Lotus blossoms in the wind

PFI Yearbook
20 min read
Asia

The wind power sector in Vietnam is still in a relatively nascent stage but has significant potential, both onshore and offshore. The recently closed 144MW Lotus onshore wind power project, structured and arranged by the Asian Development Bank, is to-date the first and largest internationally project-financed wind-power project in Vietnam to utilise long-term US dollar limited-recourse financing from development finance institutions and commercial banks, and represents a major step forward in this fast emerging sector. By Michael Gabisch, Desiree Zhou and Nicholas Moller from the Asian Development Bank and Ben Thompson from Mayer Brown, Singapore.

Electricity demand in Vietnam has grown at a compound annual rate of 13% since 2000 and is projected to grow by 8% annually through to 2030. Meeting this power demand will require an expansion in Vietnam’s generation capacity to approximately 100GW by 2030, as well as alternatives to carbon-intensive power projects to avoid significant increases in greenhouse gas emissions.

The Revised National Power Development Master Plan for the 2011–2020 Period with the Vision to 2030 (Revised PDP 7) sought to increase the share of wind generation capacity in Vietnam to 2,000MW by 2025, and 6,000MW by 2030. The National Power Development Master Plan for the 2021–2030 Period with the Vision to 2050 (PDP 8) is being finalised and is expected to further prioritise renewable energy.

Early wind attempts

With 3,000km of coastline and high wind speeds, especially in the southern part of the country, where average wind speeds are 9m–10m per second, Vietnam has huge potential for wind energy.

In 2011, Vietnam introduced a feed-in tariff (FiT) of US$0.0780/kWh and a template power purchase agreement (PPA) for utility-scale onshore wind power projects. Despite this initiative, only three wind power projects, with a total capacity of 153.2MW, achieved commercial operations in the period from 2011 to 2018. In contrast, since Vietnam introduced a FiT of US$0.0935/kWh in 2017 for utility-scale solar power projects, about 8.9GW of solar capacity had been commissioned by September 2020, far exceeding the targets under the Revised PDP 7.

Although many of these solar projects were financed by local rather than international banks, the contrast remained stark with respect to the high interest in solar as opposed to wind. Three explanations that have been put forward are (i), the original wind FiT not being sufficiently attractive to project developers and financiers, (ii) the perception of international lenders that the standard PPA had bankability issues, and (iii) local banks being less familiar with the wind sector and non-recourse project financing structures.

Welcome reforms

To spur greater interest in wind power development, Vietnam increased the FiT to US$0.085/kWh for onshore wind projects in 2018. To qualify for this FiT, the commercial operation date (COD) had to be before November 1 2021.

The Ministry of Industry and Trade (MOIT) also revised the model wind PPA template applicable to grid-connected onshore and offshore wind power projects in early 2019 to address some perceived shortcomings, including the position on termination payments, which had previously been identified as a key project inhibitor by potential financiers.

Lotus Wind

The Lotus Wind Power Project, which achieved first drawdown in August 2021, is currently the largest wind power project in the country to be project-financed by international lenders on a limited recourse basis and developed under the revised PPA. It is also the first wind project financed with significantly limited recourse to sponsors.

The project entails the development, construction, and operation of three wind farms and associated transmission facilities at different sites in Quang Tri Province, each with a capacity of 48MW (144MW in total). Each project is implemented under a separate 20-year PPA with Vietnam Electricity (EVN) with COD achieved in October 2021.

The three wind farms were developed and are owned by Lien Lap Joint Stock Company (Lien Lap), Phong Huy Joint Stock Company (Phong Huy), and Phong Nguyen Joint Stock Company (Phong Nguyen), each a newly created, special-purpose company incorporated in Vietnam that is majority owned by Power Construction Joint Stock Company No. 1 (PCC1) and Renova Inc (Renova).

* Sponsors – PCC1’s local expertise and commitment to provide highly-structured and targeted sponsor support, combined with Renova’s unique experience in the renewables sector, were key factors (in addition to its significant size and ideal location, with strong wind resources) in making the Lotus project stand-out among the many proposals presented to the Asian Development Bank (ADB), which acted as mandated lead arranger and bookrunner (MLA) for the financing.

PCC1 is a domestic leader in the power infrastructure sector in Vietnam with nearly 60 years of experience. It specialises in constructing power transmission networks, and has completed several hundred thousand kilometres of transmission lines and more than 100 substations for EVN. This unrivalled experience makes PCC1 one of the private companies most familiar with the power supply and demand dynamics in Vietnam.

Renova is an independent Japanese renewable energy developer and power producer, with 400MW of generation assets in operation, 500MW under construction and a further 900MW under development across solar, wind, biomass, and geothermal technologies. This project is its first overseas venture after a two-year search for a renewable energy project in Vietnam, and also the first investment by a Japanese company in a new large-scale wind-power project in Vietnam.

* Financiers – The 15-year, US$173m green loan project financing package for the project was arranged and syndicated by ADB, with ADB, Japan International Cooperation Agency (JICA) and Export Finance Australia (EFA) as direct lenders and Bank of China (Hong Kong) Ltd, Bank of China Ltd Macau Branch, Societe Generale, Singapore Branch and Triodos Groenfonds NV as ADB B loan providers. The ADB loan comprises a US$35m A loan directly funded by ADB and an US$81m syndicated B loan. The JICA and EFA portions of the financing package are US$25m and US$32m respectively.

Structuring and the deal

It was a major challenge to formulate a package of documents with a risk allocation acceptable to the international lenders, and it is testament to the efforts of PCC1 and Renova as sponsors, ADB as the MLA, Mayer Brown as the lenders’ legal adviser, and all others involved that the project successfully achieved financial close in August 2021, particularly during Covid-19.

The PPA for all three wind farms is based on the model PPA template released by the MOIT as set out in Circular No. 02/2019/TT-BCT, which is for an initial term of 20 years. As MOIT is generally resistant to amending the model PPA template, the lenders had to undertake extensive legal, financial and technical due diligence to identify the extent of each relevant risk in the context of the project itself, and then determine in close consultation with the sponsors, appropriate mitigants with the proper balance to ensure that the transaction was structured as a project financing (rather than a corporate financing). PCC1’s willingness in its role as a local sponsor to provide support for debt service shortfalls due to certain specific events was an important factor in that overall analysis.

* Completion risk and failure to meet FiT deadline – The PPA does not contain any entitlement to extend the FiT deadline (November 1 2021), whether for construction delays, force majeure or otherwise. The FiT of D1,928 (US$0.085/kWh) does not apply to any wind turbine generators (WTGs) that failed to achieve commercial operations by the FiT deadline.

The MOIT has to-date not provided any official indication of how the tariff would be determined for WTGs that achieve commercial operations date (COD) after this time. This risk of construction delay is further aggravated by the recent Covid-19 shut-downs, which have impacted construction projects across the country and disrupted the supply chain and delivery of equipment and construction materials.

In the Lotus project, this completion risk is mitigated by adopting (a) an all-encompassing turn-key contracting structure, together with the engagement of highly qualified and experienced contractors that have been proactive in managing construction risks, including Covid-19 related restrictions, and (b) a dynamic disbursement control mechanism whereby the amounts that can be disbursed depend on actual construction progress.

The construction contracts for each of the three wind farms operate as a single turn-key EPC contract, with PCC1 (in the capacity of the lead contractor) being solely responsible for delivering all components of the works, including the supply of the WTGs, which were subsequently subcontracted to Vestas.

This EPC contracting structure was carefully chosen to give the project companies direct recourse against the contractor for defects or non-conformances in any part of the work, including those delivered by Vestas, and is therefore a key feature that contributed to the bankability of the project.

The complement of PCC1 working with Vestas enabled the project companies and lenders to benefit from both PCC1’s considerable on-the-ground experience of developing power projects in Vietnam and Vestas’ commercially proven and market-tested WTG technology.

* Grid connection risk – Under the PPAs, the project companies assume all grid connection risk, including responsibility for constructing the transmission line and connecting each wind farm to the grid.

In the Lotus project, the EPC contracts for the wind farms did not fully cover the construction of all of the interconnection facilities required for connection to the grid (part of these interconnection facilities were built and are owned by third parties, with the project companies contributing to part of the construction costs). A key focus was to ensure that all necessary interconnection facilities being constructed by third parties would be completed in time to achieve commercial operations before the FiT deadline, along with appropriate contractual protections in the event of delays.

* Dispatch and curtailment risk – Grid dispatch and curtailment are key risks assumed by the project companies under the MOIT PPA template.

Following a detailed assessment of (a) the grid study that had been carried out for the project; and (b) power projects specifically approved by MOIT/EVN in Quang Tri province, along with planned improvements to the grid, the lenders’ technical adviser concluded that curtailment risk for the project remained relatively low, which coincided with PCC1’s own assessment prior to undertaking the project.

Comfort was also taken from the fact that Vietnam’s upcoming PDP 8 aims to prioritise grid projects with the objective of developing more renewable energy and integrating these into the power system. Consistent with PDP 8’s goals, the MOIT has announced that Quang Tri province will be a wind power centre in Vietnam, with expected capacity of over 2.5GW. EVN has in turn recommended building out the transmission infrastructure in the province during 2021 to 2025 to evacuate any excess power from operational and future wind power plants.

* Changes in law – The MOIT PPA template does not include any provisions regarding changes in law, meaning there is a risk that the FiT rate and its other features can in theory be modified.

The lenders therefore paid careful attention to the government’s historical track record in this regard, with the conclusion that it would be unusual for the Vietnamese government to change laws (particularly retroactively) that detrimentally impact the revenues of ongoing projects. On the contrary, new laws and policies tend towards the grandfathering of existing projects into more favourable treatment.

Vietnam's new Law on Investment also came into play. Article 13.2 states that where there is a new law that "provides less favourable investment incentives than those currently enjoyed by investor", the investor is entitled to "continue enjoying the current incentives for the remaining period of the incentive enjoyment of the project". In the context of the FiT, this could be construed to mean that the FiT (and its associated features) should continue to apply until the end of the PPA term.

* Force majeure and termination – The MOIT PPA template does not contain any concept of political force majeure or corresponding payment protection to the project company in such circumstances, nor does it contain a precise termination payment calculation to cover different termination scenarios. There is no explicit termination payment for offtaker default or prolonged political force majeure/force majeure impacting the offtaker. Instead, the non-defaulting party is entitled to claim for direct and actual damages but will bear the burden of proof in establishing the quantum of damages.

Although less than what international investors and their financiers may expect, this position represents an improvement on the previous PPA template, where compensation was expressly limited to the value of electricity generated during the previous year. A further mitigant is also the project company’s express ability under the PPA to directly opt into the competitive power market (provided that it is still able to generate) by giving EVN 120 days’ notice.

* No step-in rights – There is to-date no renewables project developed under the MOIT PPA template that has succeeded in obtaining a direct agreement from EVN. In the absence of a direct agreement or express provision to deal with step-in rights, lenders to the Lotus project took primary comfort from their ability to effectively step-in by exercising a transfer of the shares in the project companies upon enforcement of the share mortgages.

* EVN risk – EVN’s creditworthiness was a key focus in the absence of any government guarantee for renewables projects (or any power project in Vietnam that is not developed on a PPP framework), with the lenders to the Lotus project ultimately taking comfort in EVN’s standalone credit rating of BB from Fitch with a stable outlook, which is on par with Vietnam’s sovereign rating. The lenders were confident that this reflects EVN’s (i) strong financial profile with headroom to absorb any impact of Covid-19; and (ii) entrenched market position given its monopoly in the power sector. Further, given EVN’s strategic importance to Vietnam’s power sector, there was some expectation that the government would not allow EVN’s financial profile to excessively deteriorate.

* Operation and maintenance risks – The viability of the project will be dependent on the WTGs being reliably operated at the budgeted costs and satisfactorily maintained to achieve sufficient availability. To this end, each of the three wind farms have engaged Vestas as the WTG supplier to maintain the WTGs for the first ten years of operation, with the option of extension. Vestas’ proven track record of operating and maintaining WTGs worldwide will be key to mitigating operation risk, particularly in the initial years of operation when “teething issues” tend to be more prevalent. The balance of the plant will be maintained by PCC1 and its affiliates.

A landmark project

The Lotus project is the first financing of a wind power project for ADB and all the other lenders involved in Vietnam, and represents a significant step forward for Vietnam’s rapidly evolving wind power industry. A number of features stand out:

i) It is the first limited recourse project financing of a wind power project in Vietnam by international lenders without export credit agency cover.

ii) The project consists of three wind farms of 48MW each, 144MW in total, and is one of the largest wind power projects developed to-date in Vietnam. It will move the country one step closer towards its goal of having 6GW of wind generation capacity by 2030.

iii) ADB as the MLA developed a financing structure that addresses key PPA risks to attract international lenders, and mobilised long-term US dollar financing at a reasonable cost that is otherwise not available onshore in Vietnam due to legal restrictions and currency availability. The project provides a replicable model for private-sector investments into wind power projects in Vietnam and is expected to further catalyse private sector funding in the future.

iv) ADB as the MLA has assembled a unique lending group of development finance institutions, commercial banks and an institutional investor, none of which had a pre-existing relationship with the sponsors. This project stands out in contrast to the majority of the project finance transactions in developing Asia, which are sponsor-led club financings.

v) The ADB B loan financing structure has proven to be successful in attracting financing from international commercial banks and institutional investors that have in the past been reluctant to offer limited-recourse project finance loans because of concerns around the PPA and the nascent nature of the renewable energy sector in Vietnam. The ability to leverage ADB’s extensive experience in large-scale renewable energy projects in Vietnam, which has served as a trusted reference for the market, alleviates some of these long-held concerns.

vi) The participation of ADB, EFA and JICA has ensured that the environmental and social safeguards of the project are in accordance with international best practice standards, including measures to promote gender equality and women’s empowerment in business. The project is also certified by the Climate Bonds Initiative responsible for administering the international Climate Bond Standard and Certification Scheme.

vii) The project highlights the continuing rise of regional sponsors and their financiers, particularly in the renewables space, and their ability to mobilise the full strength and suite of the regional infrastructure financing and advisory ecosystem.

Paving the way

While formulating a bankable project structure against which international lenders are willing to commit funds and make their first forays into Vietnam’s emerging wind sector is a significant achievement, there is clearly still a long road ahead for both the Lotus project itself and the Vietnam wind power market more generally.

The next challenge for Vietnam in the renewables space is the offshore wind sector, where projects are larger and more structurally complex. Steering these through to successful completion will remain challenging given their more capital-intensive and technically demanding nature.

Nevertheless, perhaps more than anything else, the success of such future projects will depend on building them on a secure and bankable contractual foundation, and it is in that respect that Lotus represents an important first step in highlighting both the opportunities and challenges in this exciting new chapter for Vietnam.

The project

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