VIETNAM WIND ENERGY

INVESTMENT GUIDE

APRIL 2021

DUANE MORRIS VIETNAM LLC

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Vietnam, one of the world’s fastest growing and energy-intensive economies, has
recently been identified by the World Bank as having world-class wind energy
resources, both onshore and offshore.

In this investment guide, we explore the key opportunities and challenges inherent in
the Vietnamese wind energy market, undertaking an analysis from commercial, legal,
and regulatory perspectives.

It is hoped that the commentary contained within will be of value to key market
participants, namely developers, sponsors, and lenders, as they consider investing in
what is fast becoming the most promising wind energy market in the Asia-Pacific
region.

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MARKET OVERVIEW

Vietnam, a country of more than 90 million citizens, is one of the world’s fastest
growing economies, having experienced rapid industrialization over the past two
decades. Vietnam is also one of the world’s most energy-intensive nations, consuming
vastly more energy per unit of economic output than major regional counterparts such
as the Philippines, Malaysia, Indonesia, and India.1 With surging power needs and
limited available natural resources, the Vietnamese government estimates that up to
USD 130 billion of investment will be required to avoid mass energy shortfalls over the
next decade.2

Within this context, Hanoi has recently sought to create a sustainable energy future,
with a greater focus on incorporating renewable power into the existing energy matrix.
Pursuant to Vietnam’s latest draft national master power development plan (“Master
Plan 8”), Hanoi has set a target of up to 19 GW of installed wind energy capacity by
2030. It is expected that Master Plan 8 will be finalised and released by May 2021.

1
The World Bank Group, Energy Intensity Level of Primary Energy, 2021.
2
Prime Minister, Draft Decision on Power Development Planning VIII, 2021.
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VIETNAM’S WIND ENERGY POTENTIAL

The World Bank has recently characterised Vietnam as a world-class wind energy
destination with the most promising wind conditions in Southeast Asia. 3

Vietnam boasts over 3,300 kilometres of coastline, yearly average wind speeds of 8-
9m/s in its southern regions and 6m/s nationally, suitable offshore water depths, and
proximity to large load centres, all coalescing to provide the ideal natural conditions
for the development of utility-scale wind generation assets.4 Vietnam also offers great
prospective investment synergy with other nearby regional wind energy markets,
including China, Taiwan, Japan, South Korea, the Philippines, and Indonesia.

Much like the rest of the region, Vietnam is however a monsoonal country and
susceptible to seasonal typhoons and tropical storms. Such conditions potentially
present as an issue for developers in relation to technical design, maintenance, and
curtailment risk.

Overall, the natural conditions of Vietnam are very promising and offer numerous
untapped onshore, nearshore, and offshore wind energy investment opportunities
over the coming decades.

3
The World Bank Group, Going Global: Expanding Offshore Wind to Emerging Markets, 2019.
4
Global Wind Energy Council, Global Offshore Wind Report, 2020.
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KEY MARKET PARTICIPANTS

Sponsors/Developers: Renova Japan, Landville Energy South Korea, Blue Circle

France, Trung Nam Group, Enfinity Global, EAB New Energy GmbH Germany,
Woojin South Korea, GE.

Lenders: KfW Development Bank, Agri Bank Vietnam, Vietnam Development

Bank, US Export Import Bank, Macquarie Bank.

EPC Contractors: Hydropower China, CTV France, HCE Germany, Petro Vietnam
Power Corporation, Huy Hoang.

Manufacturers: Vestas, GE, Fuhrlaender, Enercon, Siemens Gamesa, Goldwind.

Offtakers: EVN holds a current market monopoly on the purchase, transmission,

and distribution of electricity in Vietnam.

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LEGAL CONSIDERATIONS

Foreign Ownership Limitations

Whilst Vietnam does impose strict foreign ownership thresholds on numerous sectors,
the renewable energy market is currently not under any such restriction, allowing for
up to 100% foreign equity ownership in wind energy project companies.

Investment Forms

Foreign investors may enter the Vietnamese wind energy market via the following
primary investment forms:

 Brownfield (M&A, share purchase): Due to concerns around licensing and land
allocation, it is often common practice for foreign investors to acquire the charter
capital (LLC) or shares (JSC) of a pre-existing project company at a stage when
preliminary, but nevertheless fundamental, investment approvals have already
been obtained (e.g. power development plan approval, land use rights, construction
permits, etc.). Such project companies are generally owned by domestic
Vietnamese investors.

 Brownfield (M&A, asset purchase): It is uncommon and highly cumbersome to

solely acquire project assets under Vietnamese law. As mentioned above, issues
around land allocation and the potential transfer of such rights is problematic and
may result in material transaction delays. For that reason, the preferred route of
investment is generally via share purchase, as opposed to asset purchase.

 Greenfield: Whilst greenfield foreign investment is an option and one that is

preferred in numerous sectors, for the reasons mentioned above, the preferred
route of investment in the renewable energy market is via the acquisition of an
equity interest in a pre-existing early-stage Vietnamese project company that has
already obtained basic investment approvals. Of course, investors are free to
develop projects entirely on a greenfield basis, but this will require careful
navigation of early-stage licensing and permitting processes.

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 Public-Private Partnership: Under Vietnam’s first uniform Public-Private
Partnership Law, effective from 1 January 2021, foreign investors are able to enter
into PPP arrangements with the Vietnamese government to develop energy
projects. The PPP Law provides for typical contractual structures such as build-
operate-transfer, build-transfer-operate, and build-own-operate, amongst several
others. Investors are also able to self-propose projects. Please note that a strict
minimum investment threshold applies - not less than USD 8.6 million, except for
projects in areas with difficult socio-economic conditions.

CURRENT FEED-IN-TARIFF REGIME

Vietnam currently offers a favourable feed-in-tariff mechanism for renewable energy

projects, applicable to solar, wind, hydropower, and biomass power plants.

The current FiT for utility-scale wind power plants is 8.5 US cents per kWh for onshore
projects and 9.8 US cents per kWh for offshore projects.

In order to access this premium tariff, wind power plants must achieve a commercial
operation date prior to 1 November 2021. However, in order to accelerate the
country’s sustainable energy transition and to encourage greater investment in wind
power, the Ministry of Industry and Trade has recently requested the Prime Minister to
extend the commercial operation deadline until 31 December 2023. Such request is
still pending approval. The extension would ensure that new projects are able to
realistically meet the deadline and thus access the premium tariff. Further, with the
onset of Covid-19, developers are facing great difficulties in the timely importation of
specialist plant components such as turbines.

The FiT is set by statute, non-negotiable, and applied for a 20-year contractual term
under the mandatory standard form utility-scale PPA with EVN. The FiT is denominated
in Vietnamese Dong and linked to the official State Bank of Vietnam USD exchange
rate. Generators will therefore receive payment in Vietnamese Dong. The standard
form PPA does not provide an adjustment mechanism to account for the cost of
inflation during the term of the PPA.

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PROJECT FINANCING IN VIETNAM

Large-scale energy projects in Vietnam have traditionally been funded by a mix of debt
and equity finance. Funding is typically mobilized through shareholder loans and multi-
tranche syndicated secured facilities from domestic and international lenders. There
have also been several export credit agency (“ECA”) financings of which most related
to State-owned corporations developing national priority projects.

The terms of financing vary and are largely dependent on bankability assessments,
however, consistent with international project finance practice, it is common for
funding to be provided on a limited or non-recourse basis, supplemented by specific
borrower guarantees or undertakings. Developers have started considering using
project bonds to raise funds on a larger scale or to restructure prior debts.

There is no fully project-financed financing from international lenders to date in the

Vietnamese market. Foreign banks and ECAs have previously worked with local
domestic lenders to mitigate risk and create innovative financing structures. Re-
financing with large offshore lenders post COD is an option for developers. Sponsor-
backed financing, particularly through regional lenders is common, as is ECA financing
backed by local domestic bank guarantees in regards to EVN’s payment obligations.

Of note, Vietnamese domestic banks typically lack the experience and capital to fund
investments in high-risk complex renewable energy projects, such as offshore wind
assets. Concerns also continue to persist around the inability of foreign lenders to
directly take security over land and assets, thereby acting as a serious impediment to
attracting tier-one international project finance funding. Under current Vietnamese
law, security over land use rights and real property is only available to domestic
lenders. Moreover, the use of local security agents to hold land-related security
remains fraught with uncertainty and practical constraints.

Finally, uncertainties around key areas of the standard form PPA (as discussed below)
have negatively affected bankability assessments and thus limited foreign lender
participation in the Vietnamese renewable energy project finance market to date.

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INCENTIVES AND TAXES

Several investment incentives and tax relief mechanisms are potentially available for
renewable energy investments in Vietnam. In general, the following incentives apply to
wind energy projects:

 Corporate income tax: Corporate income tax exemption for the first four years
of the project, a 50% income tax reduction for the following nine years, and a
preferred income tax rate of 10% for the first 15 years.

 Land lease fees: Exemption on land use fees of up to 15 years.

 Import duties: Exemption on goods imported to form fixed assets (e.g. specific
parts of a wind turbine) as well as on project materials which cannot be
manufactured within Vietnam (e.g. rotor blades).

In conjunction with a favorable feed-in-tariff and 20-year PPA term duration, such
incentives provide additional attractive commercial benefits for developers and
investors alike.

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POWER PURCHASE AGREEMENT

Standard Form PPA

As the only wholesale electricity purchaser in Vietnam, it is mandatory that wind

generators sign a formal PPA with EVN as sole offtaker.5 This is a mandatory
requirement and the essential terms of the standard form PPA cannot be amended.
There is the potential for developers to seek to incorporate additional contractual
terms, although, in practice, EVN is typically reluctant to agree to such requests.

As discussed below, whilst the PPA does provide a favourable FiT and contractual
duration, the terms seemingly allocate unfavourable risk to investors in several key
areas, presenting as an obstacle to securing financing with offshore international
lenders.

EVN

As noted above, under current power regulations, EVN holds a monopoly over the
sector and is thus the sole wholesale purchaser of electricity in Vietnam. Accordingly, it
is mandatory that wind generators sign a formal PPA with EVN. Doubts have been
raised about EVN’s creditworthiness. As the sole offtaker under the template PPA,
developers will have to navigate such risk and ensure proposed financing
arrangements provide requisite comfort to lenders with respect to EVN’s current credit
position.

Negotiating PPAs with EVN

Officials from the Ban Thi Truong (Market Department, EVN) are responsible for
negotiating power purchase agreements with investors. Investors and developers are
most welcome to contact Dr. Oliver Massmann and the Duane Morris team for further

5
Circular No. 02/2019/TT-BCT, dated 15 January 2019, Ministry of Industry and Trade.
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guidance on how best to structure negotiations with the Ban Thi Truong (Market
Department, EVN).

Governing Law and Dispute Resolution

The standard form PPA requires the terms of the agreement to be governed by
Vietnamese law. Vietnamese law, particularly in relation to renewable energy, is
constantly evolving and does not typically provide a predictable and clear legal basis
when compared with more developed jurisdictions.

In relation to dispute resolution, the template PPA is again restrictive and only permits
parties to resolve disputes via formal internal Ministry of Industry and Trade
adjudication (i.e., supervised by the Electricity and Renewable Energy Authority).

Such limitations will undoubtedly create unfavourable risk for investors who would
otherwise rely on the predictability of foreign law and third country international
arbitration should a dispute scenario arise.

The Rights of Lenders

The standard form PPA is silent as to the ability of lenders to step-in should the project
company be unable to remedy a serious contractual breach. The PPA is also silent as to
whether a project company would be able to assign their interests to a lender without
the consent of EVN.

Step-in right mechanisms are a crucial component of power purchase agreements and
the absence of such rights is inconsistent with global best practice, potentially
undermining project bankability assessments.

Foreign Exchange Risk

Currency depreciation is a serious issue for investors seeking to invest in renewable

energy projects in developing markets the world over. Where a PPA is denominated in
local currency, investors face the additional burden of an exchange rate fluctuation

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arising from the time when payment is received until the time of conversion back into
a foreign currency. Where a currency is not freely convertible, such as the Vietnamese
Dong, investors are particularly exposed and often seek out formal government
guarantees to support same-day USD conversion.

The current standard form PPA however is denominated in Vietnamese Dong and does
not provide any specific form of guarantee as to same-day conversion. Such risk is
amplified by the fact that the terms of the PPA allow up to 25 business days between
the date EVN issues the invoice and the date payment is received.

Curtailment Risk and Grid Connection

Under the terms of the PPA, EVN is not contractually obliged to purchase power when
the grid is disrupted. No express compensation mechanism is currently provided.
Investors will need to carefully consider the likelihood of such risk as Vietnam has in
recent times approved significant volumes of additional capacity, creating great
pressure on existing inadequate transmission infrastructure. A key policy issue going
forward will be the challenge of adequately upgrading existing grid and transmission
infrastructure to attract genuine foreign investment in power generation projects.

Further, investors are not protected where the plant has achieved commercial
operation but ancillary transmission infrastructure is inadequate or unable to connect
the plant to the grid. Under the standard form PPA, developers’ bear the cost and risk
of connection.

Guarantees, Assignments, and Changes in Law

The PPA does not provide specific government guarantees. This is particularly of
concern with regards to foreign exchange risk and the potential contractual non-
performance of EVN. The provision of such guarantees would provide much needed
comfort for prospective investors.

Further, the PPA provides an unfavourable risk allocation to the extent that EVN, as
offtaker, is provided with the right to assign their contractual interests under the PPA

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to a third-party entity without the consent of the project company. Conversely, the
investor is not provided with the same express rights of assignment. The PPA also does
not provide protection to investors should an adverse change in law scenario arise.
Given Vietnam’s rapidly evolving legislative environment, such silence is concerning
and inconsistent with international best practice.

REGULATORY APPROVAL PROCESS

The sequence below provides a high-level overview of the current regulatory approval
process required to develop greenfield wind energy projects in Vietnam.

1. Preparation Phase:
> Decision on Inclusion in Power Development Plan
> Site Study / Pre-Feasibility Study
> Decision on Investment Policy
> Investment Registration Certification and Enterprise Registration Certificate (SPV)
> Security Deposit Agreement

2. Development Phase:
> Metering Agreement / Grid Connection Agreement
> SCADA Agreement / EMS Agreement / Protective Relay Agreement
> PPA with EVN
> LUR Certificate / Assignment of Seabed Rights

3. Construction Phase:
> Construction Permit
> Contract on Design, Construction and Equipment Purchase
> Approval for Basic Design / Feasibility Study
> Fire Prevention and Fire Fighting System Approval
> Environmental Impact Assessment

4. Operation Phase:
> Operation Licence
> Electricity Generation Licence
> EVN COD Confirmation

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With world-class natural conditions, surging power needs, and proximity to large load
centres, Vietnam presents as one of the most promising wind energy markets in the
Asia-Pacific region and globally.

Moving forward, key policy challenges nevertheless remain, particularly with regards to
grid infrastructure, the terms of the current standard form PPA, the implementation of
direct PPAs and a transparent auction system, and the need to simplify existing
licensing procedures.

Investors will therefore need to carefully navigate complex commercial, legal, and
regulatory considerations in order to fully realise the true investment potential of the
Vietnamese wind energy market over the coming decades.

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ABOUT DUANE MORRIS

Duane Morris LLP is an international law firm headquartered in Philadelphia, USA,

operating for more than 100 years. Duane Morris has 29 offices globally, including in
the USA, UK, Singapore, China, Vietnam, Myanmar, and Oman.

Dr. Oliver Massmann

Partner
Tel: +84 392495833
Email: [email protected]

Tran Minh Thanh

Senior Associate
Tel: + 84 934 526 882
Email: [email protected]

Daniel Haberfield
Associate
Tel: + 84 28 3824 0240
Email: [email protected]

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