Process to fix tariff ranges for transitional projects now set but path to commercialisation remains up in the air
12 min read
Since feed-in tariffs (FiT) expired for solar power projects (31 December 2020) and wind power projects (31 October 2021), the Vietnamese Government has been grappling with how to deal with the many so-called ‘transitional’ solar and wind projects that were under active development at the time of FiT expiry but failed to meet the relevant FiT deadline.
These orphan projects range from formally approved but barely developed, to fully constructed and operational. They also vary in size, location and cost, making it difficult to apply a ‘one size fits all’ approach.
In this Insight, we unpack the key contents of Circular 15 and assess their likely impact given ongoing uncertainties.
On 3 October 2022, the Ministry of Industry and Trade (MOIT) issued Circular 15/2022/TT-BCT providing regulations on the method for formulating power generating tariff ranges (Tariff Ranges) for transitional solar and wind power plants (Circular 15). Circular 15 is far from a final answer on how transitional projects will be commercialised, but does at least finally provide a concrete stepping stone and some clues to the road ahead.
Circular 15, which formally takes effect on 25 November 2022, follows three previous draft versions of the regulations (Drafts)1 which had been circulated for consultation throughout the course of 2022. Notable differences between Circular 15 and previous Drafts include:
- narrower scope in that Circular 15 regulates only the formulation of the Tariff Ranges applicable to transitional solar and wind plants (Transitional Plants) and is completely silent on how the tariff for a specific Transitional Plant will subsequently be determined and recorded;
- more concrete definition of Transitional Plants; and
- introduction of the concept of ‘Standard Power Plants’ for solar power and wind power projects used to determine the ceiling tariffs of the Tariff Ranges (Ceiling Tariffs).
Despite not including any concrete provisions in Circular 15 on how to determine the tariff for a specific Transitional Plant, the MOIT has recently, in parallel with finalising Circular 15, taken the initiative to make certain proposals to Vietnam Electricity (EVN) about how this might be done2, including:
- EVN to directly negotiate tariffs with Transitional Plant investors on a bilateral basis with the agreed tariff being within the relevant Tariff Range3; or
- conduct auction-based price discovery among Transitional Plants to determine tariffs for a three-year period with the bid tariff required to be within the relevant Tariff Range.4
In response to suggestion (i), EVN expressed its view that negotiation is not feasible because: (a) the parameters for price negotiation (including average delivered power of the plant and total investment capital costs) lack legitimate grounds for EVN to verify and rely upon, and (b) the lack of control over timing of negotiations may negatively impact expected operation dates and thus cause supply-side uncertainty for the power market.5 In relation to suggestion (ii), the MOIT itself noted that investors of Transitional Projects were strongly opposed to an auction process providing commercial certainty for just three years.
While pouring cold water on both these proposals, both the MOIT and EVN appear to agree6 that Transitional Plants have the option to voluntarily register to participate in the Vietnam Wholesale Electricity Market (VWEM).7 In that case, it appears the principle would be that the contracted tariff at which the plant could sell power in respect of committed capacity would need to within the relevant Tariff Range, with excess sold on the spot market. While legally viable, there is considerable uncertainty as to how a specific contracted tariff would be agreed and how committed capacity would be determined for a given plant.
The net result of these recent discussions, followed promptly by issuance of a stripped-back Circular of narrow application, is that it remains uncertain how and what Transitional Projects will ultimately be paid. Circular 15 sets up a variety of possible scenarios and further decisions are required. The relatively long lead-in time to Circular 15’s effectiveness and timeline involved in determining the Tariff Ranges will hopefully provide sufficient time for those decisions to be made without further delay.
Summary of key contents of Circular 15
|Standard power plants9|
|Method for determination of the Ceiling Tariff (ie tariff applicable to the Standard Power Plant)12|
P = FC + FOMC
P: power generating tariff (Dong/kWh);
FC: average fixed costs (Dong/kWh); and
FOMC: fixed O&M costs (Dong/kWh).