MIL-OSI Australia: Draft Circular officially ends FiTs era

10
Recommended Sponsor Painted-Moon.com - Buy Original Artwork Directly from the Artist

Source: Allens Insights

Electricity tariffs for new renewable power projects will need to be negotiated with EVN 7 min read

Vietnam is set to end all feed-in tariffs (FiTs) for renewable energy generation, with a draft Circular regulating power price formulation for waste-to-energy (WTE) and biomass power projects.

Despite arguments that WTE projects serve a higher waste management purpose, justifying continued offtake price certainty, the Government appears intent on standardising a tariff negotiation process for all forms of renewable energy projects.

In this Insight, we look at aspects of the Draft Circular that will be of particular interest to sponsors and lenders of WTE and biomass power projects.

Key takeaways

  • The Draft Circular is set to dramatically alter how the economics of WTE and biomass projects are determined.
  • FITs will end, and annual price frameworks will be developed to be used as a basis for project-to-project negotiation. In this regard, the fundamental commercial approach for all types of renewable energy technologies will be standardised.
  • WTE and biomass projects differ from solar and wind, as they both rely on physical feedstock, which is reflected in the Draft Circular as regards biomass projects. With WTE projects, feedstock will typically serve as an additional revenue source, rather than as a cost base, which is not taken into account in determining a WTE project’s electricity tariff.  

Background

On 18 December 2023, the Ministry of Industry and Trade of Vietnam (the MOIT) published the second draft of the Circular regulating methods of formulating the price framework for WTE and biomass power plants (the Draft Circular) on its website. Its content is based heavily on Circular 19/2023/TT-BCT on price frameworks for wind and solar power projects, which was issued in November 2023 (Circular 19). See our comments on Circular 19 here.

Currently, WTE and biomass power projects in Vietnam enjoy fixed FiTs under Prime Minister Decision 31/2014/QD-TTg dated 5 May 2014 and Decision 24/2014/QD-TTg dated 24 March 2014 (as amended). When the Draft Circular is issued, it will officially end the FiTs era for all renewable power projects in Vietnam. Going forward, each renewable power project selling electricity to Electricity of Vietnam (EVN) will have to negotiate its electricity tariff with EVN, subject to a ceiling price that the MOIT will calculate and issue annually for each type of technology.

The Draft Circular regulates the method used to calculate the annual ceiling tariff based on the data of a so-called ‘standard power plant’ (the standard plant), and the process for authorities to formulate and approve it. While the same process applies to formulate and approve the annual ceiling electricity tariffs for both WTE and biomass projects, the formulas to calculate the ceiling tariffs differ between them.

Scope of covered power plants

The Draft Circular does not apply to projects for which power purchase agreements have already been signed with EVN and that are enjoying FiTs as provided for in previous Prime Minister Decisions. In other words, it only applies to new projects. In particular:

  • A ‘WTE plant’ under the Draft Circular is a power plant using steam or gas generated from waste to produce electricity, providing part or all of the produced electricity to the national grid.
  • A ‘biomass plant’ under the Draft Circular is a power plant that utilises steam generated from biomass fuel to produce electricity, supplying a portion or the entirety of the produced electricity to the national grid. Of these, a ‘combined heat and biomass power plant’ is a biomass plant that simultaneously produces and supplies both heat energy and electrical energy.

Method for determining the price frameworks

Overview

The methods for formulating the electricity price frameworks – in essence, the tariffs of the standard plants – for WTE and biomass power plants are similar to the methods applied to solar and wind power projects, as stipulated in Circular 19. In particular:1

  • Parameters such as installed capacity, project economic life, average repayment period, equity/debt ratio, foreign currency/dong debt ratio and profit margin are determined similarly to the Circular 19 provisions.
  • Foreign exchange rate and operating and maintenance cost ratios are determined for standard plants based on input from consultants, to ensure standardisation.
  • Interest rates for domestic and foreign currency loans are determined based on statistical data from credit institutions.

These inputs are used to establish ceiling tariffs on an annual basis, which serve as the upper limit for project-by-project negotiation of specific tariffs.

The formulas

  • The tariff for a WTE or biomass plant must be negotiated and agreed between EVN and each seller, and must be within the then-applicable electricity generation price range (the price range) that MOIT issues. The price range runs from the minimum value (0 VND/kWh) to the ceiling tariff,2 which is the tariff calculated annually and issued for a so-called standard plant (being a representative plant of the relevant electricity generation technology and fuel).3
  • Different formulas are used to calculate the tariffs for a WTE standard plant and a biomass standard plant.4
    • TariffWTE = FC + FOMC
    • TariffBiomass = FC + FOMC + VC

FC is the project’s fixed average costs. FOMC is the project’s fixed operation and maintenance costs over its economic life (which is set at 20 years for both WTE and biomass plants). VC is additional variable costs (VND/kWh), which is applicable only to biomass projects, and calculated based on the consumption rate (kg/kWh) and the price of the biomass fuel (VND/kg). The price of biomass fuel for this purpose excludes transportation costs. In cases where the biomass fuel supply contract does not separate the fuel’s transportation costs, the price of biomass fuel will be as stated in the biomass fuel purchase contract.

There is no VC component for WTE plants, reflecting the fact that a typical WTE project is paid to receive and process solid waste feedstock. Notably, however, there are other existing waste management regulations that link determination of waste processing fees payable by municipal authorities to revenue generated from such waste by the processor. This complicating factor effectively appears to be ignored in the Draft Circular, leaving WTE project sponsors to navigate related regulations in parallel.

  • The standard plant’s tariff is determined taking into account reasonable costs that the owner incurs throughout the project’s economic life and an internal rate of return being 12%.5 Specifically, the parameters for the tariff’s calculation, such as the maximum capacity operating hours, are specified by the MOIT for each type of power plant. For WTE plants, 7000 is the maximum capacity operating hours (Tmax).6 For biomass plants generating both heat and electricity, the Tmax is 3,000 hours, and for other biomass plants, it is 6,000 hours.7
  • The capital structure used to determine the total investment of both WTE and biomass plants is specified in detail in the Draft Circular. In particular, the owner’s equity contribution ratio is set at 30% and debt at 70%. Consistent with Circular 19, this debt ratio is further divided into 80% foreign currency borrowing and 20% domestic currency borrowing. The average loan repayment period is 10 years.8
  • In the formulas to calculate the tariff of WTE and biomass standard plants, the elements FC, FOMC and TC are as follows:
    • FC = TC : E9
    • FOMC = TCFOMC : E10
      • Where: (i) TCFOMC is the total operation and maintenance costs (VND); and (ii) Ebq is the annual average capacity of the standard plant (kWh).
      • The TC and TCFOMC for the standard plant are both calculated on the basis of the investment capital rate (VND/kW) (SDT) and the standard plant’s total installed capacity (kW) and a financial discount rate (%) (in the case of TC) and the proportion of maintenance and operation costs in SDT (in the case of TCFOMC).
    • SDT is the investment costs incurred for one kW of the standard plant calculated on the basis of the total investment capital (as set out in the approved feasibility study as it pertains to electricity generation), with adjustments to take into account the foreign exchange rate at the time of calculation and reference to data from consultants if necessary. The financial discount rate is calculated for the project’s economic life on the basis of the lending percentage over TC, the equity percentage over TC, average loan repayments, the interest rate, and the internal rate of return rate before tax.
    • P (kWh) = Ebq : T
      • Where: P is the total installed capacity of the standard plant (kW).

Procedure for developing and promulgating the price frameworks

The Draft Circular outlines the procedure for the formulation and issuance of the tariff framework for WTE and biomass plants, as follows:11

  • First, before 1 November each year, EVN is responsible for:
    • proposing the selection of the standard plant for calculating the electricity tariff framework;
    • calculating or hiring consultant(s) to select the parameters and calculate the tariff for the standard plant; and
    • preparing documentation for the calculation of the tariff framework for the following year and submitting it to the Electricity Regulatory Authority of Vietnam (ERAV) for approval.
  • The application for approval of the electricity tariff framework for WTE and biomass power plants comprises the following documents:
    • a proposal from EVN regarding the selection of parameters and calculations for the electricity tariff framework;
    • a table of parameters and documents calculating the electricity tariff for the standard plant, as stipulated above; and
    • other relevant documents pertaining to the calculated electricity tariff parameters.
  • Upon receiving the documentation, ERAV has five working days to conduct a preliminary review of the submission’s accuracy and validity. If necessary, it may request modifications, supplements, or clarifications from EVN, which must respond within 15 working days.
  • Within 20 working days from its receipt of the supplemented and sufficient documentation, ERAV must commence an evaluation of the proposed price framework. If necessary, it may seek opinions on electricity tariffs through an advisory board established by the MOIT. The advisory board, with a maximum of nine members, includes a chairperson, vice-chairperson and secretary, and reviews and provides input on tariffs.
  • Within 15 working days from when the tariff evaluation commences, ERAV must submit the proposed price frameworks for WTE and biomass plants to the Minister of the MOIT for approval. There is no statutory time limit for the Minister to approve such price frameworks.
  • If the next year’s price frameworks are not yet published, the latest one will apply temporarily.

What’s next?

If you wish to learn more about how the Draft Circular is likely to change the way the economics of WTE and biomass projects are determined, please contact any of the people below.

MIL OSI News