New Limitations On Avoided Cost Tariff Mechanism For Developers Of Hydropower Projects In Vietnam.
Legal News & Analysis - Asia Pacific - Vietnam - Energy & Project Finance
24 January, 2020
The Ministry of Industry and Trade of Vietnam ("MOIT") recently issued Circular No. 29 amending the avoided cost tariff ("ACT") mechanism for small hydropower projects in Vietnam and the respective model power purchase agreement ("ACT PPA").1
Effective from 1 January 2020, only single hydropower plants of up to 30MW capacity each will be eligible for the ACT mechanism, with limited exceptions provided by the change in law. Cascade hydropower plants with a combined capacity of up to 60MW on the same river have had their ACT eligibility abolished under Circular No. 29.
The Circular also abolishes the option of ACT risk sharing mechanisms for parties to ACT PPAs in relation to the floor price of 90% and the ceiling price of 110% applicable for up to 12 years. This is designed to address market risks from annual ACT adjustments, together with other amendments relating to the methods and input components of determining ACT tariff structures.
Specific implications for cascade hydropower plants
Under the previous regulations of Circular No. 06, power developers may apply the ACT mechanism in any one of the following cases:
- The installed capacity of the power plant is no larger than 30 MW and the entire electrical power is produced from renewable energy ("Case 1");
- For power developers who have multiple cascade hydropower plants on the same river with a total installed capacity of no more than 60 MW ("Case 2"):
a. In cases where the cluster of cascade hydropower plants consists of a hydropower plant with capacity of no more than 30 MW, which is put into operation first, then all other hydropower plants in the cluster will be eligible for the ACT mechanism;
b. In cases where the cluster of cascade hydropower plants consists of a hydropower plant with capacity of more than 30 MW, which is put into operation first, then the power developer will:
i. participate in the competitive electricity market of Vietnam and apply another model non-ACT PPA applicable to the competitive electricity market;
ii. after the next hydropower plant(s) are put into commercial operation, then the power developer may elect to apply one of the following options:
- Continue applying model non-ACT PPA applicable to the competitive electricity market; or
- change to apply ACT PPA to all hydropower plants in the cluster from the date on which the later power plant(s) come into commercial operation.
However, from 1 January 2020 the MOIT abolishes Case 2 for cascade hydropower plants, leaving only Case 1 for the purposes of eligibility of the ACT mechanism under Circular No. 29.
Given the change in law, the Circular provides for transitional measures as follows:
- For a cluster of cascade hydropower plants for which their ACT PPAs are signed before 1 January 2020, the power developer (seller) may continue the signed ACT PPAs. However, the power developer (seller) and the power purchaser (EVN) must review and sign an amendment agreement to the PPA to provide that EVN as power purchaser is obligated to pay to the power seller for water resource tax, forest environment service tax, water resource exploitation right granting fee and VAT under Circular No. 29.
- For a cluster of cascade hydropower plants, (i) which are on the same main river and next to each other, (ii) having a combined capacity of up to 60MW, (iii) all of which are "owned/invested by the same developer or controlling shareholders", and (iv) which have been included in the master plans before 1 January 2020, then the developer of those projects may apply for a PPA under the model ACT PPA as revised by Circular No. 29.
In this respect, how to best mitigate changes in the law and handle such risk may vary on a project-by-project basis depending on the status and particular characteristics of the relevant hydropower plant(s).
Tariff structures and ACT risk sharing mechanism
The ACT mechanism for small hydropower projects is announced annually by the MOIT's Electricity Regulatory Authority of Vietnam ("ERAV").
Under the previous regulations, the power developer (seller) could elect to apply a risk-sharing mechanism related to annual ACT adjustments, specifically:
- Under this risk sharing mechanism, the ACT schedule to be announced annually was applied, along with the pre-determined floor price and ceiling price based on the ACT schedule of the year in which the PPA signed.
- If the ACT of a subsequent year fell in the range between the floor price and the ceiling price, then the tariff for energy payments was the ACT of such year.
- If the ACT of a subsequent year was higher than the ceiling price, then the ceiling price was applied. If was is lower than the floor price, then the floor price was applied for energy payments.
- The floor price of each component of the tariff was determined to be 90% of the price of such component in the ACT applicable to the year when the PPA was signed.
- The ceiling price of each component of the tariff was determined to be 110% of the price of such component in the ACT applicable to the year when the PPA was signed.
- The maximum duration for application of the tariff with the risk-sharing mechanism was 12 years from the year when the PPA was signed. The power seller could elect to apply a shorter duration.
- In case the power developer elected to apply this risk-sharing mechanism, the parties to the PPA had to specify the ACT of the year when the PPA was signed, the agreed duration of applying this risksharing mechanism, the floor price and the ceiling price for each component of the tariff structure.
However, Circular No. 29 abolishes this optional mechanism for power developers.
Other amendments of Circular No. 29
In addition to the changes noted above, the MOIT has made other amendments relating to the methods and input components of determining ACT tariff structures covering avoided energy cost components and avoided capacity components, as well as other revisions related to technical curtailment and reporting requirements for power developers.
For further information, please contact:
Frederick Burke, Partner, Baker McKenzie