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Thursday, 19/08/2021

UK’s Experience in Renewable Energy Auction

With the spirit “Sharing is caring”, the 3rd session of the Webinar series “International Experiences in Renewable Energy Auction” (IEREA2021) – co-organized by PECC3 and Center for Procurement Support (CPS), under the Public Procurement Agency, MPI – was held at 3 p.m. on August 19th, 2021, focusing on the UK’s experiences in international renewable energy auctions.

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As usual, on behalf of the Organizing Committee, Mr. Tran Quoc Dien – Deputy General Director of PECC3 – kicked off the session by welcoming distinguished guests from the British Consulate General, Ministries, and Branches, as well as UK’s experts and business representatives. In his remark, he also emphasized that the active country-level cooperation was the bedrock of the realization of Vietnam’s National Energy Development Strategy by 2030, with a vision to 2045 for better integration, while quoting meaningful lyrics of John Lenon’s Imagine song.

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Updating participants on the current status of Vietnam’s energy supply and the development of the new, clean energy sources policies, Dr. Pham Nguyen Hung – Deputy Director General of Electricity and Renewable Energy Authority (EREA), MOIT – highlighted that Vietnam already reached 17GW of renewable energy (RE) in operation, resulting in the reduction of negative impacts of fossil fuels and economic improvement in poor areas. As the enactment of Resolution 55 came along, the objective on RE-based energy sustainability would soon materialize thanks to a huge amount of domestic and foreign investment – totally estimated at more than USD15 billion. Embarking late on the RE journey, the Vietnamese government has taken the lessons of developed countries by adopting subsidy policy and support schemes to attract investors into this market, deemed to be less competitive than the traditional one, while ensuring time and cost-effective development. This process was well-paid with an achievement of 25% RE in the energy mix. Mr. Hung wished that UK’s experts could provide valuable insights on the sustainable competitive bidding procurement framework for EREA going forward.

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In the follow-up remark, Mr. Sam Wood – Deputy Consul General and Head of the Department for International Trade team at the British Consulate General in Ho Chi Minh City – agreed that this was the right time for Vietnam to undergo a transition, in terms of structure and technology, to a Clean energy-based system. As a country that has long positioned itself in this matter, the UK government also appreciated this webinar initiative. Mr. Sam also expressed his confidence in the RE development goals and orientations of Vietnam, as well as showed UK’s support towards the country’s rapid shifting from coal-fired power to clean energy. The UK’s Department of International Trade has actively cooperated with EVN to provide technical support while various domestic enterprises also put the Vietnamese market under their radar. In the end, he hoped that Vietnam could develop a clean energy supply through a sustainable policy framework, and looked forward to an interesting webinar with lots of practical information from the UK’s experts.

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The first presenter was Mr. Joshua Roebuck – Head of Policy and Strategy, Department of Business, Energy and Industrial Strategy – with the topic of the UK RE policies, where he explained why the Contracts of Difference (CfD) was gradually introduced and adopted in the country after giving the background of this industry since 1999. As one of the UK SDG priorities, along with climate change combat, RE has undergone a significant change since 2015, attributed to the Government’s proactivity in setting out clear strategies and annual goals, supported by attractive investment schemes for mid-sized projects. These factors are the foundations of a safe environment for potential developers, ensuring the program’s success.

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In the UK, there were different renewable support schemes depending on the size of the project, among which, large-scale generation, once supported by RO (Renewables Obligation), is now going through the CfD bidding process. In essence, the CfD price is pre-agreed at a certain level (the Strike Price), based on which the payments for difference would be made by the government-owned company (when the market price is lower) or generator (when the market price is higher). Regarding the bidding process, auctions close as the cumulative spend by projects awarded CfDs reaches the maximum auction budget. After a period of implementation, this scheme has been backed by many successful high-quality projects with low tariffs. Looking forward to Vietnam’s complete RE transition from coal-fired power, he outlined some of the lessons learnt: (1) early long-term ambition determination; (2) integration into transmission; and (3) flexibility in the legal framework to adapt to changing conditions of the market.

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The next presentation covered the operation of LCCC – CfD counterparty, shared by Mr. Neil McDermott, CEO of the Low Carbon Contracts Company (LCCC) and the Electricity Settlements Company (ESC). As mentioned, LCCC is an independent privately owned by the government, which shapes and implements schemes enabling low-carbon investment at the least cost to the consumers, while functioning as a power price forecaster to accelerate the delivery of UK Net Zero emissions.

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To select the most appropriate bid, there are currently 4 allocation rounds carried out for each technology category, so-called “pot”: onshore wind and solar; remote island wind; fixed bottom offshore wind. These awarded projects, including 40 onshore and 15 offshore wind up till now, are qualified to be developed across the country. Since then, the total capacity and generation in the UK have been dominated by projects under CfD each year as the price of each round is getting lower. In addition, investors also show more confidence in the market due to the security of support levels. After 8 years of implementation, the UK has proved to be more efficient in CfD regulation, which both caters to market needs and protects the interests of investors. In Mr. Neil’s view, this scheme will open lots of potential for long-term clean energy development regardless of the project’s size and can be combined with PPA, depending on developers’ competency.

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As the last speaker, Mr. Sam Rea – Senior Manager at the Office of Gas and Electricity Markets (Ofgem) – brought in Ofgem’s experience in tariff support allocation, risk management, or dispute resolution consultancy for each type of policy. For instance, the FiT regime typically includes guaranteed grid access and cost-based purchase prices, thus volatility risk and output planning must be taken into account. It is also worth noting that generators empowered by FiT should be carefully selected. On the other hand, the RO scheme places an emphasis on premium from ROCs. Particularly, developers gain economic benefit by selling these ROCs to suppliers, who are under obligation to obtain a certain number of ROCs. The purpose of this scheme is to create an open and market-based system, in which the extra amount of charge can be predicted by stakeholders.

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The OFTO mechanism (Offshore Transmission Owner), as its name, is developed to identify the owner of offshore transmission, through which minimizes the cost of distribution and operation under continuous regulation, as well as provide stable national grid connection to a high standard, ensuring minimum tariff for consumers. In addition to Ofgem, Grid Code Review Panel is another administrative body in charge of the national grid, offering transparency and objectivity in management, as well as support. He finished off the presentation by introducing the UK PACT program – an initiative providing expertise in RE to meet the demand from both public and private sectors.

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In the panel discussion, Mr. Nguyen Nam Trung – Director of Legal Department, EVNPECC3 – was in the role of moderator to help deliver questions to the Panelists:

What are the lessons learnt for Vietnam’s RE sector from your successful experiences?

Mr. Ian Hatton – Chairman & Founder Director, Enterprize Energy: We have developed large-scale projects similar to Thang Long Wind 3,400MW in the UK, the USA, and other countries. Taiwan also transitioned from the FiT regime to an auction scheme. Even though the RE sector in Vietnam can benefit from the EU-approved local supply chain of foundation, utility infrastructure, etc., it shouldn’t be viewed as a low-cost source of energy due to price changes in relevant orders. Regarding contract terms and conditions during the auction phase, I think the capital cost is the barrier to project development in Vietnam. For example, the 3,400MW Thang Long Wind project is the real gem for developers, yet still necessitates bank financing due to its enormous investment capital. Cost, hence, should be adjusted to ensure a good rate of return on capacity. Another issue with FiT is that developers can only benefit from it in the early days when the technology is already there. However, Vietnam should consider PPA as a priority in case of FiT reduction like in Thailand. Last but not least, flexibility and adaptability to change is the key to success. For example, the Thang Long Wind project was deemed to be included in Resolution 55, but the transmission line and storage system couldn’t keep up with its generated capacity, while the use of new inventions such as liquid-air or hydrogen-based energy storage for generation or export is totally viable. Overall, a new energy market is necessitated as developed countries have already undergone a transition to a less fossil fuel-dependent period.

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What are the ways to limit and handle the risks such as delays in permitting, construction, land allocation, production, etc., or force majeure like the Covid pandemic in this multi-stakeholder approach?

Dr. Tran Dang Khoa – Director of Power Market Department, Vietnam Electricity (EVN): According to our statistics, there are 15GW of solar energy including both ground-mount and rooftop systems, 700MW of other clean energy, and 4GW of small and medium hydropower in operation, not to mention 400 PPAs on nearshore and offshore wind power, of which 1000MW have been signed and 300MW will officially be commenced by the end of November 2021. Due to the difference in auctioneer selection between Vietnam (regulated in Law on Bidding) and the UK (Government agency), the risk is balanced out for both parties as developers don’t own the land or water areas, which is another hindrance to RE development in Vietnam…The risk of site selection and permit-based site allocation is one of the issues that need addressing before handing over to developers. These are matters that ought to be incorporated into planning to streamline the process.

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How to determine the auction demand and volume for different technologies? Should an auction be held for each project with a capacity of several to hundreds of MW?

Mr. Joshua Roebuck – Head of Policy and Strategy, Department of Business, Energy and Industrial Strategy: First of all, I want to emphasize that Vietnam should specify its system development strategy. In the UK, there are plenty of schemes to publicly update information on the number and size of ongoing projects, as well as a roadmap for offshore wind with capacity in need. Besides, we always come up with new solutions to ensure on-time project completion for different categories and sizes, in order to enable a competitive bidding procurement process.

Should developers be selected based on expertise and allowed to bids within a disclosed ceiling price (before or after its disclosure)? Under what circumstances, should the number of bidders be limited?

Mr. Neil McDermott – CEO of LCCC and ESC: LCCC is not involved in the developer selection process, which Joshua already mentioned. In my opinion, pre-qualifications and bidding documents must be well prepared by the government as those are the prerequisites for developers to be eligible. They must be ready in terms of financial and technical capacity as approved. Under 12-month CfD, developers must be able to cover permit fees and other payments of relevant contracts such as 10-15% of total capacity, material, maintenance, construction, etc. If not, they would be able to sign CfD with LCCC. Please note that CfD must be signed in combination with PPA, stipulating the reference price, as Sam has shared. There will be a separate auction for seabed identification and allocation for offshore wind projects in round 4, which requires EIA, project design, and so forth to enhance the winning probability of the bid.

What documents need to be standardized in regulations or by expert associations? What documents should developers prepare to deal with uncertainty about grid development or land acquisition?

Mr. Neil McDermott – CEO of LCCC and ESC: In CfD, developers will bear the construction risk and are only paid for the actual generation. Therefore, they can freely negotiate contracts for installation, deployment, financing, or discuss tariffs during the auction, etc. with other parties. These payments will be calculated into the CfD final price. In terms of financial capacity and access, developers can use relevant documents to seek other sources. However, the termination of CfD is likely to happen in case third parties’ standards are not met. In addition, LCCC also offers support regarding some contract provisions such as force majeure provisions, land use, site clearance, etc. As a suggestion, all technical issues need sorting out by developers to limit losses, since the CfD is only based on the amount of electricity produced and the fixed cost.

After introducing a preliminary mechanism such as FiT, is the wholesale price going to be affected?

Mr. Sam Rea – Senior Manager at Office of Gas and Electricity Markets (Ofgem): In my opinion, the wholesale price will increase, so suppliers, consumers, and even external factors such as the environment will be affected. This, in general, may push the electricity bills higher 3-4%. As our goal is to ensure people’s energy consumption at the lowest price, a ceiling price is also applied to protect their interests. In fact, there are businesses willing to pay the green tariff, as long as it is renewable electricity, to compensate for the price difference that consumers have to bear in the UK.

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How to ensure competitiveness in the auction process? Should the ceiling price be disclosed before or after the auction process?

Mr. Neil McDermott – CEO of LCCC and ESC: It will depend on the government’s regulation. From my and other investors’ perspective, CfD is a good incentive to attract more developers to participate in the auction, which is also the end goal of it. In the UK, there are counterpart agencies that operate and manage CfD, facilitating a more transparent and efficient market. I believe that investors’ confidence plays a key role in enhancing competitiveness in the market. Plus, CfD should also be developed further to ensure his scheme is the perfect match for the current energy market.

Should investors offer a fixed price or just some ratio to a known or unknown ceiling price? Should financial institutions be involved in the auction process?

Mr. Neil McDermott – CEO of LCCC and ESC: As Joshua mentioned, in addition to price, the developer is also awarded based on technical and financial availability, as well as installed capacity. Financial institutions should be involved to understand the financial picture, not in a direct way, but through thorough discussion with investors.

Should new factors, local job creation, community benefits, among others be included in the bidding documents?

Mr. Neil McDermott – CEO of LCCC and ESC: The UK is currently applying an integrated approach for different projects to ensure the following auction criteria: operation, supply chain, infrastructure requiring huge workforce, local benefits, infrastructure development, maintenance of power plants and systems. Many job opportunities will be created to accommodate the growth of this whole system.

Dr. Tran Dang Khoa – Director of Power Market Department, Vietnam Electricity (EVN): Adding up on Mr. Sam and Mr. Neil’s comments on financial security contracts in Vietnam, even though wholesale electricity market has been implemented for many years, CfD contracts are not reliable enough to ensure bankability in Vietnam. Therefore, the transition from FiT to CfD in our country is a long process that requires great efforts, in which auction and other schemes such as DPPA to promote CfD has currently been discussed by the MOIT. Vietnam also learns from the UK’s experience in offshore wind development as the country has long prioritized this sector and carried out plenty of surveys on site, seabed conditions, metocean, etc., in advance for the investors. Plus, since submarine transmission lines aren’t available in Vietnam, the scheme should focus on inland projects to create an attractive and competitive investment environment.

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There were more than 20 questions answered by Speakers in the Q&A function. To conclude the seminar, Ms. Vu Quynh Le – Deputy Director, Procurement Management Department, Ministry of Planning and Investment – has expressed her interest in the insightful content and lessons since day one. She believed that today’s valuable information will soon be factored into the development and approval of important policies in Vietnam’s RE sector going forward.

The organizers would like to thank Enterprize Energy and ACSV Legal as sponsors supporting PECC3 and CPS to successfully organize the seminar today.

To get an overview of other sessions (Denmark, India, Germany, USA), please find details at the website of Power Engineering Consulting JS. Company 3 (PECC3). We are proud bringing our integrity and trust to our distinguished partners through this webinar series.

https://www.pecc3.com.vn

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