Vietnam DPPA, grid curtailment solution offers no guarantee

Vietnam’s renewable energy development success is offering a text book case of the right steps to take, but also what can go wrong when a country’s renewables build-out happens too quickly. Now, it’s trying to change course. In June, it passed a new direct power purchase agreement (DPPA), known as Decree 80, that allows private consumers to buy electricity directly from renewable energy producers.

Vietnam’s renewable energy development happened fast. In 2010, the country ranked 196th globally in solar power capacity. By 2021, it ranked ninth, moving ahead of EU powers Spain and France. It also has the most renewables capacity in South East Asia with a combined solar and wind power capacity of 19 GW, while its utility scale solar and wind power accounts for nearly 70 percent of the region’s total capacity. However, the ramp-up in renewables has led to severe grid curtailment along with the inability to handle extra power demand during Vietnam’s hot summer months.

Landmark legislation

Under the terms of the new DPPA, large electricity consumers with a connection voltage level of 22 kW or higher and an average monthly consumption of 200,000 kWh will have the choice to buy renewable energy directly from producers, bypassing politically powerful state-run electricity distributor Vietnam Electricity (EVN).

Before passage of the decree, EVN was Vietnam’s sole electricity distributor. It prohibited companies from buying electricity directly from power producers. This in turn allowed EVN to stick to a one-sided PPA for energy projects that critics claimed gave the company too much control and scared away foreign investors that could find more advantageous PPAs in neighbouring countries.

The new decree allows two primary forms of direct electricity purchases via the DPPA. The first is a through a dedicated private connection line between the renewable energy generators and a large electricity consumer. It also includes usage, service standards, rights and obligations of the parties, electricity price, method of payment, duration of contract and termination conditions. Alternatively, under the second method, consumers can buy electricity from producers on the spot market using forward contracts, while accessing the purchased output via the national power grid operated by EVN. 

Proponents and detractors

The decree has generally received more accolades than detractors. Most have agreed that it will help Vietnam reach its net zero 2050 pledge by incentivising more FDI in the country’s energy sector. Eric Gibbs, Clean Energy Buyers Association (CEBA) senior vice president of global programmes, said that the “the final decree on the DPPA marked a transformative step in clean energy procurement in Vietnam.”

He added that it “benefits CEBA members and other large energy customers by allowing for greater flexibility and more transparent negotiations on price, which will spur clean energy development to power Vietnam’s rapidly growing economy.” 

However, others offer a different take. Lam Tran, founder of Hồng Hạc Group, an investor in Vietnamese renewable projects, told Gas Outlook that DPPA hurdles remain if end-users buy electricity on the spot market because buyers aren’t guaranteed to receive electricity from a specific renewable project. Another problem could arise if the grid still can’t accommodate the extra electricity supply, he added.

Pham Minh Tuan, vice president of Bamboo Capital Group, also sees problems with the new DPPA. He told Reccessary that “upstream development and investment, especially trading electricity through private grids, still involves complex and time-consuming planning procedures,” adding that the regulation has not specified how projects that already obtained a feed-in tariff can transition to the DPPA mechanism.

Power demand in the industrialised north

In addition to helping alleviate grid curtailment, Vietnam’s new DPPA could help encourage much needed renewable energy development in the country’s industrialised northern provinces.  Over the past few years, a growing list of global conglomerates have moved all or part of their operations and supply chains away from China into neighbouring countries to mitigate geopolitical risk, including into Vietnam.

Vietnam, for its part, now prides itself on being a manufacturing and electronics hub that houses facilities of several high profile manufacturers, including South Korean smartphone producer Samsung, U.S. chip manufacturer Intel, U.S. smartphone maker Apple, Dutch brewer Heineken, and Danish toymaker Lego. Most of these companies set up operations in the northern part of the country.

However, in May 2023, cracks in Vietnam’s power sector were starting to show as power outages in the north ensued due to increased power demand and higher summer temperatures. Some of the outages came from lower water levels needed for hydropower due to persistent heat and drought, while some were due to coal shortages needed for coal-fired power projects.

However, other sectors were also hit, with foreign tourists reportedly fleeing due to persistent high heat and power outages in hotels and other establishments. Power sources in Vietnam’s north include 46.5 percent  hydro, 47.7 percent coal, 3 percent renewables, and 2.8 percent imported electricity, mostly from neighbouring Laos.

The World Bank estimated that the May and June 2023 power outages cost Vietnam around U.S. $1.4 billion. It didn’t mention the goodwill that the country had been losing with manufacturers and tourists due to its power supply problems.

Vietnam had similar problems this year. In May and June, during the height of the summer and record high El Niño temperatures, rolling power outages plagued the northern region again.

Added to the fray, EVN refuted a Reuters report from May that claimed the state-run power distributor had told foreign-owned companies in the north to cut electricity demand by some 30 percent.

It’s still unclear if Vietnam’s DPPA can help mitigate the country’s power supply problems in time to save its global manufacturing hub aspirations. That will take time and more investment. It does, however, show that the government is taking the problem seriously while also showing support for companies that have decided to pivot to the country away from China.