New regulations on tariff ranges for solar and wind power projects

First stepping stone in building a post-FiT reality 8 min read

Ever since feed-in tariffs (FiTs) expired for solar power projects (31 December 2020) and wind power projects (31 October 2021), the Vietnamese Government has prevaricated over the legal framework to develop solar and wind power projects including, most importantly, what pricing mechanisms will apply to new projects.

The recent Circular 19 provides clear indication of the post-FiT reality for solar and wind power projects, even if critical project development issues remain to be addressed.

This Insight unpacks the new Circular and its implications.

Key takeaways

• Circular 19 only regulates formulation of the Tariff Ranges and is silent on how the tariff for a specific solar or wind power plant will subsequently be determined and recorded.
• Although Circular 19 does not provide any guidance or indication as to how investors will be selected to implement wind and solar projects, it does establish the base commercial foundation on which Vietnam will rely to procure investment into future projects. 
• Circular 19 introduces the concept of so-called standard power plants (Standard Power Plant) to be used as reference points to determine the upper limit of the Tariff Ranges (Ceiling Tariffs), though the process to identify specific power plants for this purpose remains unclear.
• Solar project tariffs will differ for different regions based on irradiation data.
• Circular 19 is silent on power purchase agreements (PPA) terms, including how long tariffs will be applicable for and/or how they may be adjusted over time for a given project.

Background

The Ministry of Industry and Trade (MOIT) issued Circular No. 19/2023/TT-BCT on 1 November 2023 providing regulations on the method for formulating power generating tariff ranges (Tariff Ranges) for solar and wind power plants (Circular 19). Circular 19 sets out guidelines for developing annual electricity generation price frameworks for ground-mounted and floating solar power plants and onshore, nearshore and offshore wind power plants. The regulation provides procedures for development and promulgation of these pricing frameworks and defines roles for relevant entities such as Vietnam Electricity (EVN), investors and regulatory authorities.

Summary of key contents of Circular 19

Scope and regulated entities

Circular 19 applies to ground-mounted and floating solar power plants and onshore, nearshore and offshore wind power plants. Circular 19 does not apply to so-called transitional power plants and solar and wind power plants already operating under PPAs with EVN with effective FiTs.¹ Rooftop solar power plants are also excluded and will be subject to their own separate regulation currently under development.² Circular 19 sets out the formula for determining Ceiling Tariffs. The calculation and determination of actual tariffs for each specific power plant needs further guiding regulations but, fundamentally, will be subject to negotiation with EVN on a project-to-project basis subject to the Ceiling Tariff cap.

Methods for determining pricing framework

The heart of Vietnam's Circular 19 lies in the detailed and comprehensive methods it sets out for determination of Tariff Ranges for solar and wind power plants. These methods serve as a guiding financial framework for stakeholders involved in the renewable energy sector. Annually, based on a formula set out in the Circular, Ceiling Tariffs will be determined and promulgated for each type of technology by the MOIT. Overall, the method used for solar and wind power plants shares the same pattern in that the generation cost of a Standard Power Plant, calculated based on the formula set out in the Circular using deemed or hypothetical data, will be used to establish the Ceiling Tariff. Fundamentally, the Ceiling Tariff is determined as a sum of fixed costs and operation and maintenance costs of the Standard Power Plant. The detailed methodology is set out further below.

Standard Power Plant

A Standard Power Plant is a solar or wind power plant that:

• is being developed in line with the National Power Development Plan;³
• has investor(s) selected to develop;
• has a 'common' installed capacity;
• has not entered into any PPA; and
• is 'representative' of the relevant technology/system (ie ground-mounted, floating solar power plants or onshore, nearshore and offshore wind power plants).

Circular 19 is silent on how to determine what 'common' or 'representative' means for the above purposes, thus presumably this is subject to EVN's discretion given Circular 19 tasks EVN with selecting Standard Power Plants.⁴

Tariff Ranges

• The Tariff Ranges are a range of values from zero to the Ceiling Tariff corresponding to each type of solar and wind power plant.
• With respect to Tariff Ranges for solar power plants, it appears there will be separate Tariff Ranges for each region (North, Centre and South) of Vietnam developed by reference to the average irradiation levels in each different region.
• The Tariff Ranges will be formulated and issued by the MOIT annually. In the event Tariff Ranges for a given year are not promulgated in time, the latest Tariff Ranges may be temporarily applied.⁵

Ceiling Tariff

• The Ceiling Tariffs (ie tariff applicable to the Standard Power Plant) is calculated in accordance with the following formula:

P = FC + FOMC

In which:

P: power generating tariff (Dong/kWh);

FC: average fixed costs (Dong/kWh); and

FOMC: fixed O&M costs (Dong/kWh).

• Average Fixed Costs (FC): The Circular introduces a formula for determining the average fixed costs of a Standard Power Plant. This component serves the purpose of investment recovery and is derived from annual converted investment capital and the projected average electrical energy delivered by the Standard Power Plant over time.

Specifically, FC is calculated according to the following formula:

      TC

FC = ------------

       E

In which:

TC: investment capital cost (not including VAT) for construction of the Standard Power Plant, calculated per year (in Vietnamese Dong). This factor is influenced by the investment rate (Dong/kWp), installed capacity, economic life (set at 20 years for solar and wind plants) and a discount rate.

Notably, the investment rate will take into account the 'updated' foreign exchange at the date of calculation of the Tariff Ranges, though there is no guidance on what will be used as the reference for such exchange rate. The discount rate (tỷ suất chiết khấu in Vietnamese) is a combination of both domestic and foreign loan interest rates. The domestic loan interest rate for this purpose is set at the average of the 12-month deferred deposit interest rate in Vietnamese Dong for individual customers for the five years immediately preceding the year of calculation of the Tariff Ranges, determined as at 30 September each year (for of Vietcombank, Vietinbank, BIDV and Agribank) plus 3.5% per annum. The foreign loan interest rate for this purpose is set at the 180-day average SOFR for the 36 months preceding the year of calculation of the Tariff Ranges (as published by the US Federal Reserve) plus 3% per annum.

E_: the average projected delivered power for a number of years of the Standard Power Plant (kWh). This parameter considers the total solar panel installation area, average annual irradiation, solar panel efficiency and the standard solar power plant's efficiency (for solar) or forecasted average annual electrical energy, total variability and standard distribution factors corresponding to forecast electrical energy (for wind).

• Fixed Operation and Maintenance Costs (FOMC): This element, serving to recover major repair costs and annual operation and maintenance expenses, is determined through a formula considering the fixed total cost for operation and maintenance of the power plant and the average forecast annual electrical energy delivery.

FOMC are calculated in accordance with the following formula:

           TC_FOMC

FOMC^MT = ------------

           E

In which:

(TC_FOMC): the total fixed O&M costs of the Standard Power Plant is calculated based on the investment rate (Dong/kWp), the total installed capacity of the Standard Power Plant and the ratio of the fixed O&M costs over the total investment capital costs for each type of power plant, based on data provided by consultants engaged by EVN.

As discussed above, while the TC does take into account the updated foreign exchange at the date of calculation of the Tariff Ranges and foreign loan interest rates, this formula cannot fully reflect actual exchange rate fluctuation and funding costs over the life of a project.

Development and approval procedures

EVN plays a crucial role in the process. EVN is tasked with proposing the selection of Standard Power Plants and calculating the Ceiling Tariffs annually. The Electricity Regulatory Authority of Vietnam (ERAV) is responsible for appraising the proposed Ceiling Tariffs and submitting them to the Minister of Industry and Trade for approval.

The step-by-step procedure is as follows:

• Before 1 November each year, EVN must:
  • propose and decide the selection of the Standard Power Plants;⁶
  • carry out calculation or hire a consulting organisation to select a set of parameters and to calculate the Ceiling Tariffs; and
  • prepare documentation and submit the Tariff Ranges to the ERAV for appraisal.
• Within five working days from the date of receipt of the dossier from EVN, ERAV must examine its adequacy and validity. If necessary, ERAV will send a document requesting EVN to revise, supplement or explain the contents of the application. Within 15 working days from the date of receipt of a request from ERAV, EVN must send an explanatory report as requested.
• If EVN's dossier is valid and the explanatory report is satisfactory, within 20 working days from the date of receipt of the dossier, ERAV will organise appraisal of the Tariff Ranges proposed by EVN.
• If necessary, ERAV may consult with an advisory board established by the MOIT, or the affected entities (eg relevant solar or wind power plants).
• Within 15 working days from the date of appraisal, ERAV must request the MOIT to consider approving the next year's Tariff Ranges and publish them on ERAV's website. In the event the Tariff Ranges for the next year is not promulgated in time, the latest Tariff Ranges may be temporarily applied.

Effective date

Circular 19 came into force on 19 December 2023. Accordingly, the first Tariff Ranges should be promulgated by the MOIT by the end of 2024 for year 2025. As noted, it remains unclear at this stage exactly how the Standard Power Plants will be identified by EVN, and this will be a critical condition precedent to formulating any Tariff Ranges.

Final remarks: positive steps, but greater clarity is required

The MOIT's stated aim with Circular 19 is to provide a transparent and systematic approach to determining pricing frameworks for solar and wind power generation post FiT regime. The guidelines set out in Circular 19 are designed to ensure fairness, efficiency and sustainability in the development of renewable energy projects in the country. By establishing clear guidelines and procedures, the Circular aims to provide a solid foundation for the continued growth of the solar and wind power sectors in Vietnam. While these are laudable and important goals, much remains to be determined to enable greenfield project development, notably including regulations on selection of investors and clarity on PPA terms.