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Vietnam’s golden solar years aren’t over, despite policy changes

Vietnam is looking to replace its solar tariffs, which ushered in a golden era for solar power in the country, with an auction scheme. What will change for developers, and can the new policy live up to Vietnam’s earlier success?

A new era dawns for solar power in Vietnam. Last month, the Vietnamese government announced it would shift to an auction system for future ground-mounted solar projects, overruling a previous proposal of a second round of its immensely successful feed-in-tariff scheme.

The move, which would cut the tariff scheme that was to expire in 2021 short by one year, sparked dismay among domestic developers whose projects will be affected. But provided the Southeast Asian nation does everything right, auctions could bring long-term benefits to Vietnam’s power supply, including reduced electricity prices, better grid management and improved oversight of clean energy projects. The programme’s implementation, however, will be a balancing act.

In theory, letting developers bid on solar projects rather than paying a fixed feed-in-tariff for power exported to the grid could help slash electricity prices. Auctions, after all, encourage competition, allowing only developers who beat others on the power price at which they can realise a project to participate in the market.

But to reap such benefits, Vietnam’s power grid, which has struggled with the recent proliferation of clean energy projects coming online, needs upgrading, said Bree Miechel, projects and construction partner at global law firm Reed Smith LLP.

With power transmission lines underdeveloped in many areas, Vietnam Electricity (EVN)—Vietnam’s electricity company that buys all power from energy producers—has often restricted power delivery from generators to prevent grid overload—in some cases to 60 per cent of a plant’s full capacity—and only pays for the electricity fed to the grid, as stipulated by its current feed-in-tariff scheme.

For a price competitive auction scheme, however, this would need to change, said Miechel. With tariffs paid under the new programme significantly lower than its current feed-in-tariff, EVN would need to align power purchase agreements with international market standards to attract more investors, requiring the electricity firm to guarantee that all the power produced is paid for, regardless of whether the grid can accommodate it or not.

This means auctions will fail to deliver cost reductions unless all the electricity bought can be transmitted to consumers and industries.

Even if Vietnam can replicate this year’s auction success of neighbouring Cambodia, which, at 3.87 US cents per kilowatt hour (kWh), achieved a solar price about half the amount set by Vietnam’s second tariff scheme, electricity paid for but not off-taken will effectively cancel out most of the savings in power prices.

“Vietnam knows that the transmission infrastructure is not where it needs to be, and that EVN will need to pay for the total solar power capacity,” Miechel said. “There is a lot of work going into the upgrade of the grid, and what the country will get out of this scheme will really depend on that.”

Auctions will bring certainty to all parties involved. Developers and financiers will know what their returns on the plant are going to be. This will enable a broader group of investors and lenders to come into the market.

Bree Miechel, projects and construction partner, Reed Smith LLP

Solar development in Vietnam has been rampant. Nicolas Payen, chief executive officer at Singapore-headquartered clean energy investment firm Positive Energy Limited said the lack of oversight of solar deployment has led to concentrated investment in some regions boasting favourable conditions, especially in the nation’s southern provinces, where cloud cover is low and solar radiation high.

“What we have seen in recent years is a hyper concentration of projects in specific locations. This has put stress on the grid in those areas.” he told Eco-Business. In many instances, he adds, such grid overload has led to curtailment—the restriction of power delivery from solar plants.

Opening auctions, Payen noted, will enable the government to effectively manage where and when solar assets are installed. “This will help the government manage the grid better, and that will make power purchase agreements more bankable and reduce the risk for investors to come on board,” he said.

“Overall, the move towards auctions is a good thing for the country,” he added.

Miechel said: “The first feed-in-tariff scheme was successful in terms of the quantity of power capacity brought online, but auctions could produce a different kind of success. If the government manages to offer internationally bankable power purchase agreements, the auction process is going to deliver low cost renewable energy, provided the grid infrastructure is in place.”

New scheme, new players

Vietnam’s solar boom started two years ago when the sun-blessed Southeast Asian nation launched its first feed-in-tariff scheme to spur solar deployment, offering an attractive 9.35 US cents per kWh for a period of 20 years.

With the programme set to expire in June this year, this caused a surge in construction as global solar players rushed into the country to commission their projects before the deadline.

A staggering 89 new renewable power plants with a total capacity of over 3,000 megawatts (MW) came online under the scheme, far exceeding the original government target of 1,000 MW by 2020 set down in its power development plan. Should all projects currently registered be built, Vietnam’s total capacity would reach 26,000 MW.

The second round of the scheme, announced in April this year, stipulates a tariff of 7.09 US cents per kWh—32 per cent lower than the previous amount. The reduction has caused concerns among experts that it could discourage investors and make life more difficult for domestic developers already struggling to receive financing for the projects.

But the auction scheme is set to transform Vietnam’s solar developer scene entirely, Miechel told Eco-Business. Once the government adopts a take-or-pay model, ensuring developers won’t have to watch their plant run to waste, the solar auctions will likely attract more international investment giants who, unwilling to take the risk of unspecified curtailment and scaled-down returns, have previously shied away from doing business in the country.

“A big change is going to be the parties bidding for those projects. We are likely to see larger utility players coming in and, based on their scale and ability to deliver low costs, squeezing out a lot of the smaller developers,” Miechel observed.

She added: “Auctions will bring certainty to all parties involved. Developers and financiers will know what their returns on the plant are going to be. This will enable a broader group of investors and lenders to come into the market—groups that have stayed outside and have not participated in the feed-in-tariff scheme.”

Vietnam needs to accelerate solar deployment or it will run the risk of not having sufficient power generation to support its growing economy.

Nicolas Payen, chief executive officer, Positive Energy Limited

Vietnam’s first feed-in-tariff scheme has proven to be a massive success, but not all solar projects the government has handed out permits for, amounting to a total capacity of 22 gigawatts (GW), ended up being built. The tariff, it turned out, was so attractive that it encouraged speculators to join in the game.

“Out of those 22 GW approved, developers installed only four. There are clearly many permits that have not translated into real assets,” said Payen. “Cutting the second feed-in-tariff programme short will help the government clean up the market and discern real projects from speculators,” he said.

Assaad Razzouk, chief executive officer at Sindicatum Renewable Energy, a pan-Asean and India clean energy company headquartered in Singapore, said: “The high feed-in-tariff encouraged some companies to acquire permits for a project, only to seek to sell those rights immediately after rather than to operate in the market. There are a lot of firms in that market that went in there because the tariff allowed them to make money speculating on real estate.”

“Such speculation distorts the marketplace because it artificially inflates asset prices. With the new auction scheme, these players will hopefully exit the sector,” he added.

The shift towards auctions will not affect all solar projects in the country. Ground-mounted plants that have already signed a power purchase agreement with EVN and will enter commercial operation by the end of 2020 will be subject to a new feed-in-tariff regime, while a separate tariff for rooftop solar is to be announced in mid-December, a source close to the Vietnamese government told Eco-Business.

But, according to Razzouk, there is still a lack of clarity on the new policy, leaving developers dangling. “We’re all sitting and waiting,” he said.

With its power demand soaring, Vietnam needs to act quickly, Payen said. The nation is expected to need about 130 GW of electricity by 2030, up from 47,900 MW last year.

“Vietnam needs to accelerate solar deployment or it will run the risk of not having sufficient power generation to support its growing economy. But that will depend on how fast they can put this auction mechanism in place,” he observed.

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