UPDATE ON THE DEVELOPMENT OF DIRECT POWER PURCHASE AGREEMENT (DPPA) MECHANISM IN VIET NAM

On 13 September 2023, the Ministry of Industry and Trade (MOIT) submitted to the Prime Minister Report No. 158/BC-BCT on the study of the mechanism for direct power purchase agreement between renewable energy plants and large consumers (Report 158), following the Report No. 105/BC-BCT dated 25 July 2023 on the same matter (Report 105). Compared to Report 105, Report 158 includes some new suggestions from the Ministry of Justice and the Ministry of Finance, along with new proposals from BCT on the development and issuance of DPPA mechanism provisions. The DPPA mechanism, according to Report No. 94/BC-BCT dated 29 October 2021, aims to achieve the overall goal: Meeting the demand for clean energy; attracting investment capital in the sustainable development of renewable energy (RE), and being a necessary preparation step for the transition to the competitive retail electricity market in Vietnam.

Legal basis and selected DPPA models

The legal basis for DPPA mechanism, as outlined in Report 158, is point b, clause 1, Article 47 of the Electricity Law, granting large electricity consumers the right to buy electricity directly from power generators under a forward contract or from the electricity market; the Ministry of Justice has confirmed this legal basis as well. Accordingly, the MOIT has selected two cases for applying DPPA in Vietnam: Private-wire DPPA: Parties sign a DPPA to exchange electricity through a direct connection line that bypasses the national grid. This model is also known as Physical or Behind-the-meter DPPA and has been applied to rooftop solar power projects under Circular 18/2020/TT-BCT.

On-national-grid DPPA: Also known as “Virtual” or “Financial” DPPA, parties sign a Contract for Difference (CfD) with electricity price (for 1 MWh/kWh) and volume (MWh) agreed. Under the CfD, the generator participates in the electricity market, connects to the national grid, and ensures offering the electricity volume agreed with the buyer into the competitive wholesale electricity market. The seller and buyer will settle the payment based on the Contract for Difference principle: for each settlement period (monthly/quarterly, depending on contract agreement) both parties will pay each other the difference between the contract price and the reference price – spot market price – for all delivered electricity volume during the period under the contract. For example, if the spot market price is lower than the contract price, meaning that the seller is “at a loss”, the consumer will compensate for the difference to ensure the seller gets the expected profit. The virtual DPPA is a financial guarantee that helps renewable energy project cope with market price fluctuations.

For the case of private-wire DPPA, partiers are not limited by conditions such as capacity, output, voltage level, and purpose of electricity consumption. Meanwhile, to participate in on-national-grid DPPA, the wind or solar power plants must meet the minimum requirement of 10MW installed capacity, and the customers must be connected to the grid at 22kV or higher.

Regarding the consumers, the MOIT proposes 2 models for consumers to pay for electricity received from retail electricity suppliers:

Model 1 – Consumers buy electricity at the retail price regulated by the State from the retail electricity supplier for their entire electricity demand, as they do now, under the price structure specified in Decision No. 28/2014/QD-TTg and Decision No. 24/2017/QD-TTg, as well as relevant guidelines.

Model 2 – Consumers buy electricity at the spot market price, plus service costs (including costs for (1) transmission and distribution, (ii) power system operation, (iii) market operation, (iv) power system auxiliary services). In this model, the total electricity cost includes energy costs and service costs for the settlement period.

Roadmap for the implementation of DPPA

The MOIT states that the model where customers buy electricity at state-regulated retail prices from retail electricity supplier (Model 1) does not require much amendment and supplement to related applicable legal documents. On the other hand, applying the model where consumers buy electricity at wholesale prices, plus various electricity service fees (Model 2), requires legal adjustments and guidelines for calculation of: (i) electricity distribution cost; (ii) power system and market operation cost; (iii) power system auxiliary services and other costs; (iv) model power purchase agreement. The time to apply Model 2 depends on the effective date of the Price Law 2023 (1 July 2024).

The MOIT suggests a two-phase approach for the DPPA mechanism. Model 1 will be used until the Price Law 2023 and its related guidelines are effective, and then Model 2 will be adopted: customers will pay a price that reflects the spot market prices plus various service fees.

In Report 105, the MOIT proposed the Minister to approve the development of DPPA mechanism in the form of a Government’s Decree under the expedited procedure. However, according to the Ministry of Justice, the Electricity Law does not have a provision that entitles the Government to the authority to regulate the DPPA mechanism in detail; thus, the legal basis and authority to issue the Government’s decree on this matter, under the Law Promulgation of Legislative Documents, must be further clarified. The Ministry of Finance also states that the CfD has not yet regulated by laws; they request the MOIT to study a proposal to the competent authority for regulation of CfD, in order for them to determine which taxation mechanism applicable to this form of contract. According to Report 105 and 158, CfD is “a form of contract that is not clearly defined in the Electricity Law as well as there is no link between the regulation on this contract in the Electricity Law with the contract in the Commercial Law, Value-Added-Tax Law like other derivative financial contracts”. From the above opinions, the MOIT proposes the Minister to consider adding regulations regarding DPPA mechanism in the Electricity Law, including provision on issuance authority and DPPA mechanism. This proposal aligns with the one previously put forward by the MOIT in their Report No. 4999/TTr-BCT dated 31 July 2023 on proposal for amendment to Electricity law. According to the Report, the draft amendment to Electricity Law is, expectedly, due to be submitted to National Assembly for comments at the Eighth Session of the XV National Assembly (10-11/2024), submitted for approval at Ninth Session of XV National Assembly (5-6/2025), and enforceable on 1 January 2026.