How Renewable Energy developers can overcome legal, financing and commercial challenges

06 April 2018 - 03:51 PM

Despite the excitement, out of 24 GW of renewables’ registered capacity in our database, only 19% made it to construction stage and 8% are in operations. Meanwhile, most projects are still at the preparation stages.

Lack of comprehensive information is the first challenge for investors and developers to maneuver RE opportunities. Even though information about RE projects in Vietnam has been floating around the market, there is no clear information on number of projects, development status, etc. creating confusion and uncertainty for investors, developers, and other stakeholders.

In an effort to develop the most comprehensive database of RE projects, StoxPlus identified a total of 245 RE projects, including wind, solar, and biomass in their various development stages, not to mention 72 out of 719 small hydropower projects throughout Vietnam. If all of these wind, solar, and biomass projects are implemented, a total of 23.2 GW will be installed, almost ten times the 2.65GW planned capacity by 2020 as indicated in the Revised National Master Power Plan VII effective March 18, 2016.

Figure 01. Capacity of total RE projects from StoxPlus database by stage (MW)

Source: StoxPlus Database

Even with high FiT and investment incentives, developers encountered many challenges in getting the project to the Operations phase, including the questionable bankability of the PPA, the lack of credit rating of EVN, and the operational risks that the project faces.

Type

Risks

Details

Financing and legal risks

The PPA is hardly  bankable, hence international financiers such as the World Bank / IFC are reluctant to take up the risks based on the PPA

The PPA is standard and non-negotiable. This has resulted in International financiers such as the World Bank / IFC not being able to take up the risks based on the PPA

FiT is fixed and not inflation-adjusted for the whole PPA term of 20 years

International financiers are unable to take land assets and mortgage in Vietnam as securities

No deemed commissioning clause if the plant is able to generate power but the purchaser (EVN) fails to absorb

No stabilization clause against unfavorable change of law

Dispute resolution at Electricity and Renewable Energy Authority (under MoIT). No international arbitration is mentioned

Seller (generator) must bear the costs and risks of connecting the plant to the transmission grid

Commercial Risk

Project delays

RE planning and licensing processes are lengthy and complex, together with site clearance and compensation could delay the project, hence missing deadlines for solar

FiT likely to get to reasonable level after June 2019

After the existing FiT’s expiration on 30 June 2019, the generators would be facing downward price pressures from competition and from EVN

Counter-party risks

EVN’s lack of credit rating

There is no government guarantee that developers would be indemnified for all the power output that has not been off-taken or if EVN becomes insolvent.

Finding a good local partner/ joint developer

Local developers may not perform their parts of the agreement after the transaction has been made, or under-perform due to lack of experience and relationship with local authorities, resulting in delays, inefficiency, or missing the solar deadlines

Operational Risks

Low quality equipment

Local developers tend to cut costs, such as sourcing cheaper, made-in-China solar panels. If equipment does not perform as expected when installed, additional costs of repair or replacement may be incurred.

Low local grid capacity in certain rural areas

The aggregate output of RE power in one concentrated, underdeveloped area could overload the local transmission lines which had not been built to support such large amount of offtake.


Solution: Local developers to team up with foreign investors / joint developers                                                                                                                                             

What the local partners lack in terms of technical know-how, experience or financial health, foreign partners may make up with hands-on assistance, knowledge transfer and the financial back-up as corporate guarantees in financing. This approach bypasses the limitations of the PPA, while providing the boost for solar projects to complete before the deadline of June 2019.

As the project progresses, foreign partner could choose to invest further into the JV in stages, eventually holding 100% of the JV for better control and management.

Some success stories have emerged using this JV strategy, such as the cooperation between BIM Group with Ayala’s AC Energy (Philippines), to jointly develop over 300 MW of solar power projects in Vietnam’s Ninh Thuan province. AC Energy has had extensive experience in developing energy projects, being one of the fastest growing regional energy platforms with development, operations and retail supply capabilities. While BIM takes care of the paper processes, AC Energy is expected to support in technical aspects as well as financing aspects, including the debt structure. The EPC contractor is Conergy, a German developer which has worked with AC Energy before to develop solar farms in the Philippines.

It took BIM Group 5 months to finish the registration process, and the project broke ground in January 2018. The construction phase is expected to finish in 7 months and the project completed within the year, just on time to secure the solar FiT, according to press releases[1].

More information could be found in our first comprehensive report on Renewable Energy in Vietnam, featuring the most up-to-date information on Renewable Energy projects as well as practical investment opportunities, risks, and mitigation measures. Please visit website: https://biinform.com/Reports/1A6F-vietnam-renewable-energy-report-2018-.html for report details.

Contact our Energy Specialist team:

Dong Le

Director Biinform

Dong.le @stoxplus.com

Dung Vu

Senior Research Analyst, Biinform

Dung.vu@stoxplus.com