A FUTURE FOR OFFSHORE WIND IN VIETNAM
Vietnam’s Power Development Plan VIII (“PDP8”) has set an ambitious target of 6GW of offshore wind (“OSW”) by 2030. Unlike Vietnam’s previous power development plans that provided a list of projects within scope, PDP8 only mentions prioritized and major projects on a national scale. While this includes hydropower projects, and thermal (including LNG to power) projects, it does not mention wind projects. To meet the PDP8 scheduled target, the OSW projects should have been identified, investors selected, and permits issued by now, given the typical lead time of 5-7 years for OSW projects to be constructed and commissioned. Investor interest remains strong based on the policy direction that the government has taken and the potential for wind projects there. However, three key challenges need to be addressed to capitalize on this interest.
Policy and Regulatory Framework
- On a positive note, the implementation plan for PDP8 to be issued by the Ministry of Industry and Trade (“MOIT”) is expected to provide details of wind projects within scope. The latest draft of the implementation plan was reportedly sent by the MOIT to the Prime Minister on 31 August 2023, although the timeframe for approval remains unclear and there remain significant logistical and other challenges ahead for the MOIT in finalizing the implementation plan. Provincial authorities should provide a list of projects to consider for inclusion in the implementation plan, for which information will need to be gathered locally to accurately establish electricity demand, to identify renewable sources and to determine optimal solutions.
- We understand that there is a high-level proposal by the MOIT to define a pilot period during which Vietnam Electricity (“EVN”)/Petrovietnam (“PVN”) will develop OSW projects. This would have certain synergies given most of the power infrastructure is also owned by EVN and PVN and, as state-owned enterprises, and EVN and PVN might be better placed to take the first step in respect of OSW projects with input from foreign investors. If such a pilot period is imposed, private investors would likely need to wait until the end of such period before commencing their own OSW projects. While no clear details are available on the pilot program, the wind survey permit issued to the consortium between PTSC, a subsidiary of PVN, and Sembcorp Utilities Pte Ltd for an OSW project in the offshore of Ba Ria Vung Tau province on 29 August 2023 suggests that there may be joint venture opportunities with EVN/PVN even under the pilot program.
- To date, it is unclear whether there are any project-financed OSW projects in Vietnam and international funding will likely be essential for OSWs given that the cost of projects is significantly higher as compared to onshore wind projects. The G7 countries together with Denmark and Norway have committed funding to Vietnam for renewable projects under the Just Energy Transition Partnership and this funding has theoretically been unlocked by the approval of PDP8; however, given the lack of sufficient detail in PDP8, such as a list of projects, questions remain on how this funding can/will be disbursed.
- To enable funding by international commercial banks, the well-publicized bankability concerns of Vietnam’s model power purchase agreement (“model PPA”) need to be addressed. The model PPA, which is applicable to both onshore and offshore wind, still does not include any support for the payment obligations of EVN, project finance style termination provisions, compensation if project output is curtailed by EVN or USD indexation applicable to the tariffs. Currently, EVN (or its wholly owned subsidiaries) is the sole offtaker under the model PPA.
- The model PPA is only required to be used for independent power projects (“IPPs”). Where a project is to be undertaken under Vietnam’s Public-Private Partnership (“PPP”) regime, there may be room for arguing that the PPA and build-operate-transfer (“BOT”) Contract should be on previously financed terms. PPP investors may also be eligible to obtain a guarantee on foreign exchange convertibility of up to 30% of the project net revenue, the only available Government guarantee under the PPP framework. Investors should note however that the governing law of PPP Contracts must be the laws of Vietnam and that PPP Contracts may only be terminated in exceptional cases such as force majeure events, national defence or security reasons, insolvency of the PPP project company, or material breach by the State contracting party. Further, a transfer of equity interests in a PPP company to a third party is restricted until the construction phase has been completed.
- While several OSW developers have submitted applications for wind surveys, until recently, the Ministry of Natural Resource and Environment (“MONRE”) had not approved wind survey permits. Without reliable wind data, it is difficult to see how a base case revenue projection can be established for these projects, assuming there is no capacity element in the tariff (as is usually the case for renewable projects in the region where the project takes resource risks). Whilst it is likely that the MONRE will issue these permits once there is a confirmation of the approach of the MOIT to OSW projects under PDP8, when that will be remains unclear.
- On a technical level, there remain concerns about the capability of the Vietnamese grid system to deal with the high intermittency associated with OSW power generation, particularly in the context of there being no deemed commissioning mechanism under the model PPA. Significant improvements will be needed to the grid system to accommodate the changes in the electricity mix envisaged in PDP8 in the lead up to 2050. In addition, the south of the country, which has the most wind potential, is a significant distance from the high demand in the north of the country. The existing grid system has already shown considerable strain in accommodating current requirements, increasing curtailment risks under the PPA.
- PDP8 does however envisage the upgrading and expanding of grid capacity and includes a list of proposed transmission grid and substation projects although they will require time and money. The Provincial People’s Committees will grant approvals to interested and eligible investors and no restrictions apply on private sector participation in transmission. However, there is no clear framework for investors to invest in transmission grids and hand over operations to EVN or any other relevant authority.
The potential for OSW in Vietnam has never been in doubt. The Government of Vietnam has set a vision for a sustainable future by approving ambitious targets in PDP8. While there are several challenges to implementation, with planning and strategic changes, there should be many opportunities for investment in OSW projects in Vietnam.