Despite hopes that Vietnam’s rapidly growing economy and the corresponding need for more power would drive renewables development, an “unbankable” power purchase agreement (PPA) has deterred international lenders, both private and multilateral, from backing projects in the country.
To get over that obstacle, the Asian Development Bank’s private sector operations department instructed Mizuho Bank to undertake an independent credit assessment for the Da Mi Floating Solar project. The assessment, a favourable credit rating, and a state-owned sponsor all contributed to allow a financing for the country's first ever floating solar project to close on 2 October 2019.
Lenders and developers have highlighted a number of problematic issues with the PPA approved by the Vietnamese government and still valid as of now (October 2019). These include the absence of a ‘take-or-pay’ mechanism, and the government's failure to address issues such as the absence of arbitration and termination clauses, or guaranteed access to state utility EVN’s grid.
In its favour, Vietnam had offered an attractive solar feed-in-tariff (FiT) of $9.35 per kWh for any solar project that reached operation by June 2019. Many developers, mostly local with some international partners, scrambled from mid-2018 to meet the deadline – with mixed results.
The $9.35 per kWh solar FiT has now expired and the government is in the process of finalising a new FiT regime.
One of the projects that did meet the deadline was the 47.5MW Da Mi Floating Solar project. Its developer is Da Nhim–Ham Thuan–Da Mi Hydro Power (DHD), a third-tier subsidiary of Vietnamese monopoly state utility EVN.
The solar plant floats on the man-made reservoir of DHD’s existing 175MW Da Mi hydro power plant in Ham Thuan Bac district, in the south eastern province of Binh Thuan.
DHD appointed the Asian Development Bank (ADB) as financial adviser for the floating solar development in October 2017.
DHD’s status as a state-owned enterprise and subsidiary of the monopoly electricity utility, which has an on-going relationship with the ADB, helped to smooth the way for the transaction to proceed.
Following due diligence and technical viability studies, offtaker EVN signed a 20-year PPA in early 2018.
The tariff for the PPA is the $9.35 per kWh price offered under the previous solar FiT regime. Da Mi Floating Solar connected to the power grid in May (2019) and was operational ahead of the June FiT deadline.
ADB indicated in October 2018 that it was planning to finance the Da Mi floating solar power facility, which had a total cost of $64 million.
ADB's job of structuring a financing package was aided by EVN - parent company to the sponsor and the project's offtaker - being rated BB, two notches below investment grade, by Fitch in June 2018. The project successfully achieved the same as the Vietnam sovereign rating, which is currently BB from Fitch, BB from Standard & Poor’s and Ba3 from Moody’s.
The borrower still had to overcome the challenges posed by the problematic PPA however. Japanese bank Mizuho was appointed to undertake an independent credit assessment of EVN in an attempt to bring comfort to potential lenders.
Though the credit assessment was not made public, it is understood to have been instrumental in bringing lenders into the deal. It was particularly necessary as the Vietnamese government had declined to offer a government guarantee on the PPA - historically an essential requirement for international lenders.
The conclusion to negotiations with lenders resulted in Da Mi Floating Solar being financed at a debt-to-equity ratio of 70:30, with the sponsor raising $37 million of debt.
ADB, the Canadian Climate Fund for the Private Sector and the Japan International Cooperation Agency (JICA)-supported Leading Asia’s Private Infrastructure Fund (LEAP) were the lenders.
“With a conservative risk profile assessment based on lower solar output, the financial ratio was pretty tight. Hence the decision to restrict to concessional financing,” said the ADB’s Gabisch.
Debt for the project breaks down as follows:
- $17.6 million loan from ADB's ordinary capital resources
- $15 million blended concessional co-financing from Canadian Climate Fund for the Private Sector in Asia and its follow-on fund, Canadian Climate Fund for the Private Sector in Asia II
- $4.4 million parallel loan from LEAP
ADB’s loan is understood to have a tenor of 15 years and is priced in line with Vietnam’s 10-year sovereign risk spread, a source said. The yield on 10-year Vietnamese government bonds was at 3.96% as of 9 October (2019).
Advisers on the transaction include:
- Poyry – lenders’ technical
- Watson Farley & Williams – lenders’ legal
- Pwc – tax and modelling
Sunny future for renewables
Vietnam’s economy grew by 7.1% in 2018 and the ADB forecasts GDP growth will be 6.8% in 2019 and 6.7% in 2020.
“The growth momentum is expected to continue, thanks to ongoing reforms to improve the business environment and encourage private investment,” said the ADB’s Vietnam country director Eric Sidgwick.
The strong economic growth will more than double Vietnam’s demand for power between 2015 and 2035, according to the government’s last energy outlook report published in 2017.
“In Vietnam, the scarcity of land means the opportunities are brightest for wind power, particularly near-shore, as well as rooftop and floating solar,” said the ADB’s Gabisch.
Several near and offshore wind farms are in the early stages of development, IJGlobal data shows.
Amongst them are:
- Enterprize Energy’s Ke Ga offshore wind farm (3GW)
- Mainstream Renewable’s Phu Cuong near-offshore wind farm (800MW)
- Gulf Energy’s Binh Dai offshore wind farm (310MW)
There is a large solar pipeline too.
As of summer 2019, more than 330 solar projects, with a total capacity of 26GW, are in various stages of the approval process, according to VILAF, a Hanoi-based law firm.
Of that, 121 projects with a combined capacity of 6.1GW have been approved and included in national and provincial power development plans, per Ministry of Industry and Trade data.
The financing of Da Mi Floating Solar shows some lenders can get comfortable with an EVN PPA, albeit when EVN is effectively the sponsor and borrower. More comfort will be needed in order to finance the country's growing pipeline of projects.