On 1 November 2023, the Ministry of Industry and Trade (MOIT) issued Circular No. 19/2023/TT-BCT providing regulations on the method to formulate power generating tariff ranges for solar and wind power plants (Circular 19). In general, Circular 19 outlines guidelines for determining annual electricity generation price frameworks for ground-mounted and floating solar power plants and onshore, nearshore and offshore wind power plants (not including transitional power projects) and lays out the steps for creating and implementing the tariff ranges and outlines the responsibilities of investors, regulatory bodies, and pertinent parties like Vietnam Electricity (EVN). Circular 19 came into force on 19 December 2023 and, accordingly, the first tariff ranges should be promulgated by the MOIT by the end of 2024 for year 2025.
While Circular 19 is one of the set of rules the MOIT is working on to put the Power Development Plan VIII (PDP 8) to life, the MOIT and the Government are still working hard on the same. More specifically, on 1 March 2024, the MOIT, again, submitted another draft on the Implementation Plan for the Power Development Plan 8 as requested by the Government on 29 February 2024 under Report No. 1346/TTr-BCT. It is worth noting that the draft is still structured with two phases implementation which the Government rejected before. At the (almost) same time, On 4 March, MOIT signed a Decision to set up the Drafting Committee and Editing Team for the Electricity Law revision. The Draft Amended Law on Electricity (Draft Law) is on track for public consultation by the end of March 2024. Once reviewed by MOJ, the Draft Law will be submitted to the Government for consideration and decision whether to submit the finalized the Draft Law to the National Assembly. As statted in the MOIT's work plan, the submission of the Draft Law to the Government is scheduled to happen in July 2024. This submission, if endorsed by the Government, must occur no later than 30 days before the opening of the 8th session of the 15th National Assembly, which takes place in October 2024. It is expected that all of the relevant regulations under the Circular 19 and the PDP 8 will become much clearer and enforceable after the issuance of the Implementation Plan and the Amended Law on Electricity.
For further details, Circular 19 regulates the following key provisions:
1. Methods for determining pricing framework
Circular 19 lays out the formula for determining the upper limit of the tariff range (the "Ceiling Price"). Every year, the MOIT will establish and publish Ceiling Price for every category of power plant, using a formula specified in Circular 19. Overall, the method for solar and wind power plants follows the same general structure: the Ceiling Price will be determined by applying the Standard Power Plant's generation cost, which will be determined using either actual or hypothetical data and the methodology specified in Circular 19. In which:
- Standard Power Plant is regulated as a solar or wind power plant (i) being implemented in line with the Power Development Plan; (ii) has investor(s) selected for the project; (iii) has common capacity; (iv) has not entered into any Power Purchase Agreement; (v) is representative of the relevant technology/system. Since Circular 19 is silent on the definition of "common" or "representative" for the aforementioned purposes, it is likely up to EVN's judgment. EVN is tasked under Circular 19 with choosing Standard Power Plants.
- Tariff range: There will be separated tariff ranges for each region of Vietnam with regard to solar power projects developed by reference to the average irradiation levels in each different region. Every year, the MOIT will develop and publish official tariff ranges. The most recent tariff ranges may be temporarily in effect if the tariff ranges for a certain year are not published in a timely manner.
- Ceiling Price: The Ceiling Price is calculated with the formula as below
P = FC + FOMC
In which:
P: power generating tariff (Dong/kWh);
FC: average fixed costs (Dong/kWh); and
FOMC: fixed O&M costs (Dong/kWh).
while
I. Average Fixed Costs (FC): Circular 19 introduces a formula for determining the average fixed costs of a Standard Power Plant. This component serves the purpose of investment recovery and is derived from annual converted investment capital and the projected average electrical energy delivered by the Standard Power Plant over time.
Generally, FC is calculated according to the (not including VAT) for construction of the Standard Power Plant, calculated per year (in Vietnamese Dong) (TC) and the average projected delivered power for a number of years of the Standard Power Plant (E) as follows:
TC
FC = ————
E
and
II. Fixed Operation and Maintenance Costs (FOMC): This element, serving to recover major repair costs and annual operation and maintenance expenses, is determined through a formula considering the fixed total cost for operation and maintenance of the power plant and the average forecast annual electrical energy delivery.
FOMC are calculated in accordance with the following formula:
TCFOMC
FOMCMT = ————
E
whereby TCFOMC is the total fixed O&M costs of the Standard Power Plant is calculated based on the investment rate (Dong/kWp), the total installed capacity of the Standard Power Plant and the ratio of the fixed O&M costs over the total investment capital costs for each type of power plant, based on data provided by consultants engaged by EVN.
2. Step-by-step procedure for promulgation of tariff ranges
Step 1: By 1 November each year, EVN must (i) propose the selection Standard Power Plants; (ii) carry out calculation or hire a consulting firm to select a set of parameters and to calculate the Ceiling Price; (iii) set up an application dossier and submit the same to the Electricity Regulatory Authority of Vietnam (ERAV).
Step 2: After receiving the dossier from EVN, ERAV has five working days to review it for validity and appropriateness. If required, ERAV will submit a request for EVN to amend, add to, or clarify the application's content. EVN is required to provide an explanatory report as requested by ERAV within 15 working days of the request date. ERAV will arrange for an evaluation of the tariff ranges that EVN has recommended if the dossier is legitimate and the explanatory report is adequate, and this will happen within 20 working days of the dossier's arrival. If required, ERAV may confer with the impacted parties (such as pertinent solar or wind power facilities) or an advisory board formed by the MOIT.
Step 3: ERAV is required to suggest that the MOIT take into consideration approving the Tariff Ranges for the following year and post them on ERAV's website within 15 working days after the appraisal date. The most recent tariff ranges may be temporarily in effect if the tariff ranges for the next year are not announced in time.
3. Conclusion and recommended action plan
The stated goal of MOIT Circular 19 is to offer a clear and methodical process for establishing pricing frameworks for wind and solar power generation after the FiT regime. The goals of Circular 19's standards are to guarantee sustainability, efficiency, and justice in the nation's growth of renewable energy projects. The Circular seeks to lay a strong basis for the sustained expansion of Vietnam's solar and wind power industries by defining precise rules and processes. Although these are admirable and significant objectives, there is still much to be decided in order to facilitate the development of greenfield projects, most notably regarding investor selection restrictions and PPA conditions.
With regard to investment into the power sector of Vietnam, it is highly recommended that investors make necessary moves as soon as possible to reap benefits from the PDP 8 and its guiding documents, i.e. Circular 19. Regarding foreign investment protection vis-a-vis Vietnam Government, the Investor State Dispute Settlement (ISDS) will ensure highest standards of legal certainty and enforceability and protection for foreign investors in Vietnam. We recommend foreign investors to carefully select the special purpose vehicle (SPV) to represent its investment in Vietnam to enjoy the legal certainty given by the ISDS mechanism since it is going to be applied under the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). Under such provision of the CPTPP, for investment related disputes, the investors have the right to bring claims to the host country by means of international arbitration. The arbitration proceedings shall be made public as a matter of transparency in conflict cases.
In addition, all decision of the ISDS tribunal is directly enforceable in Vietnam and offshore against Vietnam. That is a level of legal certainty that never existed before in Vietnam. It is a game changer for bankability of transactions. By setting up entities falling under the protection of ISDS mechanism under the CPTPP, investors can enjoy maximum legal protection from the CPTPP while investing in power sector in Vietnam.
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Please do not hesitate to contact Dr. Oliver Massmann under omassmann@duanemorris.com if you have any questions or want to know more details on the above. Dr. Oliver Massmann is the General Director of Duane Morris Vietnam LLC.
Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.
