Direct power purchase agreement: good policy but slow enforcement

Sound renewable energy policies and the direct power purchase agreement (DPPA) model will help Vietnam save costs, enhance its export advantages, and boost sustainable development while contributing to global efforts to mitigate climate change, writes energy expert Lam Son.

At the height of summer last year, the power load in northern Vietnam increased sharply without backup sources, leading to large-scale power cuts. Yen Dinh, a remote district in the northern-central province of Thanh Hoa, was no exception, with the lights going out for up to 10 days a month.

But one man somehow managed to source a bucket of ice every day to quench his thirst, making everyone jealous. He revealed that his family cooked meals for a group of Vinamilk experts working nearby. They had a freezer that ran on solar power.

A few years ago, Vinamilk, one of Vietnam's largest dairy producers, installed rooftop solar power systems at 12 of its dairy farms (known as the Vinamilk Green Farm model) in remote areas across Vietnam, applying 4.0 technology.

According to a Vinamilk report, the solar power systems on the farms have a total capacity of 3.39 MWp, using 7,542 high-performance solar panels, helping the farms keep the temperature no more than 28 degrees Celsius, and running food processing equipment, and environmental treatment and lighting systems.

In addition to being self-sufficient for power, using rooftop electricity at the Green Farms also saves a lot of costs. A Green Farm leader said this model demonstrated a practical commitment to protecting the environment as the systems helped reduce 62,341 tons of CO2 per year, equivalent to planting 3.4 million trees.

At an international conference two years ago, the Vinamilk Green Farm model was introduced as a pioneering way to use clean electricity for production, helping Vinamilk enhance its reputation as a competitive exporter in the E.U. and other demanding markets for meeting strict environmental standards.

Besides the story of Vietnamese firms like Vinamilk, Samsung Vina, a foreign-invested enterprise, has long proposed the direct power purchase agreement (DPPA) model. Instead of installing rooftop solar system itself, the company wants to buy electricity directly from renewable energy producers, such as companies with solar power systems on their factory roofs.

However, although it contributes about 20% to Vietnam's GDP, the Korean-backed enterprise has only recently received in-principle approval from the Ministry of Industry and Trade to pilot the model.

After the EU-Vietnam Free Trade Agreement (EVFTA) was approved, not only Samsung, but also Vietnamese export businesses have shown increasing interest in using clean energy to obtain green credits, an important factor to access export markets.

"Green certificates" are needed as only goods produced with clean electricity are accepted by many international markets, especially the EU, where they have started to apply measures to minimize the risks of "carbon leakage".

Carbon leakage is a phrase that refers to production moving from countries with strict climate policies to countries with less stringent policies, leading to an increase in global greenhouse gas emissions. The EU has proposed the Carbon Border Adjustment Mechanism (CBAM), which would require companies wanting to import goods produced outside the bloc to purchase certificates corresponding to the amount of emissions generated during the production process.

This means that products that do not comply with EU climate standards could be subject to a carbon tax, resulting in higher prices. Besides the EU, other markets such as the U.S., Japan, Canada, and Australia may also apply similar standards in the future due to globalization trends and their commitment to reducing greenhouse gas emissions and combating climate change.

Why has Samsung's campaign for the DPPA taken so long?

In a May 14, 2024 meeting, Deputy Prime Minister Tran Hong Ha said that creating a competitive electricity market is stated in the Electricity Law, the National Power Development Plan, and related documents, but the implementation has been too slow due to technical conditions mentioned in the draft mechanism. Now conditions are more open, as the latest draft by the Ministry of Industry and Trade has removed some previous requirements and provided specific criteria for selecting parties to participate in the pilot program.

For example, consumers are no longer required to commit to purchasing at least 80% of the total amount of electricity that state utility EVN supplies in the first three years after participating in the DPPA pilot program. Producers no longer need to provide a bank/credit institution guarantee to ensure their obligations to complete the construction of a power plant, and consumers are not required to provide bank/credit institution guarantees to ensure payment obligations under their DPPAs.

The requirement for the futures contract term (contract for difference - CfD) of between 10 and 20 years from the commercial operation date (COD) has been removed. In addition, another draft decree that is about to be submitted to competent authorities for approval will not set restrictions on capacity or voltage levels for connection and specific uses.

However, even though electricity trading can be conducted quite openly through a private transmission network, it must still comply with current regulations on planning, investment, safety, and fire prevention, as well as other related regulations.

Another concern of investors and consumers is that the mechanism will integrate international standards on intervention, dispute resolution, and termination rights to make DPPAs accepted by banks. A bank-acceptable DPPA will put investors at an advantage when seeking financial support for their projects from banks and other credit institutions, as many large financial institutions are and will be applying environmental, social, and governance standards for loans.

Even though the summer has just begun, there are already many threats of electricity shortages. Some entertainment events in urban areas may lack ice and fans, but in some remote areas, people will still be able to quench their thirst thanks to pilot projects such as Vinamilk's Green Farms.

Late President Ho Chi Minh said: "What is beneficial to the people must be done with all our might, and what is harmful to the people must be avoided." An open DPPA mechanism is the best way to respond to that request.