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Vietnam’s bid to become a wind powerhouse

The outlook for investment in wind projects in Vietnam is ‘very positive’, despite continuing regulatory uncertainty and some of the usual risks that come with investing in developing markets.

Vietnam made an ambitious pledge in 2021: to phase out coal power entirely by 2040, a step that many developed countries have failed to take, never mind a Southeast Asian nation with huge strides still to make on renewable energy installation.

Underpinning that aim, which is part of the country’s wider goal of reaching net-zero carbon emissions by 2050, is a large expansion in solar and wind development.

Wind offers huge potential for investors, with Fitch Solutions Country Risk and Industry Research naming the sector in Vietnam as a “market to watch” in a briefing note published in December 2021.

Daine Loh, an infrastructure and power and renewables analyst at Fitch Solutions, says: “We named Vietnam as a market to watch this quarter because we expect rapid [growth in] wind power capacity over the decade from both the onshore and offshore segments, with further upside given the increasingly supportive regulatory environment for the sector and a project pipeline that has continued to expand.”

Fitch Solutions has forecast that total wind capacity will increase from around 3GW in 2021 to just under 13GW by 2030, with the government also looking to develop 21GW of offshore wind by 2045.

“The potential opportunities for wind investment in Vietnam are considerable. Vietnam is an energy transition leader in ASEAN and the country’s plans to develop its wind power capacity far outpace those of its neighbours such as Thailand or the Philippines,” says Jamie Franklin, partner at law firm White & Case in Singapore.

Generous tariff

Vietnam has several advantages that make it an attractive place for wind investment. The most obvious is its massive 3,000 kilometre-plus coastline, perfect for extensive offshore wind development, which when coupled with high wind speeds make the case for wind power clear. Loh says that both onshore and offshore wind are “equally attractive” at present.

The country is also very open to foreign investment, as InfraCo Asia chief executive Allard Nooy explains: “There are no restrictions on foreign direct investment in Vietnam. A lot of other countries in the region have these, like the Philippines, but in Vietnam you can have 100 percent foreign ownership.”

“Vietnam is an energy transition leader in ASEAN and the country’s plans to develop its wind power capacity far outpace those of its neighbours such as Thailand or the Philippines”
Jamie Franklin

Vietnam has also had a generous feed-in tariff of $0.085/kWh for wind projects, which helped spur a flurry of development ahead of that tariff’s expiration on 1 November, 2021.

Not all projects were able to get over the line in time, however, thanks to supply chain and construction delays because of the pandemic – and the Vietnamese government opted not to grant an extension.

“There are some uncertainties given that the government is still considering price mechanisms for projects that missed the deadline… despite strong appeals from many investors and associations,” Loh says.

“It is also still uncertain if the government will continue with tariffs or move to an auction-based system for wind projects going forward. We believe these will likely be announced after the Power Development Plan 8 (2021-30) is finalised and approved, but it’s still not very clear when or what PDP8 will entail, given that each draft rendition released over the past year has seen significant differences.”

Legal uncertainties

This uncertainty is probably the main risk for investors to weigh up if they are considering wind projects in Vietnam.

Nooy says that InfraCo Asia is in the planning stages of a project in Quang Tri province, which would see it finance and build two 50MW wind farms there. He believes the project will be on the PDP8 list of approved schemes, but the firm is waiting for the plan to be finalised.

“There are no restrictions on foreign direct investment in Vietnam… you can have 100 percent foreign ownership”
Allard Nooy

“There have been initial talks about an auction process, similar to what they are designing for solar. But more recently there have been noises about introducing a cap on the rate of return that developers can make on their wind power projects,” Nooy says, a different funding model once again.

Navigating this legal framework, and the uncertainty around what it may look like in the near or medium term, is a major challenge, says Tim Fourteau, another partner at White & Case in Singapore. “Vietnamese laws and regulations are often grey, incomplete, inconsistently interpreted and applied, and irregularly enforced, while the judicial system lacks binding case laws providing legislative guidance,” he adds.

“Compounding this issue, corruption remains pervasive in the country. Foreign investors have to be comfortable with (and price in) a degree of uncertainty when investing in the country and should carefully conduct due diligence on their local business partners.”

In addition, Fourteau says, poor record-keeping can make it hard to determine with certainty who owns title to a particular piece of land, while restrictions on currency conversions and repatriations mean that investors have to assume a level of foreign currency risk.

InfraCo Asia’s Nooy says that finding local expertise, if that due diligence is robust, is a vital part of doing business in the country.

“It is still uncertain if the government will continue with tariffs or move to an auction-based system for wind projects going forward”
Daine Loh

“There are regular changes to legislation which can impact projects. Rules and regulations are issued by line ministries, so there is no one-stop-shop for foreign direct investment as there is in other places like Indonesia. That’s an investment risk – these circulars are issued in Vietnamese, so before you have an English translation on your desk, there could be another change to the regulation.

“I would say it’s advantageous to have either your own Vietnamese nationals on the ground, or a local partner.”

Off-take agreements

And it’s not just the regulatory framework that will pose a barrier for some. The market for power-purchase agreements is underdeveloped, with only one off-taker available at all for wind projects: the state utility Vietnam Electricity (EVN).

There are differing views about how reliable EVN is as an off-take partner, with Franklin saying that a “more bankable form of power-purchase agreement could help developers in procuring international financing for their projects”.

“Vietnamese laws and regulations are often grey, incomplete, inconsistently interpreted and applied, and irregularly enforced”
Tim Fourteau

Nooy, though, says that InfraCo Asia’s previous experience on solar and run-of-river hydro projects in the country have been mostly positive when it comes to dealing with EVN.

“I’ve seen certain statements saying EVN is not bankable, or it can’t commit to paying its bills. EVN, to date, has never defaulted on a foreign-owned independent power producer. I know they have had significant delayed payments with local IPPs, but not a foreign one – so that is a sign of commitment,” he says.

“On our previous Vietnamese projects, you would have to do quite a lot of paperwork every month to submit your invoice, navigating a lot of red tape, but once you are used to that process, we were largely paid on time. It was only during covid that there were a couple of months that saw a few weeks’ delay.”

Despite some of these concerns, all sources tell Infrastructure Investor that the wind sector in Vietnam presents a huge amount of promise for those investors willing to put in the work.

“While to date much wind development in the country has been characterised by smaller-scale onshore wind farms, the market is now watching in anticipation as major international wind players look to enter the field and undertake larger projects, especially offshore wind projects,” Franklin says, with Ørsted one of the latest to announce in Q4 2021 that it planned to develop 3.9GW of offshore wind in the country.

“With supportive government policy-making and continued investor appetite, the future for wind power in Vietnam looks very positive.”