omassmann legal obstacles for renewable energy development in vietnam


AGENDA

● MESSAGE: LIFE IN A BALANCED ENERGY MIX WITH A STRONG

FOCUS ON RENEWABLE ENERGY

● OPPORTUNITIES FOR RENEWABLE ENERGY INVESTORS

● LEGAL OBSTACLES FOR DEVELOPMENT OF RENEWABLE ENERGY

● RECOMMENDATIONS

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MESSAGE

LIFE IN A BALANCED ENERGY MIX WITH A STRONG FOCUS ON RENEWABLE

ENERGY


WHY RENEWABLE ENERGY?

● Economic Development Demand

● Natural Advantages of Vietnam

● General Policy of Vietnam

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● Economic Development Demand:

Within the next 20-30 upcoming years, the gas and crude oil reserves of Vietnam will become exhausted;

In 2020 Vietnam is expected to import 100 million of coal annually when all existing thermo-electricity plants come into operation;

Electricity demand of Vietnam is expected to increase at 17-20% per year within the period of 2006 – 2015;

4,000 MW should be added to the national grid annually

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● Natural advantages of Vietnam

Vietnam is one of 14 richest countries in water energies with thousands of small rivers and fountains and 9 main rivers with high flow velocity

Wind power potentials of Vietnam in peninsular and littoral zone are 860 – 1,410 kWh/m2/year and 800-1,000 kWh/m2/year respectively

Located in the subequatorial region, Vietnam has good solar resources with solar radiation from 3 to 4.5 kWh/m2/day in winter and to around 4.5 to 6.5 kWh/m2/day in summer

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● General Policy of Vietnam

“Develop a comprehensive and reasonable energy system [including] electricity,

oil, coal, renewable and new energy with the interest in developing clean energy and priority in developing new and renewable energy…”

[Article 1, Vietnam’s national energy development strategy up to 2020, with 2050 vision, as

approved by Decision 1855/QD-TTg dated 27 December 2007 based on Resolution 18-NQ/TW dated 25 October 2007 of Politburo of Vietnamese Communist Party’s Central Committee]

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“Striving for the increase of new and renewable energies in Vietnam to 3%, 5% and 11% of the total basic commercial energies in 2010, 2020 and 2050 respectively”

(“Article 1.2.b, Decision No. 1855/QD-TTg dated 27 December 2007 approving the Strategy for development of national energies of Vietnam up to 2020 with perspective to 2050”)

“In 2010 and 2015 there are 95 % and 100% of the communes able to use electricity”

(“Decision No. 110/2007/QD-TTg dated 18 July 2007 approving the

master plan for development of national electricity for the period of 2006 – 2015 with perspective to 2025”)

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CURRENT LEGAL FRAMEWORK ON RENEWABLE ENERGIES

● Electricity Law 2004

● Decree 105/2005/ND-CP implementing Electricity Law

● Decision No.26/2006/QD-TTg

● Decision 110/2007/QD-TTg approving Sixth Master Plan

● Decision No.30/2006/QD-BCN

● Decision No.18/2008/QD-BCT

● Decision No.2394/QD-BCN

● Decision No.130/2007/QD-TTg

● Investment Law 2005

● Enterprise Law 2005

● Tender Law

● Decree No. 78/2007/ND-CP on BOT, BT and BTO projects


OPPORTUNITIES FOR INVESTORS IN RENEWABLE ENERGY

● Attractive incentives for renewable energy projects

Favorable tariff

Tax incentives

Additional incentives for CDM projects

● Legal framework aims at less monopoly


FAVOURABLE TARIFF

● Decision No. 18/2008/QD-BCT of the Minister of Industry and Trade dated 18 July 2008 (“Decision 18”) and Decision No. 74/QD-DTDL dated 24 December 2008 of the Electric Authority of Vietnam on issuance of tariff based on avoidable costs for the year of 2009 (“Decision 74”) provide a more favorable tariff for small on-grid power plants using renewable energies having capacity of less than 30 MW:

For example, the price of a kWh generated from small hydroelectricity plants to the national grid during peak hours in rainy season of 2009 ranges from US $ 0.115 to US $ 0.117 under Decision 74 compared with US$ 0.027-0.052 as previously provided under Decision 2014/QD-BCN dated 13 June 2007 of the Ministry of Industry.

● The tariff provided under Decision 18 shall be applicable for the purchase between investor of small power plants and the local distributor (currently EVN).

● A new Decree for the government providing a feed-in tariff for wind power projects is expected to be issued by the end of 2010.


TAX INCENTIVES

CIT incentive rate of 10% applies for a period of 15 years to newly-established enterprises investing in power plant projects.

If the projects are classified as large scale projects, using high or new technology and in special need of investment, the time for application of the preferential tax rate of 10% may be extended to less than 30 years in accordance with a Decision of the Prime Minister.

Exemption of import duties for equipments and machinery imported to create fixed assets of the projects is applicable to power projects.


ADDITIONAL INCENTIVES FOR CDM PROJECTS

● Under Decision 130/2007/QD/TTg dated 02 August 2007 of the Prime

Minister, CDM projects are projects invested with new and advanced technologies, environmentally friendly and have sufficient reduced emission results to qualify for the certificates of emission reductions by the CDM International Executive Board.

● Additional incentives:

CDM projects are entitled to apply the accelerated depreciation method

CDM projects are entitled to the exemption of 7 years of the land rental fee from the date of operation of the project

A CDM project which has the production cost greater than the contracting electricity selling price may file an application to the Environmental Protection Fund of Vietnam for price subsidy


LEGAL FRAMEWORK AIMS AT LESS MONOPOLY

● Under Decision 26/2006/QD-TTg approving the roadmap and conditions for establishment and developments of electricity market levels in Vietnam dated 26 January 2006 of the Prime Minister, Vietnam will have a fully competitive retail power market from 2024 onwards:

2005 – 2014: competitive generation market

2015 – 2022: competitive wholesaling market

After 2022: competitive retail market [from 2024 onwards: fully competitive retail market]

● At the stage of fully competitive retail market, customers are allowed to freely choose the power retailer or purchase electricity directly from the spot market. Eligible individuals and organizations are licensed to establish retailing enterprise.


LEGAL OBSTACLES FOR DEVELOPMENT OF RENEWABLE ENERGY

● Electricity prices are still low

● EVN’s monopoly discourages investment in renewable energy

● Unfair right of power purchaser to re-negotiate the electricity price

● Strict requirements applicable to IPP projects

● Uncertainties regarding BOT power projects

Authorized state body for each kind of government guarantee remains unclear

Difficulties for the government in financing large BOT power project


ELECTRICTIY PRICES ARE STILL LOW

● The favorable tariff provided under Decision 18 is only applicable to small power plants

with capacity of equal to or less than 30 MW.

● For projects having capacity of more than 30MW, EVN and the investor has to rely on the tariff provided under Decision No.2014/QD-BCN dated 13 June 2007 of the Ministry of Industry which is unfavorable to the investors.

● Low fixed retail price hampers EVN from paying marketable price to renewable energy power plants:

In 2009, the average retail price is 948.5 VND/kWh (approx. to 0.052 USD/kWh)

After 2010, the ceiling prices for industrial customers will be applicable. However, the retail prices for residential households in localities connected to the national grid are still fixed


EVN’S MONOPOLY DISCOURAGES INVESTMENT IN RENEWABLE ENERGY

● EVN’s acting as the single buyer, distributor, transporter and

moderator may discourage investors

● Reasons:

Renewable energy power plants cannot sell their electricity at a fair price

which affects their ability to cover expenses and gain profits.

For Vietnam: Dominance of EVN would lead to lack of private investment in energy sector which may result in energy deficiency, unimproved infrastructure, and absence of projects on renewable energy, affecting energy efficiency etc.

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STRICT REQUIREMENTS APPLICABLE TO IPP PROJECTS

IPP projects shall conform with the national master plan for power development approved by the Prime Minister and the local master plan approved by the Ministry of Industry and Trade. If not, agreement of the approval authority (the Prime Minister of the Ministry of Industry and Trade) is required.

Equity/debt ratio shall be 30/70 or less in special circumstance. However, the ratio shall not be less than 20/80.

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STRICT REQUIREMENTS APPLICABLE TO IPP PROJECTS

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 Certificate .

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


UNCERTAINTIES REGARDING REGULATIONS ON BOT

● Uncertainties on exact state branch to be in charge of each kind of government guarantee to investor: Article 38, Decree 78/2007/ND-CP: “Where necessary, subject to nature of a project, the Government shall appoint an

authorized body to provide on behalf of the Government a guarantee for loans, provision of raw materials, sale of products in the implementation of the project as defined in the project contract and a guarantee for the obligations of State enterprises which have a monopoly over sale of raw materials or purchase of products and services of the project enterprise”

Currently, the Ministry of Finance is the authorized state body to issue government guarantee re offshore loan. However, what state bodies are in charge of other kinds of guarantees, e.g., offtaker’s liability guarantee, foreign exchange risk guarantee, etc., remains unclear.


UNCERTAINTIES REGARDING REGULATIONS ON BOT

● Limit on government guarantee: A pure foreign exchange government guarantee might not be enough for investors/lender of big projects

Govt. guarantees limited by the IMF under the Enhanced Structural Adjustment Program (ESAP).

Though restrictions expired end of 1998, the Vietnamese are continuing to follow them.

Loans with a maturity of 1 to 12 years, the Ministry of Finance can only provide guarantees up to US$400 million per year.

● Suggestion: Create a sharp national legal framework for debt system, e.g., municipal bond


RECOMMENDATIONS

● Recommendations for a long-term sustainable energy policy for

Vietnam

● Three-things that Vietnamese government can do in the short term to facilitate investment in the energy sector

● Recommendations for investors


RECOMMENDATIONS FOR A LONG-TERM SUSTAINABLE ENERGY POLICY

Defining “sustainable energy” as the provision of energy such that it meets the needs of the present without compromising the ability of future generations to meet their needs. It usually refers to renewable sources as well as to energy efficiency

Balance supply/demand with realistic growth targets, allowing for adequate planning

Evaluate commercial alternatives to meet strategic objectives. Strike a balance between meeting supply needs, long-term energy security, cost-benefit, etc.



Focus on energy efficiency. Create programs that reward and create incentives for efficient energy use. Maximize efficiency through COMPETITION in the gas and power sectors.

Encourage the development and use of cogeneration technologies which greatly improves the efficiency of energy use by the coproduction of power and steam. Opportunity in refineries, petrochemical plants, basically any place requiring steam/heat can become the thermal host for cogeneration;

Cogeneration: is the use of a heat engine or a power station to simultaneously generate both electricity and useful heat



Develop a long-term plan for energy supply that includes a diversity of resources in the mix. Do not rush to meet all near-term supply needs with coal, when there might be better alternatives available. Balance the cost-benefit of each resource in the fuel mix debate. Hydrocarbons will continue to play a huge role in Vietnam’s energy future, so develop policies which most efficiently utilize those resources

Apply the right technology at the right time. Do not rush to apply technology too early before it is ready. Do not lose sight of entire cost to incorporate renewable resources (e.g., interconnection cost of wind and need to bank with thermal or hydro resources in order to have a stable sources of supply)


THREE-THINGS THAT THE GOVERNMENT CAN DO IN THE SHORT TERM TO FACILITATE INVESTMENT IN RENEWABLE ENERGY SECTOR

Increase retail electricity price. This is mandatory to fund the expansion that EVN

must undergo to meet rising demand but also to allow EVN the ability to pay more in PPA’s, which will allow more investments to be made in the energy value chain.

Debottleneck the process of negotiating PPAs and Gas Supply Agreements (GSAs). Accelerate development of the energy markets to move beyond PV as the single buyer of natural gas and EVN as the single buyer of power. Accelerate the timetable allowing for direct sales of gas and power to the industrial sector.

Develop a regulatory framework in gas and power that ensures transparency and predictability for investors.


RECOMMENDATIONS FOR INVESTORS

● In-depth understanding of Vietnamese law regulating power sector, particularly land, electricity price, tax, licensing issues, etc.

● Due care on negotiations of the PPA and grid connection agreement with EVN

● Electricity selling in off-grid areas can be a good choice

● Careful and thorough investment action plan will lead to great success


DUANE MORRIS VIETNAM LLC

HO CHI MINH CITY OFFICE HANOI OFFICE

Me Linh Point Tower Pacific Place

2 Ngo Duc Ke 83B Ly Thuong Kiet

Ho Chi Minh City Hanoi

VIETNAM VIETNAM

Contact email: [email protected]