On 19 January 2023, the Ministry of Industry and Trade (“MOIT”) issued Circular No. 01/2023/TT-BCT being an annulment of certain regulations regarding the development of wind power project (“WPP”) and solar power project (“SPP”) and template of power purchase agreement (“PPA”) applicable for these type of power projects (“Circular 01”). Circular 01 come into force on 19 January 2023 and annuls certain key regulations in Circular No. 02/2019/TT-BCT on WPP (“Circular 02”) and Circular No. 18/2020/TT-BCT on SPP (“Circular 18”).

Notable changes in Circular 01

The annulments made by Circular 01 are mainly to ensure consistency in the regulations on renewable energy projects regarding recent developments of the change and application of new electricity tariff, specifically the issuance of Decision 01/QD-BCT dated 7 January 2023 promulgating a ceiling electricity tariff for transitional WPP and SPP. Notable changes include:

Annulments of key procedures and conditions for implementing WPP

Circular 01 removes a number of complicated compliance procedures and obligations of WPP developers during the project implementation stage set out in Circular 02 as follows:

(a) The procedures for adding the new WPP to the national electricity development master plan has been eliminated. Due to the fact that the draft Eighth (VIII) National Electricity Development Plan has already been submitted for approval, this change reflects the announcement of MOIT on suspension of adding WPP to the national electricity development master plan set out in Official letter No. 7421/BCT-DL dated 5 October 2020;

(b) In the event the implementation progress of a WPP is adjusted by more than  six months or phased in a way that differs from the approved relevant electricity development master plan, the developer is no longer required to report such adjustment to the competent authority which has approved the electricity development master plan for consideration and approval;

(c) The prerequisite conditions for commencing the construction of WPP facilities (i.e., having construction design dossier appraised and approved in accordance with applicable regulations; having signed PPA with the electricity buyer; and having financial documents to ensure compliance with the approved implementation schedule) have been removed; and

(d) A Developer of WPP is no longer required to submit a copy of the PPA to Electricity and Renewable Energy Authority within 10 working days from the signing date of such PPA.

Annulments of some key details in the PPA template regarding both WPP and SPP

All the terms in the PPA template on the purchase price of electricity refer to Decision No. 37/2011/QD-TTg and Decision No. 39/2018/QD-TTg for WPP and reference to Decision No. 13/2020/QD-TTg for SPP (“PM Previous Decisions”) have all been abolished. 

The elimination is not surprising when the electricity feed in tariff (“FIT”) in the PM Previous Decisions only applied to projects with the commercial operation date before 31 October 2021 for WPP and before 31 December 2020 (“COD Deadlines”). Particularly for transitional WPP and SPP, which fail to meet COD Deadlines, the purchasing price would be determined by the Vietnam Electricity Group (“EVN”) in accordance with Circular No. 15/2022/TT-BCT dated 3 October 2022 (“Circular 15”) and shall not exceed the ceiling set out under Decision No. 21/QD-BCT dated 7 January 2023 (“Decision 21”). Regarding the electricity purchase price for transitional projects, the MOIT is working on the process of developing relevant regulations to form the basis for EVN’s negotiation with investors.

The 20-year period applicable to electricity purchase prices in PPA has also been abolished, along with the elimination of the 20-year agreement term for SPP. This content is a recognition of the reality that SPP are capable of operating for more than 20 years, thus, no limit on operating term has been set for SPP pursuant to Circular 10. In addition, the responsibility to purchase the entire electricity generated from a WPP has been omitted. These changes make many investors to believe that renewable energy is no longer a sector which is prioritized for development.

Another remarkable point is that the USD/VND exchange rate applied to determine the electricity purchase price is also abolished by Circular 01. Therefore, from the effective date of Circular 01, the electricity purchase price must be determined in Vietnamese Dong. The requirement to determine the electricity generation price in VND/kWH has also been applied to transitional projects according to Circular 15.

How does Circular 01 affect the development of renewable energy project and what the entrepreneurs needs to prepare?

The issuance of Circular 01 has reflected the tendency on the new phase of renewable power projects, together with the promulgation of Decision 21 and Circular 15, with the aim of eliminating difficulties for enterprises and synchronizing the provisions of PPA, especially the terms of electricity purchase price for WPP and SPP. However, Circular 15, Decision 21 and Circular 01 seems to have met a lot of opposition from commercial perspective when the electricity purchase price is no longer as attractive as in the previous phases1.

FIT is no longer sufficient for renewable energy sector

The application of FIT pursuant to the PM Previous Decisions has attracted many investors to invest in renewable energy sectors, resulting in the increase from negligible level of renewable energy in the period before 2019 up to 26% of the total capacity of Vietnam's electricity system by the end of 20212. However, in the context that the world price of renewable energy tends to decrease, and the scale of renewable energy development becomes more competitive in terms of the market, technology and equipment, the incentive policies have been determined as inappropriate. The Government and MOIT believe that considering the transition to a competition policy, asymptote with the market is in line with the Government's policy and development trends in the world3.

Alternative mechanism for determining electricity purchase price

Accordingly, from international experience, most countries only apply FIT for a certain term and then switch to the bidding mechanism4. However, Vietnamese legal framework is not sufficient for implementing the electricity bidding process in many aspects5. Following this cause, MOIT is promulgating regulations in the direction for EVN to take the lead in negotiating and setting a suitable electricity purchase price for each enterprise, based on the ceiling price set by the Government. In the next period, hence, new regulations will continue to be studied and promulgated to serve the above tendency6. Note that for PPA that have negotiated the purchase prices before the effective date of Circular 01, the term of FIT application remains limited to 20 years. This means, after the expiration of the time limit for applying FIT under the PM Previous Decisions, the new electricity purchase price will be renegotiated on the basis of the regulations to be issued ahead and applied initially to the transitional projects. Hence, transitional projects will be the first target to apply the new mechanism, followed by new investment projects and finally projects exceed 20-year term for FIT.

Preparation for the bidding as an alternative in the next phases

Regardless, the bidding for electricity purchase price will be an option for the following phase, which has been studied and proposed by ministries and relevant agencies since the end of 20197. Once the legal framework for electricity price bidding is jointly developed by the Government, the electricity purchase price is believed to be applied under such mechanism to keep pace with the international tendency. This leads related enterprises to making their timely preparations to adapt to the next phases of renewable energy projects, regardless of whether they are transitional, greenfield or implemented projects.

If you have any questions or require any additional information, please contact Geraldine Oh and Gam Le of KPMG in Vietnam.

This alert is for general information only and is not a substitute for legal advice.

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Le Thi Hong Gam

Associate Director
KPMG Law in Vietnam

T +84 28 3821 9266