wind project development : business opportunities

WIND PROJECT DEVELOPMENT : BUSINESS
OPPORTUNITIES AND SUITABLE BUSINESS MODELS FOR
VIETNAM
OLIVER MASSMANN – MANAGING PARTNER
DUANE MORRIS VIETNAM LLC
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AGENDA
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ACCESS THE MARKET: INVESTMENT AND CORPORATE FORMS
•
MARKET STRUCTURE
•
INVESTMENT INCENTIVES
•
OBSTACLES FOR FOREIGN INVESTORS
•
RECOMMENDATIONS
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ACCESS THE MARKET: INVESTMENT AND CORPORATE FORMS
• No foreign ownership restriction for foreign
investment in energy in Vietnam
• Available investment forms: 100% foreign invested
company, joint venture or public private partnership
in the form of BOT contract.
• Corporate forms: limited liability company, joint
stock company, private company or limited
partnerships.
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WHY BOT IS THE BEST INVESTMENT FORM FOR
ENERGY PROJECTS?
• Easier to negotiate more favorable electricity rates.
• Easier to obtain more government guarantees,
especially in terms of EVN’s obligations to purchase
all electricity from the project.
• More fiscal and financial incentives.
• Precedent large-scaled BOT power projects in
Vietnam: Phu My, Vung Ang, Mong Duong 2
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MARKET STRUCTURE
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EVN is the state monopoly in transmission and distribution in power sector. It
purchases all electricity generated from on-grid independent power projects.
•
EVN owns half of power production plants in Vietnam. The remaining power plants are
owned by state-owned corporations (Vinacomin, PVN) and private investors.
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It is in a difficult financial conditions; by the end of 2011, EVN owed PVN, the oil and
gas monopoly in Vietnam, US$570 million.
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The consumer electricity tariff is regulated by the Electric Regulatory Authority of
Vietnam (ARAV). EVN, in principle, cannot purchase electricity from independent
power plants at the rates higher than the consumer rates.
•
Current average consumer rate: about 6 cents/kWh. Consumer tariff is progressive: The
more electricity is consumed, the higher tariffs will be.
•
Most of wind energy projects are developed by independent producers.
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INVESTMENT INCENTIVES: MORE FAVOURABLE
TARIFF FOR WIND ENERGY PROJECTS

Decision No. 37/2011/QD-TTg dated 29 June 2011 on new
tariff for wind energy projects in Vietnam:
• EVN has to purchase electricity from on-grid wind energy
projects at VAT-excluded price of 7.8 US cents/kWh
• EVN has take-or-pay obligations towards wind energy
developers
• Term of wind energy PPAs is 20 years
•
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Compare with wind tariff in other countries ?
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Wind Tariffs Worldwide(*)
Onshore Wind Energy
Term
China
7
US
cents/kWh
Offshore Wind Energy
Term
US
cents/k
Wh
8.9
Germany
20
12.1
20
20.2
France
15
11.1
15
17.5
Portugal
15
10.0
Denmark
20
20
11.2
Thailand (>50kW)
10
11.6
The Philippines (proposed on July
2011)
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24.6
Vietnam
20
7.8
(*) at the courtesy of GIZ
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INVESTMENT INCENTIVES: MORE FAVOURABLE
TARIFF FOR WIND ENERGY PROJECTS


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BUT: How can the government help EVN cover losses from purchasing
electricity from wind energy projects?
• Currently: The government subsidizes 207 VND/kWh for all electricity EVN
purchases from wind energy plants.
• The Government cannot continue subsidizing EVN as currently.
Solution ?
• The government should adopt a feed-in tariff for wind energy in particular and
renewable energy in general. The basics of a feed-in tariff mechanism is that the
additional costs for production of energy will be divided among electricity users to
assure a stable cash flow for renewable energy developers.
• GIZ: Each household only needs to pay an additional amount of VND 1,666 –
6,666 (equivalent to 8 – 32 US cents per month) if EVN pays an addition of 1-4
cents to wind energy power plants.
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INVESTMENT INCENTIVES: OTHER FINANCIAL AND
FISCAL INCENTIVES
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Machines and materials, that are not produced domestically and imported as
fixed assets of the projects, are entitled to import duties exemption.
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Wind energy projects are considered as projects in a special priority sector for
investment and entitled to low corporate income tax rates, exemption, and
reduction in accordance with the applicable corporate income tax law.
•
Wind energy operators are also subject to exemption and reduction of land use
fee and rental in accordance with the regulations governing projects in special
priority sectors for investment.
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These incentives are also applicable to off-gird wind energy projects
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INVESTMENT INCENTIVES: THE LEGAL FRAMEWORK
IF MOVING TOWARDS DEMONOPOLIZATION
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Dismantling generation companies from EVN: In notification No. 174/TVVPCP (25 July 2011) of the Government Office, EVN must submit a proposal
on establishment of generation companies (GENCO) from its production
entities to the Prime Minister in 2011. Production companies of EVN amounts
to nearly 50% of generation capacity of the whole market.
•
EVN has submitted to the MOIT its proposal to establish three generation
corporations to operate all EVN’s power plants.
•
The pilot electricity auction market has been operated since July 2011, after a
lengthy delay. However, there are still many loopholes in operation of this
market, particularly in terms of transparency in offering and accepting prices
and reliability of the electric system.
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OBSTACLES FOR FOREIGN INVESTORS
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The increase of wind energy tariff for IPPs is encouraging, but not enough to
guarantee bankability of the projects. As long as customer electricity rates are low,
EVN cannot agree on a higher price for electricity from wind energy projects.
•
Large payment for relocation fees. Wind power construction projects are usually set
to be located at the coastal areas with the residence of a large number of households.
•
As long as EVN remains the monopoly in the sector, there is no guarantee of fair
price for wind energy projects as well as fair competition in the market.
•
Up to date, there has been no specific legal instrument providing procedures for
negotiation of an off-grid PPA. In practice, the seller has to enter into an agreement
on electricity price with the local People’s Committee and the PPA with a lawful
distributor (often a subordinate body of the local People’s Committee) in the
relevant area.
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OBSTACLES FOR FOREIGN INVESTORS
•
•
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Government guarantees cannot be trusted:
–
In Vinashin default on a US$60 initial payment on a syndicated loan to the
international lender: the government argues that a “comfort letter” issued
by the Government when the loan was issued in 2007 does not constitute
an implicit guarantee and declines its obligations for repayment of the loan.
–
Vietnam only has detailed regulations on government guarantee for foreign
loan and bond issuance. There is no specific regulation on other
government guarantees, including guarantees for performance of stateowned companies (e.g. – EVN).
–
Given the foreign exchange reserves of Vietnam is still low (US$17 billion –
April 2012), any government's guarantee on foreign currency availability
and transfer for power projects is of little value
.
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OBSTACLES FOR FOREIGN INVESTORS
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Other macroeconomic issues:
– Inflation rate: more than 20% in 2011, only second to
Venezuela.
– Catastrophic devaluation of Dong in 2011
– Dim economic outlook: slowing growth, rising risks
Seeking loans for power projects in Vietnam may be difficult
because of the unreliability of government guarantees and bad
financial conditions of some state-owned companies.
Corruption, red tape and absence of an impartial court system
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RECOMMENDATIONS FOR INVESTORS
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Difficult time but opportunities await. For example, wind energy projects can be
surprisingly lucrative if combined wind farms with tourism and other services!!!
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Public private partnerships (e.g. - BOT) should be the first option.
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Sound financing structure, good business model and great legal assistance are keys to
success.
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Accurate prediction of where the market is heading to, in the context of Vietnam’s
critical power shortage, should be considered.
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More pressure on the government to adequately address key issues on tariff increase, demonopolization of the power market and government guarantee.
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Vietnam’s market is extremely in need of financing and EPC capability. There are rooms
for cost-effective and high quality EPC contractors and resourceful lenders.
•
In many cases, you can “test the water” with a small power plant project.
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OF A FINAL NOTE: HOW TO CHOSE LEGAL ADVISORS FOR YOUR
PROJECT IN VIETNAM ?
WATCH OUT AND FOLLOW ADVICE BELOW STEP BY STEP!
BEFORE YOU SIGN ANY SERVICES AGREEMENT WITH ANY LEGAL ADVISORS/LAW
FIRM/CONSULTING FIRM IN VIETNAM PLEASE DO THE FOLLOWING:
COPY PASTE THIS REQUEST IN YOUR EMAIL TO THEM AND WAIT FOR THE REPLY:
“Dear Ms/Mr ….,
Please send us the valid evidence that your company has an international standard and enforceable offshore
professional legal liability insurance with dispute resolution offshore Vietnam and not subject to Vietnamese court
or Vietnamese arbitration.
We would be happy to cooperate and retain your services if you can prove that your company is professionally
insured to provide legal services to international clients according to international standards.
Thank you very much
Best regards,”
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THANK YOU
For further information, please contact Oliver
Massmann at [email protected]
Duane Morris Vietnam LLC
Pacific Place
Unit V1307/1308, 13th Floor
83B Ly Thuong Kiet Street
Hoan Kiem District, Hanoi
Vietnam
Phone: +84 4 3946 2200
Fax: +84 4 3946 1311
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