The method of pricing an electricity power purchase agreement (PPA) is regulated under Circular 56 of the Ministry of Industry and Trade (MOIT) dated 19 December 2014, as amended (Circular 56/2014). Circular 56/2014 will govern PPA of (i) power plants which are not multi-target strategic hydroelectric plants (nhà máy thủy điện chiến lược đa mục tiêu), independent BOT power plants, power plants using renewable energy, and (ii) power plants without a separate mechanism issued by the MOIT.

The unit price in general is comprised of the following component:

Unit Price = Fixed Capacity Price + Fixed O&M Price + Fuel Price + Main Fuel Transport Price

Of which:

Fixed Capacity Price is a fixed number which is pre-determined throughout the entire economic life of the project. Fixed Capacity Price is calculated so that the internal of return of the power plant project will not exceed a regulatory rate (i.e. 10% or 12% depends on each case).
Fixed O&M Price is the fixed operation and maintenance price, which is the aggregate of (i) fixed price for major repair, equipment and service costs; and (ii) fixed price for employment costs. A change in inflation will be reflected in the calculation of the electricity price. However, the change is capped at 2.5% per year which is lower than the normal annual inflation rate in Vietnam.
Fuel Price is a variable number which is the aggregate of coal price component, DO fuel price component, limestone price component, miscellaneous price component (if any).
Main Fuel Transport Price is a variable number depending on the contract year transport price (if any).

The output used to calculate the electricity payment is different depending on whether the power plant has participates in the National Market or not. In particular:

If the power plant has not participated in the National Market, then the output is the actual power output delivered at the delivering point (điểm giao nhận); and
If the power plant particulates in the National Market, then the output is the planned output for a trading cycle. This amount seems to be in the range from 60% of the planned annual output (AGO) to 95% of the planned annual output. Accordingly, the planned annual output will offer some limited offtake protection for the power plant. However, since the planned annual output of the power plant can be adjusted by the MOIT, the output of the power plant participating in the National Market is not a guaranteed number.

In light of the above, there are some issues arising from the method to price a PPA:

The foreign exchange rate is not expressly reflected in the Unit Price. Even though parties to the PPA are required to report the impact of the exchange rate movement on its operation for the MOIT’s consideration annually, there is no obligation on the part of the MOIT to change the electricity price to reflect such impact;
EVN is not required to purchase any minimum amount of electricity; and
All payment from EVN to the power plant is calculated based on the actual or contract output of the power plant, not the capacity of the power plant.

This post is written by Nguyen Thu Giang and edited by Nguyen Quang Vu.

Vietnam Business Law