Vietnam's draft policies for gas/LNG and renewables underpin market reforms

Vietnam's government has unveiled two key draft policies for public consultation before they are formally approved -- one on developing power plants fueled by domestic gas and imported LNG and another for direct power purchase agreements for renewable energy projects.

The draft decrees issued in recent weeks are part of ongoing power market reforms designed to accommodate more LNG and renewables into the energy mix to replace coal, in line with efforts to decarbonize the grid and also become eligible for billions of dollars in funding under the Just Energy Transition Partnership.

Under the draft decree that outlines the development mechanism for power plants utilizing domestic gas and imported LNG, the government plans to allow the cost of natural gas and LNG to be passed through to consumers in electricity prices in power purchase agreements.

This is a long-awaited regulation that is expected to pave the way for state firms like PV Gas to sign long-term LNG contracts, according to market participants.

Between now and 2030, long-term power purchase contracts must guarantee that a minimum contract quantity of 70% of the total output of LNG power plants is purchased during the project's debt repayment period, according to the draft. Developers said this would guarantee enough electricity offtake to make the projects commercially feasible and bankable.

This requirement, however, is in place for a maximum period of seven years to mitigate adverse effects on domestic retail electricity prices and to maintain fair competition among various power sources in the local electricity market, the document said.

The mechanism for the consumption of domestic gas from key domestic gas-to-power projects, such as Ca Voi Xanh and Block B, will be determined by the Ministry of Industry and Trade, or MoIT, at a later stage.

The policy will allow electricity purchase costs from gas and LNG-fired power plants to be included as inputs in the calculation for adjusting electricity retail prices. Before this draft, state power purchasing utility EVN had highlighted obstacles faced by gas-based power projects under the national power development plan.

EVN is currently negotiating power purchase agreements with PV Power for the 1,500-MW Nhon Trach 3 and 4 LNG power plants in Dong Nai province and with Hai Linh Co. Ltd. for the 1,200-MW Hiep Phuoc LNG power plant in Ho Chi Minh City.

During the negotiations, investors requested that the minimum contract quantity be set at between 72% and 90% of the total output during the contract period to ensure their ability to repay loans, according to market sources. However, EVN proposed setting this at 65% to avoid losses and high retail electricity prices, in the event of a surge in global LNG costs.

Renewables

The second draft policy on renewables was the outcome of many investors, international organizations and electricity consumers in Vietnam showing interest in a direct power purchase agreement (DPPA) mechanism to advance their sustainability goals.

The companies include Samsung, Apple, Heineken, Google and Nike that have manufacturing units in the country and whose average monthly electricity consumption exceeds 1,000,000 kWh each, according to the MoIT. Utilizing renewable energy allows these global manufacturers to lower the emissions footprint of their supply chains.

EVN is currently Vietnam's sole electricity supplier and companies are not allowed to buy electricity directly from producers.

Under the proposed DPPA, large electricity consumers with a connection voltage level of 22 kW or higher and an average monthly consumption of 500,000 kWh, will have the choice to procure renewable energy directly from producers, bypassing EVN.

This physical DPPA will allow producers and consumers to negotiate terms of power supply, with no cap on the capacity, output, connection voltage level or the intended use of electricity. The government earlier intended to test DPPAs on a pilot basis but is now looking at a proper rollout.

Alternatively, electricity consumers will have the choice to sign a financial or virtual DPPA, under which the renewable energy producer will sign a power purchase agreement, in the form of a forward contract, with the buyer. Then EVN will sign separate agreements to purchase power from the producer, input it into the national grid and sell electricity to the consumer from its pooled supply.

The customer may not get electricity generated from the specified renewable project, but EVN would sell electricity at the agreed renewables prices and pass on the "green" attributes.

According to a survey by the MoIT in May 2022, out of 67 renewable power plants (including solar and wind), 24 with a combined capacity of 1,773 MW were interested in the DPPA mechanism. Another 17, totaling 2,836 MW, were considering participation, while 26 expressed no interest, the ministry said.

Among power consumers like manufacturing companies, 20 out of 41 expressed interest in the DPPA, with total demand of 996 MW, the MoIT said. The DPPA decree is available for comment from April 17 to June 19.