The solar development process in Vietnam, its barriers and hurdles

The development process for ground-mounted utility scale solar projects in Vietnam is laborious, time-consuming, expensive and still largely difficult to navigate for foreign developers without entering a strategic partnership, in whatever form, with a local Vietnamese counterpart.

Permitting & licensing process:

The development process is governed by plenty of administrative procedures and related legal documentation in many different fields, such as investment and enterprise, national and provincial planning, electrical connection, land and environment, to name just a few. Local legal support is mostly required to navigate the time-consuming permitting and licensing process that can easily take one to two years to reach a ready-to-build (RTB) status. Major milestones, that in many cases require the involvement of local technical consultants to prepare the correct format and liaise, and lobby with relevant authorities, in this process include:

• Investment research request and approval by relevant provincial authorities
• Site detail gathering and site commitment acceptance by relevant provincial authorities
• Pre-feasibility study (Pre-FS) preparation and approval by relevant national and provincial authorities
• Inclusion in national and provincial power development plans (>50 MW approval by the Prime Minister required, >30 MW approval by MOIT on national level required, <30 MW approval by DOIT on a provincial level is sufficient)
• Investment decision, including issuance of Investment Registration Certificate (IRC) by relevant provincial authorities
• Establishment of local special purpose vehicle (SPV) and issuance of Enterprise Registration Certificate (ERC) by relevant provincial authorities
• Land acquisition, compensation, clearance and issuance of land use rights certificate and land lease agreement appraisal by relevant provincial authorities
• Feasibility Study (FS) and Basic Design (BD), appraisal by independent third party and appraisal by relevant national and provincial authorities
• Power Purchase Agreement (PPA) negotiation and signing by relevant EVN branch
• Environmental Impact Assessment (EIA) and approval by relevant national and provincial authorities
• Preparation of detailed technical design, appraisal, and approval by relevant national and provincial authorities
• Application for electricity generation license and approval by relevant national authorities (post COD)
• Many additional different technical reports, agreements, and approvals for grid connection point, grid impact, and transmission line corridor, tariff metering system, SCADA and telecommunication system, relays and automation, electricity supply, fire prevention and firefighting, clearing explosives, entrance route, water supply etc. in different phases of the development process

Land identification, availability, and costs:

Solar power still requires plenty of land – with current state-of-the art systems in Vietnam typically larger than 8,000 m²/MW of installed capacity. For a developer, it can be hard to find suitable land plots in proximity to potential grid connection points that are feasible from a planning, technical and economic point of view. The cost of land can be high in Vietnam and often land use rights are split between many single owners making the whole process, including public hearings, cumbersome and risky.

Curtailment caused by underdeveloped transmission line system:

EVN operates the power distribution system which requires urgent expansion and countrywide interconnection to improve the country’s power supply-demand balance. Such new transmission lines would also help to bring power from LNG from the central and southern regions to the northern region, currently still heavily dependent on coal and hydropower. The situation has led to the significant curtailment of affected solar power plants, especially in the southern region and their RE centres in Ninh Thuan and Binh Thuan provinces, as well as the central region. Due to the long timeline (typically >5 years for transmission line system enhancement) and EVN lacking required investment, a pilot project allowing a private company to build a substation and transmission line was approved in March 2020 – to replicate this model, major changes in Vietnam’s current Public Private Partnership (PPP) law would be required.

Regulatory uncertainty:

Due to the speed of solar market development in Vietnam and its varying policy drafts, turnarounds on draft decisions and delayed announcements, it poses a significant risk for developers and investors to deploy resources. Examples include: (a) many changing drafts of the FIT phase 2 but only finalisation in April 2020, leaving developers and investors in the dark for 10 months; and (b) the initial announcement of the introduction of competitive selection processes, then announcing a turnaround and continuation of FIT models, and finally reversing the decision again in favour of the competitive selection processes.

Model PPA and bankability:

The revised mandatory model PPA, effective from August 2020 onwards, still does not address many commercial and legal issues, giving investors and lenders cause for concern, some major points include:

• Offtake and curtailment: No take-or-pay clause is included, and conditions are not specified under which EVN is permitted to curtail the generation, such as installation, repair, replacement of equipment, grid breakdown and grid recovery.
• Compensation for default and PPA termination: Default of EVN leading to PPA termination results in a termination payment for damages incurred until “end of contractual term” while it remains unclear if that means the termination date or the end of the 20-year PPA.
• Force majeure and commissioning: Improved force majeure clauses for damages incurred but does not address termination due to prolonged force majeure events.
• Inflation and exchange risk: No indexation of the solar FIT tariff to the Consumer Price Index (CPI) is incorporated. An annual exchange rate compensation mechanism according to VND/USD central exchange rate published by the State Bank of Vietnam of the last working day of the previous year is included.
• Dispute resolution: Local rather than international dispute resolution unless both parties agree on another dispute resolution body taking up the case, which would be subject to the (rather unlikely) approval of EVN.

Limited access to project financing:

To date, the project financing scene in Vietnam has seen a high involvement of local Vietnamese banks, some of which have received concessional loans from multi- and bilateral organisations for direct lending (interests 7–9%, tenures 10–15 years), while international banks, due to concerns of the risk allocation in the PPA, have played a smaller role and typically operate in cooperation with a local Vietnamese bank providing country- and offtaker risk cover.

Vietnamese banks (e.g. Vietinbank, Agribank, Techcombank, Vietcombank, BIDV, SHB, Military Bank, SCB, Maritime Bank, VP Bank, Eximbank, and Sacombank) traditionally lend to state-owned or well-established business. Interest rates typically exceed 10% and most cases are rather corporate financing than non-recourse project financing in which securities, other than the project itself, are pledged. The Asian Development Bank (ADB) and other international banks have provided several loans to large projects recently, such as:

• USD 186M to B.Grimm’s 275 MW solar project in Phu Yen Province: USD 27.9M by ADB, USD 148.8M by Bangkok Bank, Kasikornbank, Kiatnakin Bank, Industrial and Commercial Bank of China (ICBC) and Standard Chartered Bank, USD 9.3M by Leading Asia’s Private Infrastructure Fund (LEAP).
• USD 37M to Da Mi Hydropower’s 47.5 MW floating solar in Binh Thuan Province: USD 17.6M by ADB, USD 15M by Canadian Climate Fund and an additional USD 4.4M extended from Leading Asia’s Private Infrastructure Fund (LEAP)
• USD 37.8M to Gulf Solar Power’s 50 W solar project in Tay Ninh Province: USD 11.3M by ADB, USD 7.6M by LEAP, and USD 18.9M by Bangkok Bank PCL, Siam Commercial Bank PCL, and Standard Chartered Bank (Thai) PCL.
• Project bond issued by Hong Phong 1 Energy Joint Stock Company for its 195 MW solar project in Binh Thuan Province: VND 2.15T for 15 years and VND 400B for 5 years, guaranteed by the Credit Guarantee and Investment Facility (CGIF). ING Bank N.V. is acting as lead co-financier with USD 30M in loans.

Costs of development and risk-return ratio:

Due to the extensive permitting and licensing process, related documentation requirements, and the required involvement of local service providers, costs of the development process are high, while chances of success vary widely according to the developer’s ability to lobby. Realistically achievable development premiums do not reflect well the underlying cost risks, effectively making the market for developers that do not aim for long-term ownership, unattractive.

Natural disasters:

Vietnam is prone to a variety of natural disasters, including storms and typhoons (coastal regions are more at risk) from May to January, flooding mainly in the Mekong river delta area throughout the year, mudslides due to heavy rainfall especially in hilly areas, and rather rare earthquakes in the northwest.

Culture and language:

Vietnam’s distinct culture and language can quickly make business dealings for outsiders unfamiliar with this business environment extremely difficult and frustrating. Cross-cultural skills are essential, and a local setup is vital in proving commitment and establishing local networks.

As illustrated above, developing ground mounted, utility scale solar projects in Vietnam is not straightforward, and even more so for foreign developers. However, with the right local strategic partner, advice and thorough preparation, attractive opportunities can be realised.

By Moritz Sticher – PV Magazine – December 1st, 2020