Managing the FiT deadline's effects 8 min read
COVID-19 has affected the power sector in Vietnam in a number of ways, but perhaps none so markedly as the impact on wind power developers racing to commission projects before the 31 October 2021 feed-in-tariff deadline. So far, no decision has been made on whether to extend this deadline and, as things stand, dozens of wind power projects are expected to miss this cut-off date as a result of restrictions imposed following Vietnam's fourth Covid-19 wave. What can wind power project companies do in response to this?
- Scheduled commercial operation dates (COD) agreed in power purchase agreements (PPAs) in Vietnam may be extended multiple times with the agreement of Electricity Vietnam (EVN).
- Regulations put in place to deal with COVID-19 that adversely affect a project company's ability to meet its contractual commitments likely amount to force majeure for which project companies can claim relief, including as to missing scheduled COD. However, protection from force majeure can't entitle project companies to enjoy the current feed-in-tariff (FiT) if COD is not achieved before 1 November 2021, regardless of the reason. Developers should actively assess their current position, and the pros and cons of claiming force majeure relief.
- Financing arrangements for each project are bespoke, and implications of force majeure and failure to meet the FiT will vary and must be assessed on a case-by-case basis. A worst-case scenario is that failure to meet the FiT deadline might be an event of default, permitting the lender to call for repayment.
COVID-19 or, more precisely, measures put in place in response to COVID-19, have caused difficulties across many sectors. The wind power industry is one that has been heavily affected, especially with the 31 October 2021 deadline for application of the FiT rapidly approaching.
The construction period for a wind power project in Vietnam normally takes between 12 to 18 months. In the past two years, due to COVID-19 impacts, manufacture and transportation of wind turbines has been delayed considerably. Installation of wind turbines has also been significantly delayed due to travel restrictions, especially in the past few months, following the fourth wave of the pandemic in Vietnam. Project companies have been forced to negotiate with EVN to extend their scheduled CODs, sometimes multiple times, and claim force majeure relief. Such delays, and the inherent uncertainty of such dealings, inevitably impact projects' financing arrangements, in addition to equity investors' risks.
In 2018, Vietnam's Prime Minister issued Decision 39/2018/QD-TTg (Decision 39), providing for a FiT of 8.5 US cents/kWh and 9.8 US cents/Kwh for onshore and offshore wind power projects respectively, if they achieve COD before 1 November 2021. The FiT, if applicable, applies for 20 years from the COD of each wind power plant.
Wind power projects in Vietnam are governed by, among other regulations, a model power purchase agreement (the Model PPA) issued by the Ministry of Industry and Trade (the MOIT) in 2019. The Model PPA requires that, at least 90 days before a wind power project's scheduled COD, certain steps be taken by a project company, including registration with the National Load Dispatch Centre (the NLDC) and the Electric Power Trading Company (the EPTC) for power generation and grid connection.
This means that for a wind power project to be eligible to enjoy the FiT, it must have completed such steps, and registered for power generation and grid connection with the NLDC and EPTC, by 31 July 2021.
According to publicly available reports, 106 wind power projects with a total capacity of 5621.50 MW plan to reach commercial operation before 1 November 2021. As of 3 August 2021, all 106 wind power projects have reportedly been registered for power generation and COD testing (see here (in Vietnamese only)).
However, merely registering with the NLDC and EPTC doesn't guarantee that those projects will reach COD before 1 November 2021, as many still have much construction and commissioning work to complete, and such activities are seriously jeopardised by COVID-19-related restrictions hampering supply chains and personnel movement.
Among the reasons commonly cited by wind power projects for delays is the impact of COVID-19 on the manufacturing and transportation of wind turbines. A number of project companies had scheduled CODs well before the 1 November 2021 deadline, but have had to delay commercial operations as a result of the impacts of COVID-19. If the 1 November 2021 deadline is missed, these projects may no longer be eligible for FiTs.
There are a number of considerations in the context of COVID-19 that developers and lenders should take into account.
Multiple changes to the scheduled COD in PPAs
As, in practice, there is almost no flexibility for variation of the Model PPA's provisions, most of them have been included in executed PPAs. The Model PPA provides that within six to 12 months before a project's scheduled COD, the seller of electricity must officially confirm any change to the COD. This effectively allows the seller of electricity to unilaterally change the scheduled COD provided in the PPA just once. This provision, or, more broadly, the Model PPA, does not contemplate multiple changes to the scheduled COD. Accordingly, further changes to the scheduled COD are generally only possible with the agreement of EVN as counterpart and buyer of electricity.
We have come across cases in which project companies have attempted to extend a scheduled COD a few times and requested EVN apply the same FiT. While it is possible for the scheduled COD to be extended multiple times with the agreement of the buyer of electricity, even until after 1 November 2021, EVN would not have the authority to apply the same FiT once the 1 November 2021 deadline for COD has passed.
In any case, FiT issue aside, if the scheduled COD in a PPA is approaching but unlikely to be met for whatever reason, the project company should consider taking formal steps to obtain agreement from EVN to extend the scheduled COD. Failure to achieve the COD within three months after the scheduled COD in the PPA will constitute a breach by the project company under Article 8.1 (unless such failure was due to an event of force majeure (see below)) and, as a consequence, the buyer of electricity may claim compensation and terminate the PPA.
Claiming force majeure
The Model PPA contains provisions, notably Article 6, which set out steps parties may take in the case of a force majeure event, such as the consequences of an epidemic. Parties claiming force majeure must take a number of steps, including using their best efforts to implement their contractual obligations, and measures to mitigate the impacts of the force majeure.
The Model PPA does not expressly mention COVID-19 as a force majeure event and most executed PPAs do not contain any specific reference to it. Nevertheless, although not entirely settled, it is clearly a reasonable argument that COVID-19 events are covered by the event category of 'epidemic', especially given that Vietnam's Prime Minister declared COVID-19 to be an epidemic.1 Ultimately, any claim for force majeure relief will need to be carefully considered on a case-to-case basis.
It is notable that when claiming force majeure under the Model PPA, Article 6 allows the other party to unilaterally terminate the PPA by providing 60 days' notice if the party affected by the force majeure cannot implement its contractual obligations within one year. Therefore, caution should be exercised if a decision is taken to claim force majeure under the PPA, as doing so could potentially end up triggering a termination right for the other party.
On the other hand, failure to reach scheduled COD provided in the PPA within three months of the scheduled date constitutes a breach of contract for the project company under Article 8.1. Successfully claiming force majeure may prevent a project company from being in breach of its obligations to meet the scheduled COD, thereby avoiding liability for direct and actual loss incurred by EVN, and potential termination of the PPA by EVN as a result of such failure.
Projects with a project financing plan
Regarding wind power projects that have project financing arrangements, various scenarios may arise depending on whether financial close has been achieved.
A wind power project may fail to reach financial close if it doesn't achieve COD in time to enjoy the current FiT. Alternatively, different conditions may apply depending on the terms of the project's loan agreement(s) (eg the amount of a loan can vary according to the level of FiT obtainable by the borrower). In the worst-case scenario pending extension of the FiTs or issuance of regulations on auction, lenders may walk away from the transaction.
Meanwhile, if financial close has been achieved, failure to reach scheduled COD as stipulated in the PPA could constitute an event of default under the terms of the loan agreement, triggering early repayment obligations and/or enforcement of loan security.
Extension of deadline and future FiTs
For some time, wind power developers have proposed that the current FiT deadline under Decision 39 should be extended to apply until the end of 2022. They have argued that this is both appropriate, in light of the industry's actual development status; and necessary, as a response to project delays caused by COVID-19-related restrictions.
More recently, some Vietnamese localities have submitted proposals to the MOIT for the Prime Minister to extend the current FiT to the end of 2021 or the end of Q1 of 2022 (see here for an article (in Vietnamese only) on the proposal submitted by Soc Trang and Gia Lai provinces).
Wind power project developers may consider continuing to submit proposals to the MOIT and/or the Prime Minister (via relevant provincial People's Committee contacts) for an extension of the FiT deadline. Currently, the MOIT is compiling proposals for further action. Ultimately, any adjustment or continuation of the FiT will require the Prime Minister's approval. Pressure is mounting, as are rational arguments why such an approval would make sense for the sector as a whole.
Decision 447/QD-TTg of the PM dated 1 April 2020 on the declaration of the COVID-19 epidemic.