unimproved infrastructure, and absence
of projects on renewable energy, affects energy efficiency etc
 No guarantee of fair price for wind power projects as well as fair
competition in the market

• Negotiation with EVN/PV Power: Why NOT
efficient?
 INEXPERIENCE: Lack of knowledge/experience on
international business practice, language barriers, skilled
lawyers, etc..
 Complex approval procedure: Too many parties involved
•IMPACTS:
 Negotiation process is SLOW AND INEFFICIENT
 Mistrust and reluctance from foreign investors: they cannot
wait for years to finalize a PPA

• Unfair right of electricity purchaser to re-negotiate the
electricity price in PPA even after PPA has been signed
• Article 23.5 of Electricity Law scares the investors:
 “An electricity purchaser shall have the right to require the electricity seller to
reconsider the amount of the electricity price payable and, upon receipt of
such a request, the electricity seller must resolve it within fifteen (15) days. If
the electricity purchaser disagrees with the resolution of this issue by
the electricity seller, the electricity purchaser may request the competent body
or organization to conduct conciliation and, if the electricity purchaser does not
make such a request or if the conciliation does not resolve the issue, the
electricity purchaser shall have the right to institute legal proceedings
in accordance with the law on civil proceedings. Pending resolution, the
electricity purchaser must make payment and the electricity seller must not cut
off the electricity supply.”

Getting permits on time: How to
handle the red tape

• Plan for wind power development:
 As yet no national plan and strategy for wind power
development
 Recently, the MOIT issued Circular No. 06/2013 regulating
the procedure for preparing , assessing and approving the
national and provincial plan for wind power development
 Decision No. 37/2011 of the PM states that the PM will
decide any wind power projects until such planning is
completed and approved
 However, still a long way to a final approval

• Investment procedures in wind power projects:
 Uncertainty about investment procedures
 Many requirements to be satisified by the investor
before commencing construction, e.g. to obtain the
investment certificate, sign the PPA and electricity
integration agreement
 Other permits need to be obtained: Construction permit,
electricity operation permit, etc...

• Wind power projects generally take the following steps:
 Step 1: Site selection
 Step 2: Assessment of wind resources at the selected site
 Step 3: Pre-feasibility study and request for inclusion in the
power development plan
 Step 4: Investment report (feasibility study)
 Step 5: Signing PPA with the EVN
 Step 6: Project implementation
 Step 7: Construction phase
 Step 8: Electricity delivery

• What are the obstacles to obtain permits?
 Complicated and uncertain investment and licensing procedures with
the involvement of many State authorities
 Loose coordination and non-transparent communication among the
State authorities in charge of wind power project (from governmental
to provincial levels)
• How to get permits on time?
 Seek the in-principle approval of the PM and the MOIT before
commencing any investment procedures is a top priority
 Close coordination with the People’s Committee of the province
where the project is located is extremely important: The support from
provincial authority will help to ensure faster and more efficient
licensing procedures

• Recommendations for European investors:
 Difficult time but opportunities await. For example, wind
power projects can be surprisingly lucrative if combined with
wind farms, tourism and other services
 Sound financing structure, good business model and great legal
assistance are keys to success
 Accurate prediction of where the market is heading to, in the
context of Vietnam’s critical power shortage, should be
considered
 More pressure on the Government to adequately address key
issues on tariff increase, de-monopolization of the power
market

DUANE MORRIS VIETNAM LLC
THANK YOU FOR YOUR ATTENTION!
Duane Morris Vietnam LLC Duane Morris Vietnam LLC
Pacific Place, Unit V1307/08, 13th Floor, Suite 1503/04, Saigon Tower
83B Ly Thuong Kiet, Hoan Kiem District 29 Le Duan Street, District 1
Hanoi, Vietnam Ho Chi Minh City, Vietnam
Tel.: +84 4 39462200 Tel.: +84 8 3824 0240
Fax: +84 4 3946 1311 Fax: +84 8 3824 0241
Contact email:
omassmann@duanemorris.com gtcooper@duanemorris.com

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