At the 26th Conference of Parties in Glasgow in 2021 Vietnam’s Prime Minister Pham Minh Chinh stood before the attendees and declared that Vietnam’s economy would be net-zero by 2050. This was an ambitious target for a country developing incredibly quickly and hugely dependent on coal.
Vietnam, was at the time, however, building out what would become the highest installed capacity of renewable energy of any nation in Southeast Asia, the result of a relatively high feed-in tariff policy.
On the face of it, this policy was a job well done, serving to spur investment in renewables, however, behind the scenes, a significantly bigger number of projects were being approved than had been planned.
A Government Inspectorate report released earlier this year found that whereas 850 megawatts of solar power had been in the Power Development Plan 7, in reality, by the end of 2020, projects accounting for almost 15,000 megawatts had been approved (This had blown out to just under 22,000 megawatts by 2023).
Needless to say, it was no surprise that the grid was insufficient to carry all of that power to where it needed to be and renewable energy producers were forced to curtail their output at times by up to 40 percent, to avoid overloading Vietnam’s grid.
Moreover, the feed-in tariffs these projects were commanding were generally higher than average electricity prices and were arguably a key contributor to the huge losses of the state-power provider, EVN, in 2022 and 2023.
As a result, the Ministry of Industry and Trade, which oversees Vietnam’s power supply, started to sour on renewables–last year, it moved to end feed-in tariffs on waste-to-energy and biomass power projects and earlier this year it was arguing for no feed-in-tariffs for excess rooftop solar to avoid encouraging firms to build more than they need.
It’s in this context that direct power purchase agreements or DPPAs, approved last week through Decree 80, have the potential to offer some real value, providing a way for private consumers and power producers to work around the ministry’s concerns.
But for all their potential there are a number of challenges DPPAs will need to overcome. For one, when utilising the national grid for transmission purposes, prices negotiated between producers and consumers will be linked to Vietnam’s wholesale electricity market.
Technically speaking, the power generator will sell electricity to EVN at the spot price with EVN delivering an equivalent amount of power to the consumer who will pay a rate determined by EVN (the formula for which is outlined in the decree).
The difference in these prices to the contract between the power generator and the end consumer will then be settled between themselves.
But Vietnam’s spot electricity market is not particularly well developed with only about 39 percent of power generators participating. Furthermore, EVN is the sole buyer of electricity and still, for the most part, negotiates power prices directly with producers. Ergo, competitive pricing in the spot market is limited.
What’s more is that changes to the market have been tabled though are well behind schedule. This could create uncertainty in spot price projections and make it challenging to negotiate long-term contracts.
Furthermore, all new projects will need to be approved which will mean they will need to fit within existing power development plans, both national and provincial. These are often settled years in advance and it may be that developers with new projects need to wait until the next round of power planning in 2030.
That said, the decree does allow for private grid infrastructure and with significantly less regulation for projects that do not connect to the national grid. This, however, can be complex with firms of the magnitude required to enter into a DPPA–their minimum consumption needs to be 200,000 kilowatt-hours a month–often operating factories scattered around the country rather than in one single location.
That is not to say that it can’t be done. Trung Nam Group, a well-known local renewables developer, built a solar power plant in Ninh Thuan back in 2020 and also built a transformer station and the power lines connecting it to a local commune. The generator and its intended consumers, however, were geographically fairly close. This would be considerably more difficult moving power from the middle of the country to say key manufacturing hubs in and around Hanoi, for example.
All of that said, whether or not this legislation is effective at driving investment in renewables in Vietnam may not even really matter.
DPPAs are for the most part being pushed by foreign firms with carbon reduction commitments. The aesthetics may in fact be the most important part, specifically the Renewable Energy Certificates codified in the decree. Forging DPPAs with existing renewable energy producers, in this light, may then be enough to secure these certificates to placate carbon-concerned stakeholders.
But this all remains to be seen with the decree still very fresh and a number of key details still to be clarified.
That said, broadly speaking, Decree 80, does seem to offer, in this early stage, broad opportunities to bypass key challenges facing Vietnam’s renewable energy sector. Whether this reality is realised, however, will largely hinge on how the new decree is implemented.
With this in mind, firms looking to follow said implementation of Vietnam’s new direct power purchase agreement decree can best do so by making sure to subscribe to the-shiv.