A month after our last article - Vietnam Wind - A look ahead to 2019 - was published, Circular 02/2019/TT-BCT (Circular 02) came into effect. Attached to Circular 02 is a new PPA (2019 PPA) for wind farm projects to be used from the effective date – 28 February 2019. We’ve taken a look at what’s changed in the PPA since our January article and also some other items of interest in Circular 02.

There are a number of positives to see in the 2019 PPA and the approach set out in Circular 02 and overall we would expect these developments to be welcomed. While the changes do not go as far as international project finance lenders and multilateral development banks would like, developers and sponsors are likely to be heartened.

What's better in the 2019 PPA

Termination Payments: The change that will be of most interest to developers, sponsors and debt providers is the change to a payment on termination for EVN default. The 2019 PPA does not include a cap on compensation (under the old PPA it was equivalent to 12 months’ received payments) but instead, compensation will be a combination of direct losses and benefits that the generator should have been entitled to in the absence of EVN default. This leaves the door open to the repayment of debt taken out by the developer, together with an element of equity recovery. While not drafted as clearly as might be expected in other markets, it must be welcomed as a step in the right direction.

Force Majeure: The range of events which can give rise to a notification of force majeure has been narrowed considerably. Gone are the decisions of statutory bodies which may affect the ability of EVN to perform its obligations. Further, EVN will be required to make payments which fell due prior to the occurrence of force majeure. The events which are left in the 2019 PPA are acts of god, as is usually seen in other markets. While the 2019 PPA is silent as to where the risk of political interference sits, again the changes must be seen as a positive step.

What’s still the same

Constraint/Curtailment: EVN still retains wide discretion in refusing to take a supply of electricity. While there is an additional requirement on EVN to comply with Vietnamese legislation in carrying out installation, repair, replacement or inspection of the power grid, during which it can refuse to take electricity, the rights of EVN remain very broad and ultimately the regulations can be updated at any time by the Vietnamese government. As the scenarios remain outlined in general terms, and in the absence of a “deemed delivered” mechanism, an element of curtailment may need to be factored into financial models, especially as there is no other route to market for a generator who is ready and willing to dispatch. This assessment will likely vary depending on the extent of grid congestion from region to region. It remains to be seen what will happen if EVN does not provide the 10 days prior notice, other than in an emergency, of curtailment – this was previously deemed notice.

Exchange Rate: The 2019 PPA does include additional detail, in Appendix E, in relation to the calculation of payments to be made by EVN and includes the onshore and offshore US$/kWh rates set out in Decision No. 37/2011/QD (Decision 37) which should apply to onshore and offshore wind power projects respectively. Developers will retain some exposure to exchange rate risk, given the gap between the date on which invoices are issued (and the USD/Dong rate is fixed) and the payment date, which is 33 days later in the best case scenario. Separately, language has been added to the formula which purports to calculate downtime and outages (referred to as a “tested turbine” in the 2019 PPA). The formula should be reviewed and modelled to ensure that any deductions for turbine outages only relate to the actual downtime of the turbine rather than any theoretical output assumption related to a generator’s rated power capacity when the wind is blowing at the optimum speed.

Change in Law/Tax: The 2019 PPA remains silent as to compensation payable to generators in the event of a change in law or tax which affects the project and causes the generator a loss. As we have noted previously, this is a risk customarily borne by the state-offtaker.

What’s worse

Lender Step-In: The old PPA enabled a lender to nominate a substitute generator in the event of breach. This form of step-in right, which is often required by project finance lenders in order to make a PPA “bankable”, has been removed from the 2019 PPA and the justification for doing so is unclear. Without such protection, or some equivalent comfort, it is difficult to envisage international lenders financing transactions on a traditional non-recourse basis in large numbers, especially given certain termination rights of EVN (for generator default) are wide and in some cases a little unclear.

Other points

Amending the 2019 PPA: Circular 02, in Article 14(4), envisages that EVN and a developer may “supplement additional content” into the 2019 PPA in order to clarify the rights and responsibilities of the parties. Whilst this may be helpful to developers, sponsors and lenders in allowing some of the more general provisions of the 2019 PPA to be clarified, the “basic content”, which we take to mean the risk allocation and commercial principles, must remain the same. Clearly, developers and other parties will not be able to open some of the issues that are of the most concern.

2021 onwards: The FiT provided under Decision 37 will continue in place until 1 November 2021 – that is, 8.5 or 9.8 US cents/kWh for onshore and offshore respectively. Circular 02 envisages a new regime for wind projects coming into force from 1 November 2021 onwards.

Previously signed PPAs: Generators which have previously signed a PPA are entitled to sign a 2019 PPA version and benefit from revised terms and the increased FiT. The higher FiT would apply retrospectively from 1 November 2018 until the end of the term under the in-place PPA.

Metering: The 2019 PPA includes significantly more detail, unfortunately repetitive in parts, around the metering and measurement of electricity produced by the project. Helpfully, this includes details around the calculation of the payment price in the event of failures of the primary and back-up meters and relies upon historic, and therefore objective, data.

Late Payment Interest: Rather than receiving a one-month sum for late payment, as under the old PPA, generators will now receive late payment interest calculated by reference to each day that such payment is late.

Generator Default: Generators now have the ability to remedy breaches of the PPA following notification of the same by EVN. A generator’s right to remedy breaches matches the right grant to EVN under the old PPA.