Investing in Vietnam’s renewables sector, one of the most-talked about opportunities in Asia-Pacific, is not for the faint-hearted. Palpitation-inducing examples include PPAs of dubious bankability, a complex permit system and curtailments caused by poor grid infrastructure.

“Some solar projects in the south of the country have seen their production curtailed by up to 80 percent some days,” says Cristiano Spillati, managing director of Limes, a developer with a pipeline of 1GW in Vietnam. “There is a risk that projects owned by smaller investors, especially local ones, might default at some point.”

Despite these risks, there seems to be a consensus that the country is poised to play a major role in the development of renewables across Asia-Pacific.

“We have seen all kinds of international investors coming to the market, from investment funds to industry developers,” says Chi Lieu Dang, an M&A partner at Baker McKenzie’s Hanoi office.

Most sources agree that investment has been driven so far by local and regional players. However, they add that foreign infrastructure investors have been following the market closely and, in some cases, have started investing in it.

“Private equity is already there, having invested in some of the earliest FiT [feed-in tariff] projects in wind and solar,” says Wymen Chan, managing director of the Asia team of energy-transition specialist SUSI Partners. “But, similar to international project finance debt providers, they struggle with the shortcomings related to the [Vietnamese] PPAs and resulting lack of non-recourse project finance.”

Interest in Vietnam is being driven by the country’s large energy needs and its attractive natural energy resources, Chan says. He adds that the country is a key market for SUSI’s Asia Energy Transition Fund.

“Market participants view the addition of more renewable generation as the only way to close the supply-demand gap [in Vietnam],” he says.

Vietnam is aiming to increase its installed capacity at a pace of between 6,000MW to 7,000MW per year, to match its increasing demand for electricity, according to a report by the Institute for Energy Economics and Financial Analysis.

At the same time, according to data from Vietnam’s Institute of Energy, the latest draft of the government’s Power Development Plan aims to increase the share of renewables in the energy mix from 9.9 percent to 21 percent between 2020 and 2030.

“The country’s high energy needs are one of the motivations for the government to provide the right framework that should allow international capital to be deployed in the renewables space,” says James Knight, partner and co-lead of the renewables team at financial advisor Augusta & Co.

Sustainable FiT

But Vietnam has a lot of work to do if it wants to keep its momentum, including approving a new FiT scheme. Its initial subsidy of 9.35 US cents per kWh for solar power – launched in 2017 and ended in June – triggered the addition of more than 4.4GW of solar power to the grid, according to the IEEFA report. The government is now considering a second scheme, which could bring subsidies down and include different tariffs according to the location of the projects.

Dang points out that even with the proposed reduction in solar tariffs to between 7.09 US cents and 7.69 US cents per kWh, investors believe the projects would remain viable. “As FiTs are reduced, or a new auction scheme is put in place [after 2021], we expect to see more investors with long-term investment plans,” he says.

“When it comes to curtailment risk, the PPA [model] allows unlimited curtailment due to technical reasons, including lack of grid capacity.”

Hans Menski
Clifford Chance

The new scheme, which might be approved by the first quarter of next year, is expected to include region-specific tariffs designed to alleviate grid connectivity problems and lure investors to areas where fewer projects have been developed.

“There’s a lot of concerns about development continuing to be focused on the southern region, which has a higher radiance level,” says Spillati. “Therefore, a new FiT scheme with regional subsidies would make much more sense.”

Grid constraints have become one of the main concerns for investors, partly due to the current PPA model used for renewables in the country.

“When it comes to curtailment risk, the PPA [model] allows unlimited curtailment due to technical reasons, including lack of grid capacity,” says Hans Menski, a partner at law firm Clifford Chance.

Despite this, different sources stressed the government has identified the problem and is considering several solutions, including liberalising the electricity transmission sector to speed up its development.

“The government has realised that grid constraints are a real risk for their renewable plans,” says Dang Duong Anh, managing partner at Vietnam International Law Firm.

James Knight, from Augusta & Co, who has advised on the development of offshore wind projects in the country, points out that such improvements will be crucial for investors considering developing large-scale wind farms.

“There’s a lot of goodwill, but the implications of such a large injection of energy into the system will need to be sorted out before projects enter
the construction phase,” he says.

Several sources also point out that Vietnam’s PPA model is not up to international standards.

For example, the contracts dispute resolution mechanism doesn’t allow market players to seek international arbitration. The conditions on termination payments are also considered insufficient.

“If the developer chooses to terminate the PPA due to [state-owned utility] Vietnam Electricity’s default, then the termination payment amount that [the state-owned utility] would pay the developer will be limited to the value of the electricity output that was generated during the last one year,” says Baker McKenzie’s Dang.

Vietnam Electricity is currently rated BB with a positive outlook by ratings agency Fitch. Dang adds contracts are similarly lacking protection mechanisms typical in internationally bankable PPAs, such as protections in the event of political force majeure and changes in law.

PPA woes

Clifford Chance’s Menski says that despite this, there seems to be little incentive for the government to consider making the PPA more favourable for foreign companies, thanks to the success of the first phase of the FiT scheme.

Facing this situation, investors will need to find solace in the market’s solid fundamentals and data from a growing number of operational projects.

“Once there is a track record of 18 to 24 months of stable offtake and consistent payment from Vietnam Electricity under renewables PPAs – and the grid capacity issues are addressed and curtailment risk diminishes – foreign investors are likely to proceed cautiously into the market,” Menski argues.

Spillati, who already has a presence in Vietnam, agrees that investors will need to adapt to the local conditions.

“Ultimately, more capacity needs to be developed or the country will start suffering power shortages, impacting its industrial production,” he says. “Furthermore, solar will be the cheapest energy source and, therefore, we expect that Vietnam Electricity will fulfil its obligations in the future.”