Feed in-tariff regulations and getting wind power projects done (en)

Feed-in-tariff regulations and getting wind power projects done

OLIVER MASSMANN - GILES T. COOPER Partners

DUANE MORRIS VIETNAM LLC

AGENDA: • Snapshot of wind power development in Vietnam • Regulations on feed-in-tariff: can wind power be profitable? • Tariff negotiations with EVN/PV Power • Getting permits on time: how to handle the red tape

GREEN GROWTH & INVESTMENT


Snapshot of wind power development in Vietnam


• State policy on wind power: Clear intention to develop green power industry Master plan VII about energy development in Vietnam: To prioritize quick development of electricity sources from renewable energy (wind power, solar energy, biomass energy, etc.) Offered incentives and preferential treatment to the wind power industry

• Vietnam’s wind power potential: With 3,000-kilometre coastline and an average wind speed of 7 m/s, Vietnam has greatest potential of wind power development in Southeast Asia: 8.6% territory in comparison with 2.9% of Laos, and just 0.2% of Cambodia and Thailand Total estimated potential: as high as 713,000MW – 510,000 MW on land and 203,000 MW on islands Wind power potential in Vietnam is 200 times more than the capacity of Son La, largest Southeast Asia hydropower plant and more than 10 times total projected capacity of Vietnam’s power generation in 2020

• What is current status of wind power projects? As of May 2012, 67 wind power projects in Vietnam under development

First wind power plant in Binh Thuan Province was completed in April 2012 and in June 2013, another one in Bac Lieu commenced operations

The others are generally behind construction and implementation schedule


• What is behind the delays? Lack of finance for project implementation

No comprehensive regulatory framework on wind power

Hindrance of complicated administrative procedures

Delays relating site clearance and access


Regulations on feed-in-tariff: can wind power be profitable?


• Non market based pricing mechanism in Vietnam’s energy market:

Current pricing mechanism: NOT reflective of the actual production and distribution costs with reasonable returns on investment for investors

• Feed-in-tariff (FIT) mechanism for wind power projects:

FIT mechanism not yet developed in Vietnam Insufficient regulatory background: Decision No. 37/2011 of the Prime Minister (PM) and Circular No. 96/2012 of the Ministry of Finance


• How FITs should work!


Prices are regularly reviewed for new projects and reduced to encourage technical innovation

and reflect falling costs

Government sets the feed-in tariff for

suppliers feeding RE into the grid

Renewable systems are built all over the

provinces

Local distributors /utilities allow grid access and pay the

set price to RE operator

Incremental costs are passed on to the

customers


• How does FIT mechanism work in Vietnam? EVN has take-or-pay obligations towards wind energy developers

EVN or authorized affiliated units receive subsidy via the Vietnam Environmental Protection Fund

Subsidy formula: Amount of electricity price subsidy (VND) = Rate of electricity price subsidy (VND/kWh) x Power output purchased (kWh)

Rate of electricity price subsidy and term of tariff subsidy will change from time to time based on PM decision


• What is current purchase price of wind power in Vietnam?

Power purchase price for on-grid wind energy projects: 7.8 US cents/kWh (excluding VAT)

Electricity price subsidy: 207 VND/kWh (1 US cents/kWh) subsidized from Vietnam Environmental Protection Fund for all electricity EVN purchases from wind energy plants

Term of tariff subsidy: 20 years (i.e. term of wind energy Power Purchase Agreements (PPAs))

• Fiscal and financial incentives for wind power projects: Corporate income tax incentive rate: 10% for a period of 15 years to newly-established enterprises investing in power plant projects Possibility of 10% tax rate being extended up to 30 years: if the projects are classified as large scale projects, using high or new technology and in special need of investment Exemption of import duties: for equipment and machinery imported to create fixed assets of the RE projects Special encouraged projects: exemption/reduction of land use fee/rental (depending also on the location of the projects)

• Can wind power be profitable with current tariff?


Comparison of FITs for wind power

Vietnam Thailand Philippines

7.8 US$ cents/kWh 18 US$ cents/kWh 19.5 US$ cent/kWh

• Can wind power be profitable with current tariff? Current average retail electricity tariff of Vietnam is 6,8 UScent/kWh.

However, still lower than electricity tariff of other Asian countries

• • • Recent FIT proposal for Bac Lieu Wind Power Plant:

The MOIT proposed new FIT for the PM’s approval: For first 10 years: 11.5 UScent/kWh and next 04 years: 9.8 UScent/kWh While the developer expects from 10.2 to 12 UScent/kWh


•Recommendation: The Government cannot continue subsidizing EVN as currently and will have to adopt a FIT mechanism for wind power in particular and renewable energy in general

•Solutions to finance wind FITs: “Cross-industry" financing?

How does it work? Example of Germany: taxing heavy industry which cause much pollution with a special environmental tax, proceeds from this are used to subsidize FIT for wind and other renewable energies


Tariff negotiations with EVN/PV Power


• Why negotiate tariff with EVN and PV Power? The power purchaser under standard PPAs is EVN or authorized dependent entities The investor has to obtain agreement of EVN on power purchase prior to licensing procedures EVN monopoly in energy market: EVN acts the single buyer, distributor and transporter PV Power’s involvement is new hope for a more diversified energy market

• Dominance of EVN in the energy market: Leads to lack of private investment in energy sector which may result in energy deficiency, unimproved infrastructure, and absence of projects on renewable energy, affects energy efficiency etc No guarantee of fair price for wind power projects as well as fair competition in the market



• Negotiation with EVN/PV Power: Why NOT efficient?

INEXPERIENCE: Lack of knowledge/experience on international business practice, language barriers, skilled lawyers, etc.. Complex approval procedure: Too many parties involved

•IMPACTS: Negotiation process is SLOW AND INEFFICIENT Mistrust and reluctance from foreign investors: they cannot wait for years to finalize a PPA

• Unfair right of electricity purchaser to re-negotiate the electricity price in PPA even after PPA has been signed

• Article 23.5 of Electricity Law scares the investors: “An electricity purchaser shall have the right to require the electricity seller to

reconsider the amount of the electricity price payable and, upon receipt of such a request, the electricity seller must resolve it within fifteen (15) days. If the electricity purchaser disagrees with the resolution of this issue by the electricity seller, the electricity purchaser may request the competent body or organization to conduct conciliation and, if the electricity purchaser does not make such a request or if the conciliation does not resolve the issue, the electricity purchaser shall have the right to institute legal proceedings in accordance with the law on civil proceedings. Pending resolution, the electricity purchaser must make payment and the electricity seller must not cut off the electricity supply.”



Getting permits on time: How to handle the red tape


• Plan for wind power development:

As yet no national plan and strategy for wind power development

Recently, the MOIT issued Circular No. 06/2013 regulating the procedure for preparing , assessing and approving the national and provincial plan for wind power development

Decision No. 37/2011 of the PM states that the PM will decide any wind power projects until such planning is completed and approved

However, still a long way to a final approval


• Investment procedures in wind power projects:

Uncertainty about investment procedures

Many requirements to be satisified by the investor before commencing construction, e.g. to obtain the investment certificate, sign the PPA and electricity integration agreement

Other permits need to be obtained: Construction permit, electricity operation permit, etc...


• Wind power projects generally take the following steps:

Step 1: Site selection

Step 2: Assessment of wind resources at the selected site

Step 3: Pre-feasibility study and request for inclusion in the power development plan

Step 4: Investment report (feasibility study)

Step 5: Signing PPA with the EVN

Step 6: Project implementation

Step 7: Construction phase

Step 8: Electricity delivery


• What are the obstacles to obtain permits? Complicated and uncertain investment and licensing procedures with

the involvement of many State authorities

Loose coordination and non-transparent communication among the State authorities in charge of wind power project (from governmental to provincial levels)

• How to get permits on time? Seek the in-principle approval of the PM and the MOIT before

commencing any investment procedures is a top priority

Close coordination with the People’s Committee of the province where the project is located is extremely important: The support from provincial authority will help to ensure faster and more efficient licensing procedures


• Recommendations for European investors:

Difficult time but opportunities await. For example, wind power projects can be surprisingly lucrative if combined with wind farms, tourism and other services

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, de-monopolization of the power market

DUANE MORRIS VIETNAM LLC

THANK YOU FOR YOUR ATTENTION!

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

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Feed in-tariff regulations and getting wind power projects done (en)

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