investing in renewable energy sector solar and wind power projects – getting deals done

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AGENDA

• BACKGROUND OF SOLAR AND WIND ENERGY INDUSTRY IN VIETNAM

• REGULATORY FRAMEWORK ON SOLAR AND WIND ENERGY

• INVESTMENT GUIDELINES FOR INVESTORS• RECOMMENDATIONS

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Why investing in Vietnam?

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Vietnam 2017 Economy at a glance• GDP: US$220.3 billion• GDP per capita: US$2,385• GDP Growth: 6.81% (record breaking in 10

years)• Inflation: 1.41%• Population: About 91.70 million • Labor force aged 15 and above: 54.61 million• Total export and import turnover: : >US$420

billion (7.1% increase)• Regional Minimum wage (Region I): VND

3.980 million (US$ 175) per month (Jan 2018)

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Vietnam’s super rich population is growing faster than anywhere else….

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… and is on track to continue leading the growth in the next decade

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Communist Vietnam Has More Millionaires Than Capitalist Philippines

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POTENTIAL OF RENEWABLE ENERGY IN VIETNAM

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Energy Sector Background• Electricity demand is expected

to increase by up to 11.4 pct. for the 2016-2020 period and 7 times to 800 billion Kwh in 2030

• Electricity consumption is projected to increase from 85,932 gigawatt hours (GWh) in 2010 to 251,763 GWh in 2020

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POTENTIAL OF WIND/ SOLAR ENERGY IN VIETNAM

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Wind

Solar

Potential: 7,000MWCurrent use: 90 MW

Potential: 4-6 kWh/m2 Current use: 5 MW

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CURRENT GOVERNMENT’S POLICIES ON RENEWABLE ENERGY

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Current Government’s policies on renewable energy – General documents

• Electricity Law 2004 and 2012• The Revised Power Development Plan 2011-2020 (revised PDP

VII) approved by Prime Minister in Decision 428/QD-TTg dated 18 March 2016

• Decision 2068/QD-TTg dated 25 November 2015 on development strategy and vision of RE to 2050.

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Vietnam’s electrical energy mix• Vietnam policy emphasises the need to diversify the country’s

energy mix whilst maximising the use of local energy reserves• Currently Vietnam is developing an energy mix sector with

the mainstay of coal fired power

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Coal production – World Bank no longer supports???

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Current Government’s policies on renewable energy – Wind power• Decision No. 37/2011/QD-TTg dated 29 June 2011 on support

mechanism for wind power projects• Circular No. 32/2012/TT-BCT dated 12 November 2012 on

development of wind power projects and power purchase agreement for wind power projects

• FIT: 7.8 UScents/kWh(Buyer has financial support of 1UScent/kWh from the Environmental Protection Fund) –proposed by the MOIT to increase to 8.77 UScents/kWh (pending approval by the Prime Minister, most likely until the second half of 2019)

• PPA: Based on sample PPA.15

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REGULATORY FRAMEWORK ON SOLAR ENERGY

• Decision 11/2017/QD-TTg dated 11 April 2017 by the PM on support mechanism for development of solar power projects in Vietnam

• Circular 16/2017/TT-BCT dated 12 September 2017 setting out requirements on protect development and template PPA for solar power projects

• Solar Master Plan will be released in 2018.

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Solar Decision• FIT:

– On-grid projects: 9.35 US cents/kWh. The rate in VND will be adjusted annually according to the fluctuation in the VND/USD exchange rate.

– No FIT for off-grid rooftop projects– Only one off-taker (EVN) – The FIT applies for projects which come into operation before 30 June 2019

and within 20 years from the commercially operational date (i.e., the date when the solar plant is ready to sell electricity to the buyer – EVN)

– No reference to Consumer Price Index to address inflation risks• Net metering: applicable for rooftop projects. Oversupply amount will be

credited to the following month. At the end of the year or expiry of the PPA, exceeded amount will be sold to EVN at 9.35 US cents/ kWh.

• Under 1MW rooftop solar projects are not subject to power generation license.

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Solar PPA• Non-negotiable PPA and compulsory application for grid connected

solar projects• EVN has the obligation the buy all electricity generated from solar power

projects. However, in the PPA, EVN may stop buying electricity in certain circumstances beyond the reasonable control of the seller, without any compensation or payments to the seller/project developer.

• The purchaser must pay the seller only for the electricity that is received by the purchaser. The solar PPA does not include any provision where the purchaser is unable to take the electricity produced.

• Dispute resolution: by litigation before Vietnamese courts or mediation/ resolution at authorized energy state authorities of Vietnam. No international arbitration is mentioned!

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Back up from the Government re. the PPA

• In the recent concluded wind PPAs, the Government subsidizes EVN 1 US cent/ kWh with regards to the whole power output sold to EVN

• This subsidy no longer exists in the recent Solar Decision.• Solar PPA: no provision on any form of government

guarantee to enhance the creditability of EVN• No hint to make the solar PPA bankable.

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The EVN

• PPA is required to follow a specific template, which is not bankable.

• The PPA template is unclear whether it is a “take or pay” agreement.

• No amendment of the PPA template is possible, except the supplementation to clarify the rights and obligations of the parties, PROVIDED that it does not change the basic contents of the PPA template.

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I am only EVN (Human)I am only EVN (Human)

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Legal solutions for getting deals done in reasonable time without having to negotiate with EVN

• Try small projects And Go off-grid

• Only provincial People’s Committee and the direct buyer (a company in an industrial zone for example) involved

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Direct solar PPA

• The Government in practice does not support off-grid projects.

• The Government is working on a pilot program for direct PPA to come in Q3 2018.

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But don’t worry! We have the EU – Vietnam FTA and CPTPP• EU – Vietnam FTA:

– EU-Vietnam Free Trade Agreement (EVFTA) are ratified, Vietnam will have more legal certainty than even Germany.

– EVFTA implements investor-to-state dispute settlement (ISDS) mechanisms – investors can claim in case that an investor protection obligation has been breached

– Domestic courts cannot question the legal validity of the decisions

• Comprehensive and Progressive Agreement for the Trans-Pacific Partnership (CPTPP):

– The TPP was already concluded on 06 October 2015 but President Trump decided to withdraw from it upon his inauguration

– TPP continues without the US, to be signed on 08 March 2018.– New TPP accounts for 12.9% of global GDP and 14.9% of global trade.

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Multilateral Investment Guarantee Agency (MIGA)• What’s MIGA?

In short, a political risk insurance (guarantees) for projects with the World Bank as the Insurer.

• What does MIGA cover?All risks & losses of the insured projects relating to:§ Currency inconvertibility and transfer restriction§ Expropriation§ War, terrorism, and civil disturbance§ Breach of contract§ Non-honoring of financial obligations

• What are the leverages?MIGA’s valued added benefits are:

§ Deterring harmful actions - MIGA’s status as a member of the World Bank Group and its relationship with shareholder governments provides additional leverage in protecting investments.

§ Resolving disputes - As an honest broker, MIGA intervenes at the first sign of trouble to resolve potential investment disputes before they reach claim status, helping to maintain investments and keep revenues flowing.

§ Accessing funding - MIGA guarantees can help investors obtain project finance from banks and equity partners.§ Lowering borrowing costs - MIGA-guaranteed loans may help reduce risk-capital ratings of projects.§ Increasing tenors - The agency can provide insurance coverage for up to 15 years (in some cases 20), which may increase the tenor of

loans available to investors. § Providing environmental and social expertise - MIGA helps investors and lenders ensure that projects comply with what are considered

to be the world’s best social and environmental safeguards.25

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Multilateral Investment Guarantee Agency (MIGA)

• Eligibility?– MIGA insures cross-border investments made by investors in a MIGA member

country into a developing member country (181 countries members: Vietnam is a developing member country).

– In certain cases, the agency may also insure an investment made by a national of the host country, provided the funds originate from outside that country.

– Corporations and financial institutions are eligible for coverage if they are either incorporated in, and have their principal place of business in, a member country or if they are majority-owned by nationals of member countries.

– A state-owned company is eligible if it operates on a commercial basis. An investment made by a non-profit organization may be eligible if it is carried out on a commercial basis.

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Multilateral Investment Guarantee Agency (MIGA)

• How to apply for and obtain MIGA?

Essentially this is a two-step process:

Ø Filing a Preliminary Application. Notes: Before filing the Preliminary Application make sure your investment meets MIGA’s eligibility criteria.

Ø After MIGA processes your Preliminary Application and determines your project is potentially eligible for MIGA cover, you should submit the Definitive Application, supporting documents, a refundable application fee of US$10,000 and a non-refundable processing fee.

Detailed information is available at www.miga.org/investment-guarantees.

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Investment guideline for foreign investors

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WTO ANALYSIS OF LIBERALIZATION OF MARKET ACCESS

Vietnam ties in first place with Singapore

• *Typical restrictions: number of opened sectors, JV requirement, limits on foreign-owned shares, permission requirement

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Country Limitation of market access*

Country Limitation of market access*

Malaysia medium Myanmar highIndonesia medium Cambodia medium

Philippines medium Laos mediumSingapore low India highThailand medium China mediumBrunei high Vietnam low

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Market access and Forms of investment in power market

• No foreign ownership restriction• Investment forms:ü A wholly-owned foreign enterprise ü A joint venture company between a foreign investor and domestic

investorü Investment pursuant to the BOT legal framework ü Through the purchase of shares in either an EVN subsidiary being or

having been equitized or a private IPP holding power assets.

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BOT – BEST INVESTMENT FORM

• Government’s Decree No. 15/2015/ND-CP on Public-Private Partnership: making projects more bankable

• Easier to negotiate more favorable electricity rates.• Easier to obtain more government guarantees, especially

in terms of EVN’s obligations to purchase all electricity from the project.

• More fiscal and financial incentives.• Precedent large-scaled BOT power projects in Vietnam:

Phu My, Vung Ang, Mong Duong 231

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INVESTMENT INCENTIVES

• Subject to the decision of the local People’s Committee where the project is located

• Land: exemption of land rental within 3 years from the operation date of the project, etc.

• CIT 10% – 15 years for new enterprises investing in power plant projects – tax exemptions within 4 years and tax reduction by 50% in the next 9 years.

• Import duty exemption – on goods imported to create fixed assets of the projects; components,

materials and semi-finished products which are not available at home for the project’s operation.

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Project planning• Investors has to obtain prior agreement of EVN on power purchase prior to

licensing procedure.• Commitment of banks or credit institutions on financing the project must be

obtained prior to issuance of Investment Registration Certificate .• In-principle approval of the local People’s Committee is required prior to

issuance of Investment Registration Certificate depending on the project size• A solar power plant must obtain a power generation permit from the competent

State authorities in order to conduct power generation operations in Vietnam• Term of the permit: maximum 20 years for large power plants with particularly

important meaning on economy, society, national defense and security as per the list approved by the Prime Minister; and 10 years for other power plants projects.

• The permit cannot be renewed but the investor may apply for a new one within 60 days prior to the expiry date of the current permit.

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Project licensing• Step 1: The investor obtains approval from the competent authority [e.g., Prime

Minister, MOIT] approving the solar power plant as part of the power development master plan (if required).

• Step 2: The investor obtains in-principle approval from the competent People’s Committee (or other competent authorities subject to the details of the project) approving the solar power plant project, land demand / location, environment, construction plan, other terms of the project.

• Step 3: Application for issuance of the Investment Registration Certificate and the Enterprise Registration Certificate

• Step 4: Preparation of construction / operations of the solar power plant (for example, acquiring land area, site clearance, preparation, land investigation, conducting environmental assessment)

• Step 5: The project company to obtain necessary permits (e.g. electricity generating permit) and relevant agreements (e.g. PPA) for its and the power plant’s operation.

• Step 6: Construction of solar power plant and operation34

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RECOMMENDATIONS FOR INVESTORS• Public private partnerships (e.g. - BOT) should be the first option.• Due care on negotiations of the PPA and grid connection agreement with EVN• Electricity selling in off-grid areas can be a good choice• Sound financing structure, good business model and great legal assistance are keys

to success.• Accurate prediction of where the market is heading to, in the context of Vietnam’s

critical power shortage, should be considered.• More pressure on the government to adequately address key issues on tariff

increase, demonopolization of the power market and government guarantee.• Vietnam’s market is extremely in need of financing and EPC capability. There are

rooms for cost-effective and high quality EPC contractors and resourceful lenders.• In many cases, you can “test the water” with a small power plant project.

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CONNECTIONS ARE BUSINESSPLEASE CONNECT WITH ME ON

LINKEDIN:OLIVER MASSMANN

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WHEREVER YOU ARE - BE ALL THERE

Jim Elliot

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DUANE MORRIS VIETNAM LLC

Thank you very much!

HANOI OFFICE HO CHI MINH CITY OFFICE

Pacific Place, Unit V1307/08, 13th Floor, Suite 1503/04, Saigon Tower 83B Ly Thuong Kiet, Hoan Kiem District 29 Le Duan Street, District 1Hanoi, Vietnam Ho Chi Minh City, VietnamTel.: +84 4 39462200 Tel.: +84 8 3824 0240Fax: +84 4 3946 1311 Fax: +84 8 3824 0241

Contact email:

[email protected]

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References (1)

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References (2)

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References (3)

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References (4)

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