June 23, 2022

Vietnam's Direct PPA Pilot Scheme | Energy Market Update – June 2022


Background and Current Legislative Status 

Vietnam’s Ministry of Industry and Trade (MOIT) on 20 May 2022 released a revised draft decision on the proposed direct power purchase agreement (DPPA) pilot scheme for stakeholder consultation (May 2022 Draft Decision).1 Vietnam is seeking to implement a DPPA pilot scheme which, for the first time, will enable renewable energy generators to sell clean electricity to private offtakers via a contract for difference (CfD)/virtual power purchase agreement (PPA) arrangement. Under this DPPA scheme: 

  1. the generator and Electricity Vietnam (EVN) will enter into a PPA pursuant to which EVN will purchase from the generator physical electricity at the wholesale spot price;2 
  2. the offtaker will purchase physical electricity from EVN at the retail spot price (which is marginally higher than the wholesale spot price to take into account EVN’s transmission and administrative costs); and 
  3. the generator and the offtaker will enter into a CfD/virtual PPA mainly for the purposes of documenting a pre-agreed electricity purchase price (generally referred to as the strike price). The offtaker and generator are at liberty to determine how this CfD pricing mechanism will operate, but in simple terms, if at any given time the strike price is:
    1. higher than the spot price, the offtaker will pay the generator the difference; or 
    2. lower than the spot price, the generator will pay the offtaker the difference.

The MOIT has prepared several draft legislative instruments since 2020 on the DPPA pilot scheme, with the two most current ones being MOIT’s May 2021 draft circular (Second Draft Circular)3 and October 2021 report (Report No. 94).4 Together with the recently released May 2022 Draft Decision, these core documents provide an insight into the DPPA pilot scheme’s likely structure and conditions. 

No specific launch date for the DPPA pilot scheme has been confirmed by the Prime Minister, although based on the most recent MOIT guidance it is now expected to commence in Q1, 2023, with the final MOIT draft to be submitted for the Prime Minister’s approval in Q4, 2022.

Relevant Changes under the May 2022 Draft Decision (Compared to the Second Draft Circular and Report No. 94)

  1. Removal of the Requirement for the Offtaker to Commit to Purchasing at Least 80% of the Total Power that It Would Have Otherwise Purchased from EVN within a Given Year

    Under the Second Draft Circular offtakers could only participate in the DPPA pilot scheme if they committed to purchasing from the generator at least 80% of the total power that they would have otherwise purchased from EVN within a given year. Report No. 94 did not contain this requirement and as such it has also continued to be omitted from the May 2022 Draft Decision, providing offtakers with greater flexibility as to upfront purchasing commitments. 

  2. Removal of the Requirement for the Generator and Offtaker to Each Provide a Bank Guarantee under the CfD/virtual PPA

    The Second Draft Circular outlined, in limited detail, the key terms to be included in the CfD/virtual PPA between the generator and the offtaker, including a requirement to provide a bank guarantee securing obligations to complete construction of the power plant (for the generator) and securing payment obligations (for the offtaker). This is no longer a requirement in the May 2022 Draft Decision, again providing greater flexibility in terms of how the parties manage financial structuring considerations. 

  3. Removal of the Requirement for the Term of the CfD/virtual PPA to Be between 10 to 20 Years 

    The Second Draft Circular previously required the term of the CfD/virtual PPA to be for between 10 years to 20 years from the plant’s commercial operation date (COD). This requirement is no longer included in the May 2022 Draft Decision. 

  4. Participation Requirements – Generators

    The May 2022 Draft Decision provides further details on the participation requirements for generators. It now makes clear that eligible generators include wind and solar power plants which either:

    1. have achieved COD but failed to do so before the expiry of the feed-in tariffs for wind and solar (1 November 2021); or
    2. are currently under construction and included in the current Power Development Plan and which are able to achieve COD within 270 business days from commencement of the DPPA pilot scheme. 

    Participating generators must also now demonstrate that their power plant capacity/output will not be detrimentally impacted by grid constraints at the time of COD. This will naturally impact the initial project site selection as some regions are currently facing greater grid congestion than others, particularly in the central and south-central regions of the country. 

  5. Pilot Scheme Capacity – 1000 MW

    The May 2022 Draft Decision suggests that where the DPPA pilot scheme receives applications amounting to an aggregate capacity greater than 1000 MW, applications will be assessed based on the total volume of electricity being purchased by each offtaker. This appears to replace the previous 80% minimum purchasing participation threshold imposed on offtakers, thereby indirectly encouraging offtakers to commit to larger upfront volumes.

Going Forward

The introduction of the DPPA pilot scheme is an important step in Vietnam’s path towards a liberalised wholesale and retail electricity market. 

Direct PPAs also play a broader role in their ability to assist developing markets such as Vietnam in their transition towards a decarbonised economy, increasing the deployment of renewable energy assets whilst enabling commercial enterprises to better pursue corporate sustainability targets.

Whilst the draft pilot scheme does not provide for the direct sale of physical electricity from a private generator to a private offtaker (as physical sales are still to be routed through EVN), it nevertheless introduces more sophisticated contracting and financial structures through the use of CfDs which have been successful in overseas markets, thereby serving to attract broader interest from international energy sector participants.

Vietnam experienced a rapid deployment of solar (18 GW) and wind (4 GW) assets over the past three years which has now resulted in material issues around grid congestion and curtailment, requiring wholesale upgrades to Vietnam’s transmission infrastructure. This is why the DPPA scheme is limited to an aggregate capacity of only 1,000 MW. 

The draft PDP8 acknowledges Vietnam’s existing grid overload and curtailment issues, with the MOIT committing to building 86 GVAs of additional capacity for 500kV stations and nearly 13,000 km of transmission lines, requiring up to US$32 billion in investment to 2030. 

Recent amendments to the Electricity Law which came into effect in March this year suggest that investors of power projects are now permitted to build, own, and operate transmission assets, which is a significant deviation from the previous position whereby EVN holds a complete monopoly over the transmission, distribution, and storage of electricity. However, at this stage it is still not entirely clear how the amendments will be applied in practice and market participants are keenly awaiting the introduction of further clarifying guidelines. 

If developers are permitted to fund, build and operate transmission lines, this may fast-track the upgrading of Vietnam’s grid system and alleviate existing overload and curtailment issues, opening the door for further expansion of the DPPA scheme beyond the existing 1,000MW cap.

Private sector participation in electricity transmission may also potentially pave the way for generators to directly sell physical electricity to offtakers when DPPA contracts are introduced into the market on a permanent basis after the conclusion of the pilot scheme in 2025. As mentioned above, this is currently not permitted under the DPPA scheme which requires the transmission of all physical electricity to be routed through EVN.

Please refer to our earlier February 2022 Vietnam energy market update for a more detailed analysis of the proposed DPPA pilot scheme here.

1 MOIT, Draft Decision on Pilot Mechanism for Direct Sale-Purchase of Electricity Between Entities Generating Electricity From Renewable Energy and Major Electricity Consumers, 20 May 2022. 

2 The electricity retail and wholesale spot prices are periodically adjusted by EVN and published on EVN’s website in accordance with Decision No. 24/2017/QD-TTg dated 30 June 2017 and Decision No. 28/2014/QD-TTg dated 07 April 2014.

3 MOIT, Second Draft Circular Providing Regulations on Implementation of Pilot Direct Power Purchase Between Renewable Energy Generators (GENCO) and Consumers, May 2021. 

4 MOIT, Report No. 94/BC-BCT, 29 October 2021. 

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