Renewable energy projects face policy woes: securities broker
Renewable energy projects in Vietnam that missed the government's preferential feed-in-tariffs (FiTs) scheme will not enjoy profitability under the new price frame set by the Ministry of Industry and Trade, VNDirect Securities said in a recent report.
These projects are often referred to as "transitional" renewable energy projects. Under the new price bracket, issued under Decision 21 dated January 7, 2023, the maximum purchase price for transitional solar power projects is VND1,185-1,508 (5.0-6.4 U.S. cents) per kWh, depending on the type and excluding VAT. Meanwhile, the ceiling price for transitional wind power projects is VND1,587-1,816 per kWh (6.8-7.7 U.S. cents).
The VNDirect analysts argued that the new price frame is the first sign of rescue for transitional renewables developers as their projects have yet to be utilized since the FiT mechanism expired in November 2021.
"We have conducted an assessment of the internal rate of return (IRR), using standard assumptions for renewable energy plants at the new prices. Its results show that the IRR of transitional projects will decrease significantly.
"For example, the IRR of solar energy farms is only 5.1%, while the figure for onshore and nearshore wind power farms drops to 8% and 7.9% respectively from 12% under FiT prices," the top broker wrote.

A complex that produces clean salt and clean energy, invested by BIM Group, in Ninh Thuan province, south-central Vietnam.
In order to optimize profitability, investors of transitional renewable energy projects need to cut loan interest, operating and investment costs. Therefore, they are not too keen on such low purchase prices.
As of the end of March 23, only four applications have been sent to state utility Vietnam Electricity (EVN) for negotiation of electricity prices in power purchase agreements.
Currently, there are still many disagreements on terms related to electricity purchase currency, contract duration and prices between the buyer - EVN, and the seller - the developer. Therefore, although the new price range was released in January, the dates for transitional projects to come into operation have been unknown.
VNDirect believed that the transitional renewable energy price bracket will be the basis for the Ministry of Industry and Trade to make further decisions, especially the issuance of the official pricing mechanism for newly developed renewable energy projects.
Notably, Vietnam is actively piloting and perfecting the direct power purchase agreement policy, which is likely to be the direction of the upcoming development phase of the renewables market.
With Vietnam's strong commitment at the 26th UN Climate Change Conference of the Parties in the U.K. in late 2021 as well as ambitious adjustments in the latest draft Power Development Plan VIII (PDP VIII) to increase renewable energy capacity, VNDirect analysts said they expect an attractive pricing mechanism that will facilitate healthier competition, in order to encourage capable investors to participate in this market.
According to the report, in the first two months of 2023, renewable energy electricity output decreased slightly to 6.45 billion kWh mainly because solar power plants cut capacity. Meanwhile, wind power recorded a 9% year-on-year increase in output thanks to higher wind speeds than last year.
VNDirect said that thanks to the FiT policy, the renewable energy proportion in total power capacity increased from 9% in 2019 to 27% in 2022. However, the next development phase of this energy is facing many challenges. With the FiT expiration, investors have not been able to develop new projects, mainly due to delays in PDP VIII issuance as well as no clear signal of a new pricing policy for renewable energy.
Speaking at the Vietnam Business Forum (VBF) on March 19, Gabor Fluit, newly-elected chairman of EuroCham Vietnam, said: "Transitional projects that are already built may have no choice but to accept these tariffs or face bankruptcy (the only alternative for them is zero revenue)."
Transitional wind projects not already built will not be able to raise finances at these tariff rates, as they are now facing world market turbine pricing more than 30% higher than at the time of previous the FiT expiry, as well as higher loan interest and insurance rates, he said.
Fluit added that price appraisal for future projects should take into account existing macroeconomic conditions (higher capex, higher interestrates, supply chain bottlenecks) which many of the transitional projects that are already built did not fully face.
"MoIT should consult with independent experts to verify the assumptions and methodologies taken, before finalizing the price bracket," he said.
The 20-year preferential FiTs are 9.35 U.S. cents per kWh (Decision 11/2017) and 7.09-8.38 U.S. cents per kWh (Decision 13/2020) for solar power projects that became operational by December 31, 2020; and 8.35-9.8 U.S. cents per kWh for wind power projects that became operational by November 1, 2021.
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