Barry Weisblatt, Energy Capital Vietnam, USA,

looks at how foreign investment can achieve

project bankability in Vietnam, a country that
is swiftly becoming one of the most attractive
energy markets in Asia.

V
ietnam has long enjoyed one of the fastest-growing economies in the world.
This growth has accelerated as manufacturers shift supply chains away from
China. Though COVID-19 lockdowns temporarily slowed growth, Vietnam’s trade
surplus is recovering as factories reopen. This manufacturing growth, combined with a
rapidly expanding middle class, is driving a surge in electricity demand. Vietnam needs
an estimated US$130 billion of new investment into power generation and transmission
infrastructure by 2030 to keep up with this demand.
Tremendous foreign investment is required to meet these ambitious goals, as this
level of investment equates to roughly half of Vietnam’s 2020 GDP. New regulations will
enable more favourable conditions to prioritise foreign direct investment (FDI). In addition,
Fitch Ratings ranks Vietnam’s power sector as the fourth most attractive by Risk Return
Index (RRI) in Asia and seventh out of 117 countries globally in its 2Q21 Vietnam Power
Report (Figure 1).
 When the latest national power plan, Power
Development Plan VIII (PDP8), is finalised, a substantial
coal-to-gas transition will begin to unfold in Vietnam.
Following COP26, Vietnam’s Ministry of Industry and Trade
(MOIT) announced a working programme with the World
Bank to promote the energy transition and application of
energy-efficient technologies to reduce greenhouse gas
(GHG) emissions under its Paris Agreement obligations. As
part of Vietnam’s coal-to-gas transition, LNG capacity is
set to significantly increase from zero today to
approximately 20 GW over the next decade and to more
than 40 GW by 2045. However, as experience shows
around the world, successfully developing LNG power
solutions in new markets can be challenging. Vietnam is
at the cutting edge of these ground-breaking projects
(Figure 2).
Fitch’s Vietnam RRI includes a very favourable rating
for short-term political risk, second only to Singapore in
Southeast Asia and even better than Japan and Australia.
However, Vietnam’s operational risk rating underscores the
need by foreign investors for a partner with strong local
expertise.
MOIT published Circular No. 57/2020/TT-BCT in
December 2020 (Circular 57), which establishes a general
Power Purchase Agreement (PPA) framework, including a
methodology for determining electricity generation prices.
This regulation includes a capacity charge and a fuel cost
pass-through mechanism, but it is not intended to apply
Figure 1. Fitch Ratings Asia RRI snapshot. Vietnam’s high
rewards compensate for its moderate risks. Source: Fitch
Solutions, Vietnam Power Report 2Q21.
Figure 2. Power generation by type (MW). Growth to come
from a mix of LNG and renewables. Fitch Solutions, Vietnam
Power Report 2Q21.
to build-operate-transfer (BOT) projects. No PPAs have yet
been completed under this new regulation, and early
market participants will have an opportunity to negotiate
key provisions that should set precedent for future
projects.
The Mui Ke Ga LNG project
Energy Capital Vietnam (ECV) was founded in 2015
to capture pent-up demand opportunities in Vietnam.
Coupled with this was a recognition that US production
growth was contributing towards a global energy
transition. ECV’s focused dedication and relationship
development in-country across a matrix of stakeholders
gives the company a more complete understanding of the
process and steps necessary to participate in Vietnam’s
internal transition towards private investment.
In 2019, ECV signed a Memorandum of Understanding
(MoU) with the People’s Committee of Binh Thuan
Province to develop a fully private, multi-phase LNG
power project in Mui Ke Ga (MKG) (Figure 3). In July 2020,
the project received the Prime Minister’s in-principle
approval for inclusion in the forthcoming PDP8. In
November 2021, ECV signed an agreement with B.Grimm
Power of Thailand to jointly develop the project.
Vietnam has a consensus-driven culture and
government that highly values interpersonal relationships.
Clear guidance and support from key leadership is
necessary to make progress at any level of government.
Parties that build strong relationships based on mutual
respect are better able to shape views before any formal
meeting has occurred or an official government document,
or letter, is produced. Thus far, MKG has received more
than two dozen official government letters and documents
of support. ECV’s actions have been taken with deep
political sensitivity and in close co-operation with policy
objectives, as any project is ultimately a long-term
partnership with the government.
Government confidence in project sponsors is critical
for successful negotiations. For registered FDI projects to
progress, the sponsor must be assessed as capable of
executing effectively. In fact, recent regulatory changes
include stricter requirements for all provinces in selecting
sponsors before an Investment Registration Certificate
(IRC) can be awarded.
Power Purchase Agreement
considerations in Vietnam
Among all other factors, the execution of a bankable PPA
is paramount for any LNG power project. Feedback
and analysis from numerous trusted legal experts on
Vietnamese law is crucial. The letter of the law is but one
aspect; a deeper understanding of the spirit of the law,
and prior experience are equally important.
Official PPA negotiations for MKG require the issuance
of PDP8 and for Binh Thuan province to complete its IRC
award procedures. In preparation for these actions, ECV
has held an informal dialogue with Vietnam Electricity
Group (EVN) for more than 18 months, giving ECV valuable
insights and an understanding of the broader dynamics
for the project from multiple perspectives.
Successfully developing LNG power requires not just
an understanding of successful supply contracts, but an
Reprinted from January 2022
understanding of past power contracting methods in
Vietnam. ECV has taken an expert and methodical
approach to acquire this understating. In 2021, ECV
created a PPA Strategy Working Group to secure a path
towards achieving a bankable PPA framework in Vietnam.
This group is comprised of B.Grimm, Siemens Energy,
Gunvor, and Deutsche Bank. Leveraging this combined
expertise allows ECV to integrate international standards
and industry best practices from other successful projects.
Although there is not yet a proven power contract
framework for LNG, there is a proven power contract
framework for domestic gas through the BOT model. ECV
seeks to retain as many proven and accepted concepts of
the BOT model as possible. Comprehensive gap analysis of Figure 3. Mui Ke Ga (MKG) is ideally located near Ho Chi
Circular 57 vs BOT regulations reveals the issues most Minh City, Vietnam.
vulnerable in supporting a successful supply contract.
When negotiating a bankable PPA, key topics include
government guarantees and undertakings, foreign
exchange guarantees, change in law provisions, force
majeure events, events of default and termination, as well
as variable and fuel cost pass-through provisions.
While most key considerations are similar across both
developed and emerging markets, the regulatory and
economic framework behind how best to address them is
unique to each country. Like any country, Vietnam’s
economic history has played a key role in its regulatory
development. Specifically, following a 2016 meeting with
Vietnamese leaders, Christine Lagarde, who was Managing
Director of the IMF at the time, publicly stated, “I also
Figure 4. Vietnam public debt to GDP. The country has
encouraged the authorities to further strengthen the demonstrated commitment to fiscal discipline. Source:
country’s fiscal position and resilience amid external Vietnam General Statistics Office.
volatility. A growth-friendly fiscal consolidation over the
medium-term would reduce the public debt-to-GDP ratio
while providing increased space for important social and
development expenditures.”
Vietnamese leadership seems to have embraced
Lagarde’s words. Since then, public debt-to-GDP fell from
51% to 43% by 2020 (Figure 4). Successful policies
reducing public debt have been in line with Vietnam’s
efforts to privatise state-owned businesses and ensure
survival on their own merits without the need for ongoing
state support as a result of these measures. The cost to
insure against Vietnam sovereign default risk has also
declined significantly. In 2016, the five-year Vietnam
credit default swap cost more than 300 basis points (bps) Figure 5. FX performance index. The VND has been a haven
– today it is below 100 bps, which is a major achievement. of stability recently. Source: Investing.com.
Unsurprisingly therefore, recent regulations seek to
reduce, if not remove altogether, state support for power
projects. Guarantees for project debt servicing or payment
obligations from EVN appear difficult to obtain. Whether
such support is needed for a project to be bankable
remains to be seen. Fitch Ratings assigned EVN a BB
rating in 2018, which corresponded with the sovereign
rating. This rating was due in part to Fitch’s belief that
the socio-political implications of an EVN default would
be ‘strong’ as it would lead to service disruption
considering the company’s entrenched position across the
electricity sector value chain, making it difficult to fund
new power investments. The rating is also backed by
rising revenues and profits at EVN, as well as near 100% Figure 6. Vietnam FX reserves. Strong trade and investment
collection rates. In October 2021, EVN reported a seven- have boosted reserves. Source: Viet Capital Securities.
fold y/y increase in profits. Judged on financials alone,

Reprinted from January 2022

EVN could likely enjoy a higher credit rating but is
constrained by the sovereign itself.
Discussions with multilateral finance organisations
also indicate that sovereign support of EVN payment
obligations may no longer be necessary. Furthermore,
preliminary market sounding with insurance specialists
indicate the potential for private sector products which
can appropriately price default risk. Nonetheless, project
sponsors should still expect PPAs to include some
government undertakings customarily provided under a
BOT model. Government support is most important with
respect to land use rights, licensing assistance, and
delivery of the transmission network and connection
points.
As LNG is generally priced in US dollars, foreign
exchange risk also needs to be considered given payments
under the PPA are made in Vietnam dong (VND) (Figure 5).
Currently, foreign exchange losses are only reimbursed on
an annual basis, which is not ideal, especially because
prior to 2017 the VND regularly devalued at least 5%
annually. However, improving economic trends may give
comfort here. Robust trade surpluses and FDI have helped
the VND to be among the most stable currencies over the
past few years. In 2020, while many other emerging-
market currencies experienced strong devaluations, the
VND remained stable and has appreciated approximately
1.8% vs the US dollar in 2021. Furthermore, Vietnam has
tripled its foreign reserves since 2015, with an estimated
US$105 billion in 2021, significantly reducing
transferability risk (Figure 6). Of course, these trends are
not certain to continue over the long life of a PPA. And
LNG power projects naturally have higher US dollar
exposure given their fuel supply contracts.
Although capital markets products can help mitigate
liquidity risks, PPAs still need to address long-term price
risks. Circular 57 appears to mitigate fuel cost risk by
providing a pass-through mechanism for fuel costs and
associated transportation and warehousing expenses.
However, it is silent on take-or-pay obligations. PPA
negotiations must include offtake certainty to avoid risk
of LNG scheduling mismatch. Fuel inventory management
is considerably more difficult for LNG power projects
compared to traditional coal-fired projects. LNG cargoes
may not be able to be diverted and storage capacity at
the terminal will be finite.
ECV intends its joint venture with Gunvor to mitigate
LNG supply risk upstream from the project by creating
portfolio exposure. Volume certainty from the project
itself combined with long-term supply contracts should be
a strong mitigant to price volatility. ECV also continues to
explore conversations with US producers to find market
alignment with exposure to the dedicated long-term
demand of the project.
EVN and the Vietnamese government will likely be
increasingly focused on gas price volatility after recent
spikes in global markets. Supply contracts have previously
incorporated price floors and ceilings to protect against
major price spikes. ECV has the deep market knowledge
necessary to establish the right pricing formula given
competing fuel indexation.
Powerful opportunity
With projected consumption volumes exceeding
45 million tpy, the World Bank expects natural gas
development and LNG imports to play a critical role in
satisfying Vietnam’s substantial future energy needs.
Drafts of PDP8 show significant reductions for coal-fired
power – replaced instead with LNG and renewables – and
results in an estimated decrease of 20 million t of CO2
over the next 10 years. Developers who understand
the inner workings of the Vietnamese government
and corresponding objectives should find reasonable
negotiating counterparties in a country whose economic
success has been largely built on attracting foreign
investment.
Reprinted from January 2022
 Safe Navigation, Secure Investment
Energy Capital Vietnam has the local knowledge, expertise,
and core values necessary to develop an integrated
LNG-to-power project in Southern Vietnam.

Mui Ke Ga LNG. Operational Excellence. Coming in 2025.

Integrity. Vision. Intelligence.

ecvholdings.com
Reprinted from January 2022