On 11 April 2017, Vietnam's Prime Minister issued a long-awaited decision approving the mechanism on the development of solar power projects, Decision No. 11/2017/QD-TTg ("Decision 11").
This regulation had been in the drafting stage for the past several years with limited tangible progress. Whilst both foreign and local investors have expressed keen interest in developing solar as a potential renewable power source in Vietnam, concrete projects have stalled. The lack of clear guidance on the development scheme, especially with respect to the tariff structure, constituted an impediment to the development of Vietnam's solar aspiration. Decision 11 could therefore play a vital role in realising the government's goal under the Master Plan VII for renewable energy to contribute 9.9% to the country's total electricity production by 2020, and 21% by 2030. Decision 11 establishes the feed-in-tariff at US$0.0935 per kilowatt-hour (KwH). A key question remaining unanswered is the form of power purchase agreement (PPA) that will apply to solar projects. The key highlights from Decision 11 are detailed below.
Incentives available to investors
Decision 11 adopts similar investment incentives as those applied to wind power projects. Specifically, investors may benefit from the following incentives offered under Decision 11:
Investment credit: In a previous draft of the decision on solar power, investment credits were specifically referenced, though we note that the final draft of Decision 11 is silent on point. However, the government has recently issued Decree No. 32/2017/-ND-CP dated 31 March 2017 on state investment credit ("Decree 32"), which lists solar power projects as eligible for such credit. According to Decree 32, investors in solar power projects may apply with the Vietnam Development Bank (VDB) for a loan of up to 70% of the total investment capital (exclusive of working capital) with a maximum tenor of 12 years. The preferential lending interest rate under VDB loans is the weighted-average rate of five year-term interest rates of government-backed bonds issued by VDB.1
Import duty exemption: goods imported to create fixed assets of solar power projects may be exempt from import duty; imports of components, materials and semi-finished products which may not be sourced locally are also exempt from import duty.
Corporate income tax: solar power projects may also enjoy certain corporate income tax incentives that apply to investment projects in investment sectors encouraged by the state.
Land use incentives: Decision 11 provides that investors may enjoy land use fee exemptions and reduced land use fees pursuant to applicable land regulations. Local People's Committees are also directed to arrange land reserves for the development of solar power projects pursuant to approved development plans.
Waiting for the model PPA
Electricity of Vietnam (EVN), Vietnam's state-owned electricity company, will be the single buyer of electricity generated from solar power projects, as is the case with respect to all Vietnamese independent power projects. EVN is required to buy the entire power generated from on-grid solar projects, with priority given to deploy the full generating capacity of the system. The sale and purchase will be carried out through a 20-year term standard PPA to be issued by the Ministry of Industry and Trade (MOIT). Whilst the model PPA for solar has not yet been released, we would anticipate the quality and terms of the document to be commensurate with those of other domestic independent power projects.
Decision 11 introduces a tariff of US$0.0935 per Kwh for the purchase of electricity from grid-connected solar power plants. This is higher than the tariff applied to onshore wind power projects of US$0.078 per Kwh.
The issuance of Decision 11 is an encouraging step that should help generate more investments to tap Vietnam's potential solar power capacity and enable the country to meet its renewable power targets. We expect the MOIT will soon issue guidance, including the standard PPA, to implement Decision 11.