Capturing Vietnam’s offshore wind opportunities

January 2023  |  SPECIAL REPORT: ENERGY & UTILITIES

Financier Worldwide Magazine

January 2023 Issue

The current draft of Vietnam’s primary energy planning instrument for the period 2021-30, with a vision to 2045, which is the eighth national power development plan (PDP8), sets a target of having 7GW of offshore wind capacity installed by 2030, progressively increasing to 66.5GW by 2045.

These ambitious targets are part of Vietnam’s strategy toward achieving net-zero emissions by 2050, a commitment reiterated by Vietnam’s minister of natural resources and environment at the 27th United Nations Climate Change Conference held in 2022.

A growing number of domestic and international developers are exploring Vietnam’s offshore wind opportunities, with the 1.4GW Phu Cong Soc Trang project being the most notable such project to date. Developed by Ireland-based Mainstream Renewable Power and Vietnam-based Phu Cuong Group, this is the first offshore wind project in Vietnam to be granted an investment registration certificate (IRC), with the first phase targeted for completion by 2023.

Despite the growing interest of international investors and developers, Vietnam’s offshore wind market remains at a very early stage and there are a number of challenges which will need to be overcome before larger-scale offshore wind projects can be successfully implemented.

PPA template and government guarantee

One of the most well-documented challenges remains the form of power purchase agreement (PPA) set out in Circular No. 02/2019/TT-BCT of the Ministry of Industry and Trade (MOIT) dated 15 January 2019, as amended, which applies to offshore wind projects. This template PPA does not reflect the risk allocation typical for international PPAs (or indeed the PPAs for the large thermal projects developed in Vietnam under the previous build-operate-transfer (BOT) scheme) and the MOIT is generally resistant to allowing substantive amendments.

Another key challenge is the lack of any entitlement for developers to obtain a government guarantee. Under the new Public Private Partnership Law for BOTs and the new Investment Law for independent power producers (IPPs), both of which came into effect on 1 January 2021, there is no automatic entitlement to a government guarantee. Decree No. 31/2021/ND-CP of the government (dated 26 March 2021) on the implementation of the Investment Law does, however, give the prime minister discretion to provide security to projects under the IPP scheme, which can potentially include government guarantees.

No government guarantee has been issued to date under Decree No. 31, but investors are closely monitoring the progress of this issue on the liquid natural gas (LNG)-to-power projects currently being developed under the IPP scheme. The industry’s expectation is that large-scale offshore wind projects may also be developed under the IPP scheme and therefore the availability (or not) of guarantees on those LNG-to-power projects will be pertinent.

Tariff – move toward a bidding mechanism

The previous feed in tariff (FIT) scheme used for implementing both onshore and offshore wind projects expired in November 2021, and while the prime minister has made it clear that this will be replaced with an auction-based system, it is unclear what the proposed auction system will entail or when it will be finalised. There are increasing calls for Vietnam to consider a more transitioned approach for offshore wind in order to allow a critical mass of initial projects to move ahead with the benefit of an attractive feed-in-tariff (FIT), with a subsequent transitioning to a bidding mechanism once the market is more mature. It remains to be seen to what extent such calls will be heeded.

Grid network challenges

Grid congestion and curtailment issues in Vietnam are not new, and the planned addition of 7GW of offshore wind capacity to the energy mix by 2030 will only further strain existing grid resources. The World Bank recently concluded that the upgrades required to absorb five to 10GW of new offshore wind capacity will require at least five to 10 years of design, planning and construction work. It is therefore imperative that MOIT undertakes this process as a priority since lenders and developers may be hesitant about committing major time and resources to developing large-scale offshore wind projects until at least some of these planned grid upgrades have been successfully implemented.

Many of the proposed sites for offshore wind projects are also located at substantial distances from existing onshore connection points to the national grid. The current template PPA requires the generator to assume sole responsibility for constructing, operating and maintaining all transmission facilities required to connect to the national grid – a major investment for developers. A commitment by the MOIT to take the lead in expanding the grid and interconnection points closer to potential onshore landing points for the planned offshore projects (or to pay adequate compensation to developers to do the same) would provide much needed momentum.

Complex permitting process and lack of sector-specific regulations

Current regulations are largely focused on onshore wind projects under Circular No. 02 and do not consider the technical differences between onshore and offshore wind projects, particularly in relation to seabed lease rights, the legal status of floating and bottom-fixed offshore wind turbines, and the construction and operation of subsea transmission infrastructure.

Developers are required to navigate through a complex process of permit requirements, necessitating coordination with numerous governmental authorities at both national and provincial levels. A streamlined permitting regime specific to offshore wind developments is urgently needed to increase investor certainty.

Initial site identification and wind measurement activities

Mature markets (such as Europe) recognise the significant challenges and costs associated with the development of offshore wind projects and have shifted toward a model under which they shoulder key early-stage development responsibilities, such as site identification and the publication of zoning maps identifying potential areas for development. Vietnam has adopted an ‘open door’ approach with the developer solely responsible for all steps during the project development process, including site selection, carrying out a feasibility study (involving costly wind measurement campaigns and environmental impact assessments), applying for permits, managing the public consultation process, and resolving complaints from local residents.

The development process is initiated by the developer identifying a potential site and obtaining a ‘letter of site exclusivity’ from the relevant provincial People’s Committee. This letter serves as a temporary lease allowing the developer to install measurement equipment and undertake wind measurement activities at the site as part of its pre-feasibility study. However, notwithstanding the stated exclusive nature of such a letter, the safeguards against potential overlapping interests and the precise procedure for resolution of disputes remains unclear and untested under Vietnam law.

This letter does not give the developer exclusive rights to use the site for the subsequent development of the project – this right is only secured after the project receives an ‘in-principal approval’ from either the prime minister, the National Assembly or the provincial People’s Committee (and, if the sponsors are foreign entities, after an IRC has been issued).

Inclusion in power development plan prerequisite to commencing feasibility study and obtaining seabed lease

Prior to undertaking a formal feasibility study, which itself is a condition to commencing an application for a seabed lease, the project must obtain approval for inclusion in the National Power Development Plan or relevant Provincial Wind Power Development Plan. This can be a lengthy and complex process and will require the preparation and submission of a site pre-feasibility study, as well as the gathering of opinions from several authorities with respect to the proposed interconnection plan, power sources and use of marine areas.

Once a project has been included in the power development plan, a feasibility study must be undertaken in order for the project to obtain a seabed lease. Circular No. 02, which covers the development of both onshore and offshore wind projects, sets out a high level, generic list of requirements to be covered in the feasibility study, with the feasibility study itself requiring approval by the MOIT or the provincial Department of Industry and Trade (DOIT). Circular No. 02 is not tailored to offshore wind projects, and it remains to be seen whether the MOIT will release specific guidelines addressing more comprehensively the development features of offshore wind projects.

Seabed lease

Following the conclusion of a feasibility study, a project will need to apply for a seabed lease. Seabed leases are approved and registered pursuant to Decree No. 11/2021/ND-CP and can be approved by either the prime minister, the Ministry of Natural Resources and Environment (MONRE), or by the relevant provincial People’s Committee, depending on the project’s location and distance from the shore, the project’s size and whether or not the project has foreign investment. The MONRE will generally approve seabed leases for projects located beyond six nautical miles from the shore or projects with foreign investment. The provincial People’s Committee will generally approve projects located within six nautical miles from the shore.

The owners of projects that are majority foreign owned are required to obtain an IRC and the approval of the project company’s right to enter the seabed lease, including the lease term, is generally included within the terms of the IRC. We are not aware of any standalone permit for use of marine areas having been issued to date, which raises uncertainty as to how domestically owned offshore wind projects (for which IRCs are not issued) can obtain a seabed lease.

In contrast to onshore projects where developers can grant security over land use rights in favour of onshore lenders and transfer their land use rights to third parties, provided that all land lease fees are paid upfront, developers of offshore wind projects do not have equivalent rights in respect of seabed leases.

Existing regulations are also unclear on whether developers will need to obtain a seabed lease or other permit covering the seabed and sea surface areas to be occupied by the subsea transmission cables, nor do they clarify the process for issuing such permits.

Do offshore wind turbines constitute immovable property?

It has not yet been settled under Vietnamese law whether offshore wind turbines (either bottom-fixed or floating) would be characterised as movable or immovable property.

This issue has significant implications for developers and financiers because immovable property can generally only be mortgaged to domestic credit institutions and not foreign lenders. Contracts relating to immovable property are also required to be governed by Vietnamese law and are subject to notarisation.

Looking ahead

Despite the challenges, offshore wind offers Vietnam the requisite scale to enable the country to meet its robust commitments with respect to renewable energy. To achieve these goals, however, Vietnam will need take the appropriate legal and policy decisions to support offshore wind and to rectify the current gaps in the legal structure with respect to offshore wind. Vietnam has a recent track record of implementing policies to catalyse its renewables sector – offshore wind represents the next major frontier.

 

David Harrison and Ben Thompson are partners and Matthew Chow is counsel at Mayer Brown. Mr Harrison can be contacted on +84 28 3513 0310 or by email: david.harrison@mayerbrown.com. Mr Thompson can be contacted on +65 6922 2248 or by email: ben.thompson@mayerbrown.com. Mr Chow can be contacted on +65 6922 2316 or by email: matthew.chow@mayerbrown.com.

© Financier Worldwide

BY

David Harrison, Ben Thompson and Matthew Chow

Mayer Brown

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