09 Aug 2024 | 05:43 UTC

INTERVIEW: Vietnam's direct PPA policy to test market for I-RECs

Highlights

Current-year wind/solar I-RECs down 31% since Feb

Companies likely to favor DPPAs over I-RECs

Challenges in DPPA implementation still lie ahead

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Vietnam's Direct Power Purchase Agreement policy, which allows renewable energy generation companies to sell power directly to large consumers, can be a potential "game-changer" for clean energy procurement in the country with significant implications for the future of International Renewable Energy Certificates, industry experts told S&P Global Commodity Insights.

The government on July 3 issued Decree 80/2024/ND-CP on DPPA, which is expected to stimulate private sector investment and drive economic expansion by aligning corporate goals for reducing emissions with Vietnam's objectives for clean energy and investment.

Buyers and sellers can negotiate their own prices for direct sales via contracts, where the excess electricity can be sold to the state-owned EVN. More notably, the decree addresses renewable energy certificates that have never been mentioned in its previous drafts. RECs belonging to generators are to be bundled with the power price and transferred to large customers or zone electricity retailers, although regulations on environmental attributes remain unclear.

The contractual system for decarbonizing power opens new opportunities for companies that could in turn impact demand for I-RECs, according to Jordan Lee, energy transition strategy and policy manager at the Tony Blair Institute for Global Change, and consultants from The Lantau Group.

According to the Platts assessments from Commodity Insights, prices for current year wind/solar I-RECs have dropped 31.08% since February, due to a supply glut(opens in a new tab) in the market.

Possible scenarios for I-RECs

One possibility for the future of I-RECs in Vietnam is that generators move to using the DPPA to monetize their clean energy production and issue fewer I-RECs. This could decrease the availability of I-RECs in Vietnam and consequently drive up their price in the near term, Lee said.

The Lantau Group consultants said that if I-RECs are the only tool for companies to prove their renewable energy procurement under DPPA contracts, their prices could slightly increase in the near future.

Then again, Lee sees that over the longer term, power purchasers may prefer DPPA contracting to meet their decarbonization targets instead of acquiring environmental attribute certificates like I-RECs.

"DPPAs [may] become the 'premier' product for procuring low-carbon power, and buyers with the highest demand and/or lowest price sensitivity may therefore move to this premium product [the DPPA] instead of I-RECs, which may be perceived as less robust," Lee said.

Despite EACs being new to Vietnam, data from the I-Track Foundation showed issuance figures for the first half of the year in the country to be about 14.12 TWh.

The Lantau Group added to this, saying, "I-RECs to a large extent exist because large corporates do not have many opportunities to decarbonize power supply under today's laws and regulations. DPPAs can establish a contractual relationship directly between the generator and large end-users, and potentially even prior to project financing."

Under this view, the lack of demand for I-RECs would cause their prices to fall.

The DPPA may also become the preferred option for purchasers because it is relatively better suited than I-RECs to provide hourly matching of clean power purchases, according to Lee.

"The DPPA's ability to introduce a physical connection between generator and consumer enables hourly matching in a way that I-RECs would struggle to replicate. This is an important feature for certain customer segments that are pursuing more robust clean power procurement and looking to ensure that their power demand is being met with clean sources on an hour-by-hour basis," Lee said.

Challenges ahead

Challenges still persist in the DPPA system's regulatory, financial and technical implementation. These "elements" will be crucial to address infrastructure constraints facing DDPA agreements with a physical connection between generator and consumer, Lee said, adding that virtual DPPA agreements should be easier to implement.

"Despite the low I-REC prices, it is a common view among corporates that I-RECs are not an attractive form of EACs at present. Having said that, a full implementation of DPPA regulations may not happen overnight, so near term, the impact on I-RECs may be less," The Lantau Group said.

Platts assessed Vietnamese vintage 2024 wind/solar I-RECs down 7 cents on the day at 51 cents/MWh, according to Commodity Insights data.


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