Determining electricity generation prices: new regulations for projects participating in Vietnam's Wholesale Electricity Market

Key changes to be aware of 5 min read

Recent changes to how prices are set for generators participating in Vietnam's wholesale power market reflect a broad policy shift away from bespoke structures for large-scale power plants (in particular foreign-invested BOT projects) and the government's determination to develop the merchant market. The changes, however, amount to minor tweaks and are unlikely to satisfy developers and financiers of novel LNG-to-power projects, who are being asked to take risks on first-of-their-kind arrangements against a backdrop of tumultuous global energy markets. Ultimately, the changes will not obviate the need for detailed negotiation on power purchase agreement terms on a project-to-project basis, something history shows to be a time-consuming endeavour.

The changes were issued in November 2022 by the Ministry of Industry and Trade (MOIT) to little fanfare in the form of Circular 31/2022/TT-BCT (Circular 31) on amendment of, and in addition to, a number of articles of Circular 57/2014/TT-BCT dated 19 December 2014 of the MOIT, stipulating the method, sequence of formulation and issuance of electricity generation price ranges (Circular 57/2014) and Circular 57/2020/TT-BCT dated 31 December 2020 of the MOIT, stipulating the method for determining electricity generation prices and power purchase agreements (Circular 57/2020) applicable to power projects directly participating in the Vietnam Wholesale Electricity Market (VWEM). Circular 31 took effect on 28 December 2022.

This Insight highlights key points on how electricity generation prices are calculated in the VWEM and key changes introduced by Circular 31.

Key points regarding the electricity generation price in the VWEM

There are several noteworthy points in relation to the electricity generation price applicable to a power project directly participating in the VWEM (Price):

1. The Price is agreed between buyer and seller in accordance with a statutory formula comprising two elements: (a) contract price (Contract Price); and (b) peculiar transmission price. The Price is determined taking into account the reasonable costs incurred to the owner throughout the economic life of the project and an internal rate of return (IRR) not exceeding 12%.
2. The Contract Price is calculated in respect of the calendar year in which the project's total investment capital costs (TC) are approved (Base Year). The Contract Price is the sum of two elements: (a) the project's fixed costs; and (b) the project's variable costs (VC). The former contains two elements, one to recover the TC (FC) and the other to recover operation and maintenance costs (FOMC) over the economic life of the project. The latter covers main fuel costs, auxiliary fuel costs, other variable costs (including costs for auxiliary materials, start-up, regular repair and maintenance) and transportation costs of main fuel calculated in accordance with certain statutory formula. In short: Contract Price = FC + FOMC + VC.
3. So far, so simple. However, contortion may be required as the Contract Price must be within the then-applicable electricity generation price range (Price Range) issued by the MOIT. The upper end of the Price Range (Ceiling Price) is the price calculated and issued in respect of a so called 'standard power plant' of the relevant electricity generation technology and fuel (Standard Plant) for the relevant Base Year.
4. The price of the Standard Plant (ie the Ceiling Price) is also calculated as a sum of FC, FOMC and VC, in which:
   • FC = TC_VDT ꞉ A_bq
   • FOMC = TC_FOM ꞉ A_bq
     • Where: (i) TC_VDT is the investment capital cost for construction of the Standard Plant; (ii) TC_FOM is the total operation and maintenance costs; and (iii) A_bq is the annual average capacity of the Standard Plant at the delivery point.
   • The TC_VDT and TC_FOM in respect of the Standard Plant are both calculated on the basis of the investment capital rate (dong/kW) (SDT) and the total net capacity of the Standard Plant (kW). In the case of TC_VDT specifically, a financial discount rate (%), and in the case of TC_FOM, the proportion of maintenance and operation costs in SDT.
   • SDT is the investment costs incurred for 01 kW of the Standard Plant calculated on the basis of data set out in the approved feasibility study, the TC effective at the time of calculation of the Price Range, or the actual data for negotiation of the PPA (if any), with adjustment to take into account foreign exchange rate at the time of such calculation. The financial discount rate is calculated for the economic life of the project on the basis of the lending percentage over TC, the equity percentage over TC, average loan repayments, interest rate, and return rate before tax.
   • VC = HR x Pnlc x (1+f)
     • Where: (i) HR is the net heat consumption rate calculated at the loading level; (ii) f is the percentage of total costs for start-up, auxiliary fuel and other variable costs for generation over the costs for main fuel; and (iii) P_nlc is the main fuel cost (excluding transportation costs).
5. The pricing and payment mechanisms will be specified in a contract for difference (CfD) entered into between the power plant and the electricity buyer, pursuant to which any difference (Difference) between the Contract Price and the spot price will be payable with respect to a specific committed capacity (Q_C). The Qc is agreed by the seller and the buyer, and is a certain percentage of the projected capacity of the plant in that year. The percentage must be within a range stipulated at law (currently from 60% to 100%). The Difference is either payable by the power plant to the electricity buyer (if the Contract Price is lower than the spot price) or vice versa (if the Contract Price is higher than the spot price).
6. For the purpose of payment, the Contract Price can be adjusted in accordance with the following principles:
   • The FC can be fixed at the average fixed price each year for the life of the project or, provided the average fixed price remains unchanged, fluctuate over the project's life taking into account actual borrowing and financial conditions from time to time. FC will be agreed and specified in the CfD.
   • The FOMC and VC can be adjusted to take into account price escalations such as cost changes for major repairs, labour (in relation to FOMC), main fuel, auxiliary fuel, as well as transportation prices of main fuel (in relation to VC).
   • The Contract Price can also be adjusted due to changes in foreign exchange rates, based on the total foreign currency loan, repayment plan and actual repayment of the principal, the agreed foreign exchange rate used in the original calculation, the foreign exchange rate used for repayment in the previous year and in accordance with a statutory formula.

Key changes in Circular 31 

Overall, Circular 31 focuses its changes on the pricing mechanism, particularly in relation to calculating the Ceiling Price. Notably, under Circular 31, certain costs are now expressly excluded from the calculation of the Ceiling Price, including all costs for port and infrastructure, storage, regasification and transportation of LNG from the terminal to the power plant, and costs of storage, regasification and distribution after regasification. The previous regulations were either unclear or silent on this point. Circular 31 also clarifies which alternative data can be used in cases where certain input data is unavailable to calculate the Ceiling Price or the Price, a positive development in principle as it will provide more certainty during negotiations and, in theory, help shorten the overall process.  

Calculating FC to form the Ceiling Price: changes in the definition of SDT and other components for calculation of TC_VDT

1. Circular 31 amends the definition and calculation of SDT for the purpose of calculating the TC_VDT of the Standard Plant, and therefore, FC is a component of the Ceiling Price.
   1. Firstly, under Circular 57/2014, the SDT was calculated on the basis of the TC approved for the first time or the investment capital upon finalisation of the project (ie as-built). Under Circular 31, the SDT is calculated on the basis of data in the approved feasibility study for construction, TC available at the time when the Price Range is computed or actual data at the time of PPA negotiations (if available). This provides a little more flexibility to select the most up-to-date, and therefore presumably accurate and meaningful, data for the calculation.
   2. Secondly, under Circular 57/2014, the SDT included costs for construction, equipment, land clearance and resettlement, project management, consulting services, working capital during commissioning, loan interest during the construction phase, and contingency. Circular 31 removes this list of specific components signalling either (or perhaps both) a more flexible approach to calculating TC for SDT purposes, or less certainty and therefore more delays in negotiating on a project-to-project basis.
   3. Thirdly, it is expressed in Circular 31 that the SDT in respect of the LNG-to-power Standard Plant excludes all costs for port and infrastructure and costs relating to storage, regasification and transport of LNG from the terminal to the power plant (LNG Excluded Costs). Prima facie, this means that these costs will not be considered in the comparison between the Contract Price and the Ceiling Price. That said, subject to further guidance or regulation, it remains open as to whether such costs can be factored into the actual Contract Price, and therefore recoverable from the tariff, for a given project. We expect delicate project-by-project consideration and negotiations in practice, bearing in mind there will be a wide range of project structures in practice, some with stand-alone integrated facilities, some with shared facilities and some with terminal and power generation facilities under separate ownership.
2. In addition, the annual average capacity at the delivery point (Abq) (kWh) was previously calculated based on: (i) the total net capacity of the Standard Plant; and (ii) the number of hours of operation at maximum capacity. Under Circular 31, another element is added in the equation, that is the capacity attenuation rate (%) which is calculated for the entire economic life of the project. It is calculated on the basis of technical data provided by the equipment manufacturer and in case such data is unavailable on the basis of the data of power plants of similar technology and installed capacity.
3. Finally, the loan interest rates (applicable to both domestic currency and foreign currency loans) which is an element to compute the financial discount rate for the purpose of calculation of the TC_VDT are already amended in Circular 57/2020 and reconfirmed in Circular 31. In particular:

In accordance with Circular 57/2014, the loan interest rates are calculated by using specific reference rates. In particular:

• the foreign currency loan interest rate is the mean of the US dollar interest rate swaps of a 10-year term in 36 consecutive months preceding the year of issuance of the Price Range on the London interbank market (LIBOR swaps), plus the annual average of banking service fees, guarantee fees and related tax of 3% or stipulated by the MOIT in the electricity generation cost frame (%/year); and
• the domestic currency loan interest rate is the mean of the VND 12-month term deposit rates provided to individuals in the five consecutive years preceding the year of issuance of the Price Range determined on September 30 each year by four commercial banks (Joint Stock Commercial Bank for Foreign Trade of Vietnam, Vietnam Joint Stock Commercial Bank for Industry and Trade, the Joint Stock Commercial Bank for Investment and Development, Vietnam Bank for Agriculture and Rural Development, or lawful successors to these banks), plus the annual average of banking service fees of 3.5% or otherwise stipulated by the MOIT in the electricity generation cost frame (%/year).

Under 57/2020, as reconfirmed in Circular 31, these rates reflect the actual interest rates of the power plants which had negotiated Prices during the period of five years preceding the time of calculation of the Price Range. In particular:

• the foreign currency loan interest rate is determined based on the foreign currency loan interest rates of power plants which had negotiated Prices during the period of five years preceding the time of calculation of the Price Range (%/year); and
• the domestic currency loan interest rate is determined based on the foreign currency loan interest rates of power plants which had negotiated Prices during the period of five years preceding the time of calculation of the Price Range (%/year).

Calculating VC to form the Ceiling Price: changes in respect of HR and P_nlc

Circular 31 reconfirms the change in Circular 57/2020 regarding the measurement unit for the net heat consumption rate calculated at the loading level (HR) as originally provided in Circular 57/2014. For coal-fired power plants, it is now calculated in calorific value per kWh (ie kcal/kWh, kJ/kWh) instead of weight per kWh (ie Kg/kWh) as provided under Circular 57/2014, reflecting the different types of coal in the market. HR for gas to power remains to be calculated in BTU/kWh. The measurement unit of the main fuel price (P_nlc) is also changed accordingly (ie VND/kcal, VND/kJ or VND/BTU).

In addition, Circular 31 clarifies that in case the power plant does not have a fuel supply agreement, it is possible to use data provided in the agreement between the power plant investor/owner and fuel supplier or use data computed by consulting organisations.

As to the main fuel price (P_nlc) specifically, Circular 31 clarifies the components which may or may not be included in such price, depending on each type of technology.

• For coal-fired power plants, P_nlc includes loss, management and administration fees, insurance (if any) and does not include transportation costs. Where the transportation charges cannot be determined in accordance with the fuel supply agreement, the main fuel price will be determined as equal to the fuel price in the main fuel sale and purchase agreement.
• For combined cycle gas turbine plants using natural gas, P_nlc is the wellhead gas price exclusive of the cost of transportation to the plant.
• For combined cycle gas turbine plants using LNG, P_nlc includes the imported LNG price, LNG import duty (if any) and cost of transportation of LNG to the regasification terminal, and excludes costs of storage, regasification and distribution after regasification (if any).

Changes to the method of determining the Contract Price applicable to new power plants

Firstly, Circular 31 supplements Circular 57/2020 in that, for the purpose of the comparison between the Contract Price and the Ceiling Price where the Ceiling Price of the Base Year is unavailable, the Contract Price is calculated and converted on the basis of the corresponding cost components of the Ceiling Price of the most recent year for such type of power plant.

Secondly, in relation to VC calculated for the Base Year (as a component of the Contract Price), Circular 31 clarifies the method and data to be used for calculation of other variable costs as part of the VC in certain cases where the data to compute such costs (including total annual costs for auxiliary materials, total start-up costs, and costs for annual regular repair and maintenance) are unavailable. In particular:

• with respect to total annual costs for auxiliary materials, where data is unavailable, such cost components at the time of availability of complete data shall be permitted to be used and shall be de-escalated to the Base Year at the rate of 2.5%/year in order to calculate the total auxiliary material cost in the Base Year;
• with respect to total start-up costs, where data is unavailable, it is permitted to calculate the amount of such total cost at the time of negotiation and de-escalate it to the Base Year at the rate of 2.5%/year; and
• with respect to costs for annual regular repair and maintenance, where data is unavailable, it is permitted to calculate the amount of such total cost at the time of negotiation and de-escalate it to the Base Year at the rate of 2.5%/year.

As there are currently no examples of LNG-to-power projects in Vietnam, we assume that the Ceiling Price for the Base Year will be computed and issued to apply to a specific new plant as a starting point, though this is not clearly set out in current regulations.

Changes to the model Power Purchase Agreement (PPA)

The model PPA for generators participating in the VWEM includes an appendix to calculate the Price of a power plant at the time and for the purpose of payment. For payment purposes, FC, FOMC, and VC are adjusted to take price escalations into account. Circular 31 slightly amends the formula to adjust VC. In accordance with Circular 57/2020, the escalation rate of VC was calculated up to the ordinal number of the year of commercial operation of the plant (calculated from the date of commercial operation of the plant). Under Circular 31/2020, such rate is calculated up to the ordinal number of the year of payment (calculated from the Base Year).

Overall, most of the changes are technical in nature, aimed at clarifying certain points which were either silent or unclear in the previous legislation. While this will provide more certainty and also flexibility when it comes to negotiating prices, there are no major commercial or contractual changes to the model PPA that will support project bankability per se, a key ongoing concern for project developers and lenders alike.