DPPA and Rooftop Solar Power Regulations

Introduction

The Vietnam Government has recently issued Decree No. 135/2024/ND-CP dated 22 October 2024 (“Decree 135“) stipulating mechanisms and policies to encourage the development of rooftop solar power for self-production and self-consumption. Decree 135 took effect on the same date of its issuance.

Decree 135 and Decree No. 80/2024/ND-CP dated 3 July 2024 (“Decree 80“) on the mechanisms for direct electricity trading between renewable energy generation units and clients who are large electricity consumers are considered the Government’s significant response in (i) meeting the demands of businesses aiming to reach their Environmental, Social, and Governance (ESG) targets, and cut carbon emissions; (ii) achieving national energy security, particularly in avoiding shortage of power in the Northern region similar to what had occurred in the summer of 2023; and (iii) ensuring a competitive electricity market in Vietnam.  Decree 80 came into effect immediately, on the date of its issuance.

This Update provides key information on the two Decrees and their possible nexus.  We hope it will provide insight to sponsors/developers and lenders, or any other interested stakeholders in the renewable energy (“RE“) sector in Vietnam.

DPPA Decree

Decree 80 introduces for the first time the concept of the direct power purchase agreement (“DPPA“), which is considered to be an alternative way of power trading for power plants as generators.  In some jurisdictions, DPPA may be known as a form of corporate power purchase agreement (corporate PPA), standing in contrast to the power purchase agreement (“PPA“) signed with Vietnam Electricity Group (“EVN“), the State-owned enterprise dominating the electricity business in Vietnam.  The term DPPA implies that power plants as electricity generators can sell their produced electricity directly to end customers upon qualification and compliance with regulatory requirements and procedures.

 DPPA Forms/Mechanisms

Decree 80 is a new decree and can be considered as the foundation that paves the way for the establishment and operation of a competitive electricity market. Without Decree 80, RE developers have no choice but to sell electricity to EVN through a PPA in accordance with a template and tariff as stipulated by law from time to time.

Decree 80 provides for two mechanisms/forms for delivery of electricity from a seller to its buyer: private line or national grid.

1. Private line. This is a system of lines, transformer stations and auxiliary equipment serving private electricity transmission, which is invested, constructed and operated by the RE generation unit (“RE GENCO“) for direct sale to Large Users (as defined below).

2. National grid. This is a system of power transmission lines, power stations and auxiliary equipment to transmit electricity in the territory of Vietnam, excluding private lines. DPPA via national grid is defined as electricity trading activities through forward contracts between RE GENCOs and Large Users, or Authorised Retailers (as defined below).

These two DPPA mechanisms are discussed in more detail below.

Key Actors in DPPA

There are several key actors in a DPPA.

1. Electricity Sellers

     Under Decree 80, there are only two types of sellers that may enter into a DPPA:

• • RE GENCOs. A RE GENCO is defined as an electric power unit that owns power plants enabled by solar energy, wind, small hydropower, biomass, geothermal, ocean waves, tides, ocean currents, and other forms of renewable energy. A RE GENCO intending to utilise the DPAA mechanism may only sell electricity into the wholesale spot market, or to Large Users or Authorised Retailers.

• • EVN (or its authorised or delegated entity). EVNs may generate electricity on their own or purchase electricity from RE GENCOs. They may sell electricity to Large Users or Authorised Retailers, or end-consumers.

2. Electricity Purchasers

     Decree 80 provides that only the following types of purchasers may enter into a DPPA:

• • Purchasers in the spot market. In theory, any consumer or any retailer of electricity could be a purchaser in the spot market. However, currently, it is only EVN (or its authorised or delegated entity) that is the sole electricity wholesale purchasing unit in the spot market. An electricity wholesale purchasing unit is defined as an electricity unit with the function of purchasing electricity wholesale on the spot electricity market.

          In the current first phase of operation of the electricity market, the electricity wholesale purchasing units 
          include five electricity corporations under EVN, namely Northern, Central, Southern, Hanoi and Ho Chi Minh
          City Corporations (“Electricity Corporations“).

• • Large Users. They purchase electricity either directly from a RE GENCO or via a PPA with EVN (or its authorised or delegated entity) to meet their entire electricity needs. 

          Large Users are defined as organisations and individuals who buy electricity for their own use and do not              resell it to other organisations or individuals, and have consumption quantities as follows:

• • • For existing users (i.e. currently being EVN customers): average consumption of 200,000 kWh/month or more (averaged over the most recent 12 months); and

• • • For new customers or existing users of less than 12 months: calculated based on its registered output of consumption of 200,000 kWh/month or more.

• • Authorised Retailers. They are purchasers (i) in a PPA with EVN (or its authorised or delegated entity) to buy their entire electricity demands; or (ii) through a forward contract with a RE GENCO.

          By definition, according to Decree 80, Authorised Retailers include electricity retailers in industrial parks,               economic zones, export processing zones, industrial clusters, high-tech parks, centralised information
         technology parks, high-tech agricultural parks and other similar models regulated by a competent authority
         (known as “electricity retail units in zones and clusters” in Decree 80). The Authorised Retailers should be
         electricity units that hold an electricity operation licence for the retail of electricity in zones or clusters
         that have an electricity consumption of 200,000 kWh/month or more with connection to a voltage level of
         22kV or higher. Authorised Retailers can only retail their purchased electricity to end-consumers within the
         zones/areas stipulated in their licences. 

3.  The spot market

     Per Circular No. 21/2024/TT-BCT of the Ministry of Industry and Trade (“MOIT“) dated 10 October 2024
     (“Circular 21“), a spot market is defined as a market that schedules mobilisation, calculates market prices
     according to offers, and makes payments according to each trading
     cycle of the day for electricity trading transactions between electricity generating units and purchasing units.
     Currently, the spot market operates solely as a wholesale market and not a retail market.

     The following administrative entities are necessary and essential to operate the spot market:

• • electricity system and electricity market operation unit: responsible for dispatching the national electricity system and managing electricity market transactions;

• • electricity measurement data management unit: manages and operates the system of collecting, processing, and storing electricity measurement data to serve the electricity market, including the electricity system and electricity market operation unit, generators, transmission units and electricity wholesale purchasing units; and

• • power transmission unit: licensed to operate in the field of power transmission, and responsible for managing and operating the national grid.

      Of these three administrative entities, the electricity system and electricity market operation unit serve as the
      market administrator and operational service provider in a DPPA.  Currently, the National Power System and
      Market Operator Company Limited (“NSMO“) is assigned to take on the role of the electricity system and
      electricity market operation unit.

4.  NSMO and its role in DPPA

     On 5 August 2024, the Chairman of the Committee for Management of State Capital at Enterprises issued
     Decision No. 353/QD-UBQLV on the establishment of NSMO (“Công ty Vận hành hệ thống điện và thị trường
     điện Quốc gia” in Vietnamese).

     Accordingly, NSMO is established under the State Capital Management Committee at Enterprises (“SMSC“).
     It is the entity resulting from the separation of the National Electricity System Dispatch Center (previously
     known as A0) from EVN. NSMO is a state-owned enterprise, and a single-member limited liability company
     wholly-owned by SMSC .  NSMO’s functions and tasks include:

• • establishing a method to command and operate the national power system with the goal of attaining safety, stability and reliability;
  • managing electricity market transactions to ensure fairness and transparency;
  • ensuring safe, stable and continuous electricity supply for economic, political, social, security and defence activities;
  • investing, managing, operating, and maintaining specialised information technology telecommunications system infrastructure to serve power system operation and manage electricity and renewable energy market transactions; and
  • ensuring sustainable and effective operations, optimising costs, and managing and using state capital and assets invested in NSMO effectively and in accordance with regulations.

5.  End-consumers

     Large Users are the sole recognised end-consumers in a DPPA context per Decree 80.

DPPA via Private Line

There are two actors in this mechanism of electricity selling: (i) RE GENCOs as sellers and (ii) Larger Users as purchasers. Under this mechanism, Decree 80 does not intend for RE GENCOs, regardless of their capacity and business model, to target all levels of end-consumers in the electricity market. 

In other words, the market segment to distribute electricity to end-consumers (not being Large Users) is still exclusive to EVN (or its authorised or delegated entity) and Authorised Retailers who participate in a DPPA via the national grid mechanism.  It is not possible for a RE GENCO to legally sell the electricity it produces to end-consumers which are not Large Users.

DPPA via National Grid

Decree 80 stipulates that the sale and purchase of electricity must be via forward contracts in a DPPA through the national grid mechanism. There are several actors involved in the sale and purchase of electricity, and the role of NSMO is inevitable and critical.  In addition, the guiding regulations of MOIT regarding the coordination, price and sharing costs formulae of the national grid are essential to enable the market to function properly and efficiently.

Regarding the electricity sale, purchase and distribution via national grid, Decree 80 provides three layers of the market as follows:

• Level 1 as the wholesale market. This is the spot market in which RE GENCOs can sell wholesale to the electricity wholesale purchasing units which are EVN (or its authorized or delegated entity, which currently are the five Electricity Corporations).

• Level 2 as the first layer of the retail market via PPAs between purchasers being Large Users or Authorized Retailers and EVN (or its authorised or delegated entity).  To this date, EVN’s authorised or delegated entities are the five Electricity Corporations.

• Level 3 as the second layer of the retail market, a direct sale from RE GENCOs as producers to Large Users or Authorised Retailers. 

Questions arise as to how an Authorised Retailer resales its purchased electricity under a DPPA via national grid and/or private line mechanism, and accordingly, how the resale price is to be formulated. The wording of the scope of Article 1 of Decree 80 suggests that Decree 80 and DPPA mechanisms prescribed thereunder do not intend to cover this layer of the retail market; instead, they only aim to regulate DPPA mechanisms applicable to RE GENCOs. One could interpret this to mean that the scope, zone, forms of retail and the targeted end-consumers of Authorised Retailers shall be granted and stipulated at their respective licences of transmission and distribution.  The licences are subject to a separate guiding regulation, which regulates applications for transmission and distribution, and wholesale and retail of electricity under Circular No. 21/2020/TT-BCT of MOIT dated 9 September 2020 (as amended by Circular No. 10/2023/TT-BCT dated 21 April 2023) guiding Electricity Law 2004 (as amended in 2012), Decree No. 137/2013/ND-CP of the Government dated 21 October 2013, and Decree No. 08/2018/ND-CP of the Government dated 15 January 2018 (as amended by Decree No. 17/2020/ND-CP dated 5 February 2020)

Furthermore, as to whether an Authorised Retailer representing a group of end-consumers (in an industrial park for example) that, together, meet the consumption quantities to qualify as a Large User, can engage in the purchase of electricity under a DPPA via private line, it seems that the language of Decree 80 does not permit the Authorised Retailer to do so.

DPPA Implementation

On 16 July 2024, MOIT issued instructions to EVN, the five Electricity Corporations and NSMO via Official Letter No. 5029/BCT-DTDL dated 16 July 2024 regarding the implementation of Decree 80 (“OL 5029“).  In OL 5029, MOIT provides instructions for the two mechanisms, and separate guidance with respect to each of the actors. According to OL 5029, there are technical and internal workstreams to be undertaken separately by EVN and NSMO in order for both mechanisms to function. 

The most recent move initiated by MOIT to implement the DPPA mechanisms is the issuance of Circular 21 on 10 October 2024 (“Circular 21“). Circular 21, which comes into effect on 25 November 2024, replaces Circular No. 45/2018/TT-BCT dated 15 November 2018 (and its amendments) regulating the operation of the Vietnam competitive wholesale electricity market (“Electricity Market“), and revokes Article 1.3 and Article 10 of Circular No. 12/2024/TT-BCT dated 1 August 2024 in relation to the dispatch and operation of the national electricity system and electricity market.

Overall, Circular 21 aims to introduce certain changes to the organisational structure of the power sector and address obstacles that arise in the operation of the electricity market.  Some notable provisions contained in Circular 21 applicable to RE GENCOs in a DPPA relate to the following:

1. Eligible power generators in the Electricity Market.

• Compulsory participation in the Electricity Market, including those involved in a DPPA with Large Users, by:
  • Power plants having electricity operation licence with installed capacity of more than 30 megawatts (“MW“), and connected to the national grid;
  • Hydropower plants with installed capacity of 10 MW or more upon the expiration of its PPA at avoidable costs (including ladders);
  • RE GENCOs not being hydropower with installed capacity of 10 MW or more, whose PPAs have expired per applicable incentive and preferential pricing mechanisms policies/decisions;
  • Build-Operate-Transfer (“BOT“) power plants whose contracts have expired and have since been transferred to Vietnam; and
  • Any RE GENCO under Decree 80.

• Optional participation in the Electricity Market (i.e. the right to opt in to direct market participation) by:
  • Power plants with installed capacity of up to 30 MW connected to the national grid with a voltage of 110 kV or higher, excluding: (i) BOT power plants with valid contracts, (ii) thermal power plants, which are obliged to use gas fuel sources if they are permitted by competent authorities, (iii) multi-objective strategic hydropower plants, and (iv) imported power sources;
  • RE GENCOs not being hydropower with installed capacity of 10 MW or more; and
  • Power plants in the industrial parks that only sell a part of their production output to the national grid.

• Indirect participation in the Electricity Market (i.e. those that have signed term PPAs with EVN) by:
  • BOT power plants with valid contracts;
  • RE GENCOs not being hydropower with installed capacity of less than 10 MW;
  • Thermal power plants, which are obliged to use gas fuel sources if they are permitted by competent authorities;
  • Power plants in industrial parks that sell only part of or do not sell their production output to the national grid;
  • Multi-objective strategic hydropower plants;
  • Imported power sources;
  • Plants providing ancillary services for mandatory generations and quick start per the annual published list; and
  • Plants operated under the avoidable cost mechanism with valid contracts.

2. Guidance on pricing mechanisms and payment structures for RE GENCOs in the market.

3. Revisions relating to NSMO, specifically rules on electricity market operation planning, data management, and investment in information technology (“IT“) infrastructure to support market operations.

4. Inclusion of five procedural guidelines for the implementation of the Circular as appendices: i.e. (i) Market Operation Planning Procedure, (ii) Real-time Operation and Scheduling Procedure, (iii) Payment Calculation Procedure, (iv) Data Reconciliation Coordination Procedure between System Operator and Market Operator, and (v) IT System Management Procedure.

5. Updating of several provisions including those on principles for negotiation, contract quantities (Qc), and market participation mechanisms for certain hydropower plants.

It is noteworthy that to date, there has not been any DPPA signed pursuant to Decree 80.  There could be a few reasons for this. One reason could be that no new RE GENCO has reached commercial operation since the enactment of Decree 80. Another reason could be the lack of guidance to RE GENCOs which are in operation under a PPA with EVN that they can terminate such PPA and switch to the DPPA mechanism. Other related factors such as lack of regulations on carbon certificate management which could partially fund a DPPA, could also be causing investors to hold back. Other factors include lack of regulations relating to long-term fee schedule for the electricity system and electricity market operation, and grid sharing services.

Rooftop Solar Decree

Scope and Key Concepts

Decree 135 provides mechanisms and incentives to encourage self-production and self-consumption of rooftop solar power.  According to the definition in Article 3.2, “self-production and self-consumption power” is electricity produced by an organisation or individual to serve the needs of (i.e. consumed only by) such organisation or individual (“Điện tự sản xuất, tự tiêu thụ là điện được sản xuất và tiêu thụ do tổ chức hoặc cá nhân thực hiện để phục vụ chính cho nhu cầu của tổ chức, cá nhân đó” in Vietnamese). 

Decree 135 also states that the direct sale and purchase of electricity between organisations and individuals shall be effected in accordance with Decree 80. For anyone who is expecting that Decree 135 would create a nexus with the DPPA Decree and provide better and clear guidance regarding the direct sale of rooftop solar power, such expectation is misplaced. Decree 135 deals only with self-production and self-consumption of rooftop solar power and not third-party sales.

Decree 135 seems very generous and encouraging in its language, using words such as “no restriction” or “unlimited” regarding installed capacity for rooftop solar developments.  However, in the context of “self-production and self-consumption”, there is the inherent limitation in the capacity that can be installed considering the language used in Articles 8.1 and 7.3 of Decree 135.  The commercial reasons for, and economic costs of, installation also set out limitations as to what can be installed.

Mechanisms for Encouraging Self-Development, Self-Production and Self-Consumption

Decree 135 lists out in Article 8 nine incentives and policies for rooftop solar power development:

1. Unlimited installation and exemption from obtaining an electricity operation licence in the following cases:

• • Not connected to the national grid;
  • Installing reverse current prevention devices preventing flow of current into the national grid; and
  • Households and individuals with less than 100 kW capacity.

2. For an installed capacity of 1,000 kW or more, any surplus may be sold to the national grid. However, the surplus sale to the national grid must follow the power planning procedure and the seller must obtain an electricity operation licence in accordance with the applicable law.
3. Tax incentives pursuant to the applicable law.
4. Streamlined administrative procedures in accordance with applicable and specialised regulations.
5. There is no requirement to amend or supplement the land use purpose to permit the installation of rooftop solar in constructed works/buildings for self-production and self-consumption.
6. Installed rooftop solar power plants for self-production and self-consumption of households, individual homes, offices, and public facilities are considered technological equipment attached to construction works.
7. The sale of surplus energy into the national grid shall not be of more than 20% of installed capacity. This sale is only applicable in two cases: (i) within the planned implementation capacity under PDP8 (known as the National Power Development Plan 2021 to 2030, with a vision to 2050), which is 2,600MW; or (ii) households and individuals with less than 100 kW capacity.

     The details of such sales are as follows:

• • EVN shall purchase the surplus, but not exceeding 20% of the actual installed capacity.
  • The tariff is based on the average market price from the previous year as announced by NSMO.
  • Any surplus from rooftop solar installed on offices or public facilities is excluded.

8. For households and individual homes, there will be no need to obtain any business licences.
9. The installation of battery energy storage systems (“BESS“) for the safe and stable operation of the electricity system is encouraged.

For some of the points set out above, there are detailed requirements (for example, in the case of sale of surplus energy). Some items serve more as policy statements (for example, in the case of tax incentives or streamlined administrative procedures).  Regardless, Decree 135 certainly provides significant room and opportunities for solar photovoltaics (PVs), BESS and related electrical equipment market in Vietnam to meet the energy demands in future for households and individual houses, and office and public facilities.

Surplus Sales and DPPA

 Surplus energy from self-production and self-consumption rooftop solar power projects that are connected to the national grid can be sold to EVN. However, the sale shall not be of more than 20% of the installed capacity and shall only occur in the following scenarios:

1. For new projects with an installed capacity of 1,000 kW or more, sales after reaching the project’s commercial operation date. Such projects will need power planning approval and a licence for electricity operation; 

2. Sales by installed projects under PDP8 which are within the planned implementation capacity of 2,600 MW (for self-produced and self-consumed capacity); and

3. Sales by households and individuals with less than 100 kW capacity.

Accordingly, if a rooftop solar power plant for self-production and self-consumption would like to participate in the DPPA mechanism as a RE GENCO, the only way for such solar power plant to participate is for it to sell its surplus (i.e. maximum 20% of installed capacity) via the spot market under a DPPA through national grid mechanism to EVN.

However, it is important to note that under PDP8, Vietnam’s total planned capacity of solar power by 2030 is 4,100 MW, including 2,600 MW of self-produced and self-consumed capacity.  Per the information published on the Government E-Newspapers, on 25 December 2023, the Government Inspectorate issued a Notice of conclusion on the inspection of compliance with policies and laws in the management, implementation of planning and investment in construction of power projects according to PDP7 and amended PDP7 (“Inspection Notice“). The Inspection Notice concludes that rooftop solar power has also been invested rapidly with large capacity (i.e. 7,864 MW), increasing the total solar power capacity to 16,506 MW, 19.42 times higher than the approved capacity in the adjusted PDP7.  This has led to the solar power capacity structure according to the amended PDP7 increasing from 1.4% to 23.8%.  In addition, there are six projects/parts of projects (452.62 MW) that have been completed but have not yet been put into commercial operation by the time of the issuance of the Inspection Notice.  Hence, it would be quite challenging for any developer now wishing to develop a new project combining both self-consumption and surplus sales.