EVN seeks PM's solutions for solving challenges in PPA negotiations
EVN seeks PM's solutions for solving challenges in PPA negotiations
Việt Nam Electricity (EVN) has submitted a proposal to Prime Minister Phạm Minh Chính, seeking measures to tackle challenges encountered during negotiations of power purchase agreement (PPA) with investors of liquefied natural gas (LNG) projects in the National Power Development Plan VIII.
Thị Vải LNG terminal in Bà Rịa-Vũng Tàu Province. — Photo EVN |
Việt Nam aims to build 13 LNG power plants totaling 22,400MW by 2030, with two more plants of 3,000MW planned for 2035.
Gas power projects scheduled for commercial operation before 2030 include those in Ô Môn Power Centre, Nhơn Trạch 3, Nhơn Trạch 4, and Hiệp Phước, totaling 6,634 MW in capacity. Other projects are contingent on completing PPA negotiations and loan arrangements by 2027 to start operation by 2030. The progress of upstream projects such as Block B and Cá Voi Xanh (Blue Whale) is crucial for the efficiency of the entire gas power chain.
EVN has begun PPA negotiations for the Nhơn Trạch 3, Nhơn Trạch 4, Hiệp Phước, Ô Môn II and Bạc Liêu projects, in which only PPAs of Nhơn Trạch 3 and Nhơn Trạch 4 whose investor is Petrovietnam Power Corporation have progressed. They have agreed on most PPA terms outlined in Circular No 57/2020/TT-BCT, except for electricity pricing which is still being discussed.
According to EVN, a major challenge in PPA negotiations involves the requirement for fixed electricity consumption rates in long-term contracts since July 1, 2012, when the electricity market began. To manage risks from market price fluctuations, LNG project investors usually seek EVN’s agreement on electricity consumption rates in long-term contracts, typically from 72 per cent to 90 per cent of the contract period. These requests aim to ensure steady cash flow for debt repayment and stability in production and fuel prices for LNG suppliers, given Việt Nam’s status as a new and small LNG market.
Under existing regulations, the rates for electricity consumption in long-term PPAs are subject to negotiations between power plant investors and EVN. However, in the absence of an agreement, it will be determined based on the rate set forth by the Ministry of Industry and Trade. Yet, agreeing to high power rates in such contracts may entail the risk of escalating electricity prices and creating market inequities.
Currently, the cost of importing LNG to Việt Nam stands between US$12 and $14 per million British Thermal Unit (BTU). Consequently, gas power plants utilising LNG fuel incur generation costs ranging from VNĐ2,400 to VNĐ2,800 per kWh, significantly exceeding the generation costs of other prevailing power sources in the system.
With LNG projected to contribute about 15 per cent to the national power capacity by 2030, its high costs and long-term output commitments will significantly impact EVN's purchasing costs and, consequently, retail electricity prices.
In the report to the PM, EVN said: "Endorsing the high electricity consumption rates proposed by project investors in long-term PPAs poses financial risks for EVN during periods of low electricity demand. Additionally, committing to these rates lacks fairness to other participants in the electricity market, as current market players operate without long-term commitments, with rates adjusted annually based on supply-demand balance.”
EVN's report suggests that in line with the electricity market's development trajectory, the share of electricity via long-term contracts will progressively diminish, fostering increased competition through the spot market.
EVN estimates that if LNG power sources in National Power Development Plan VIII don't start operating on schedule, electricity supply assurance for 2028-30 could be jeopardised, leading to an annual shortage of 800-1.2 billion kWh. Beyond 2030, high demand could result in a larger deficit exceeding three billion kWh per year.
Thus, EVN has proposed committing to a 65-per-cent power consumption rate through long-term contracts.
Other bottlenecks in PPA negotiations include the requirement of dispute resolution venues, government’s guarantee of foreign currency conversion for projects generating revenue in Vietnamese đồng, as well as the need for compensation mechanism for legal changes and termination payment mechanisim.
In the proposal, EVN suggested to the PM to adjust the electricity consumption rate in long-term contracts to incentivise investment in LNG power projects, mitigate effects on retail prices and maintain competitiveness, suggesting the inclusion of imported LNG prices and associated costs in contract electricity rates to ensure fairness and affordability for consumers.
