Biomass Power Plant Development – SMALL SCALE BIOMASS POWER PLANTS IN VIETNAM – HOW TO STRUCTURE IT RIGHT?

1. Lawyer in Vietnam Oliver Massmann Biomass Power Plant Development
SMALL SCALE BIOMASS POWER PLANTS IN VIETNAM
– HOW TO STRUCTURE IT RIGHT?
Author: Oliver Massmann
Vietnam’s economic dynamism over the past years has given rise to a swift increase inenergy
demand. Electricity demand in the country has been growing in the double digits
annually.Vietnam has experienced rapid economic growth since it made a shift from a highly
centralised planned economy to a socialist-oriented market economy in the mid-80s. This also
resulted in unprecedented growth in electricity demand, which has not been observed in any
other regions or developing countries.Electricity demand in Vietnam is forecasted to increase by
up to 14.2 pct. annually for the 2011-2015 period and 11.4 pct. for the 2016-2020 period, and the
electricity demand is expected to increase 7 times to 800 billion Kwh in 2030.
In this context, the Vietnamese government identified the necessity that the available resources
of renewable energies have to be exploited and expanded to meet such a big electricity demand.
While hydroelectric energy, whose resource is abundant in Vietnam, shows certain potential
risks, biomass energy could be a choice for development in Vietnam. This derives from
Vietnam’s advantage of widespread agriculture. The capacity for sustainable power production
from biomass amounts to just 150 million tons per annum, 700 – 780 MW for electricity
generation alone can be reached.
Government’s policy with regards to renewable energies in general and biomass energy in
particular
Vietnamese Government recognizes the importance of renewable energy in power development
and reflects its objectives in the Master plan VII on energy development in Vietnam.The
renewable energy is increasingly accounting for power sources (4.5% in 2020 and 6.0% in 2030
of the total power supply.The Master plan VII sets the renewable energy target rate at 5.6 pct. of
total primary energy consumption by 2020 and 9.4 pct. by 2030. The Government’s target is to
increasethe biomass power to 500 MW (0.6 pct. of electricity production) by 2020 and 2,000
MW (1.1 pct.) by 2030.
Further, on 24 March 2014, the Prime Minister issued Decision No. 24/2014/QD-TTg to provide
mechanism to support biomass power plants. In particular, this Decision offers the following
incentives to off-grid biomass power plants:
 Investment capital:
o The investor can mobilize capital from organizations and individuals in and out of
the country for investing in implementation of biomass power projects

2. o Biomass power projects are entitled to incentives in terms of investment credits in
accordance with prevailing legal provisions on investment credit and export credit
of the State.
 Import tax: Biomass power projects are exempt from import tax for goods imported to
create fixed assets for the projects; imported goods are materials, supplies and semi-
products which have not been locally produced and imported for serving production of
projects in accordance with prevailing legal provisions on export tax and import tax.
 Corporate income tax: The exemption, reduction of corporate income tax for biomass
power projects will be conducted inthe same way as for projects which are subject to
investment incentives under laws on taxation.
 Land use: Biomass power projects and power line and substation works for connecting to
the national power grid are entitled to exemption or reduction of land use or land rent
fees.
For on-grid biomass power projects, Electricity of Vietnam (“EVN”) is to buy all of the plant’s
biomass energy output at the current price of 1,220 VND/kWh (excluding VAT, about 5.8
UScent). This price will be adjusted according to the fluctuation of the VND/USD exchange rate.
Market access for foreign investor
Currently, there is no foreign ownership restriction in energy sector in Vietnam. The foreign
investor may choose among permitted investment forms: 100% foreign invested company, joint
venture or public private partnership (“PPP”) in the form of BOT contract.
Starting up a biomass power plant
In order to construct a biomass power plant, foreign investors first need to apply for an
investment certificate. The application process is quite complicated and involves many state
agencies, with certain unpredictable issues occurring. However, as the new Investment Law and
Enterprise Law, which mainly regulate investment environment in Vietnam, takes effect from 01
July 2015, it is expected that it will be more time saving and less complicated for foreign
investors in the licensing process.
Either before or after the investor is on board (but in each case before the construction), it is
necessary to establish the project enterprise and to secure investment certificates issued by
competent authorities. Then, the project enterprise has to conclude negotiations with regard to a
wide range of important project contracts including the land lease contract and the power
purchase agreement (PPA).
Under the PPA, EVN (in case of network-dependent network) – or in rare cases also other buyers
– undertake to purchase energy from a project enterprise for a definite period and at a specified
rate. The PPA is probably the most important agreement to be negotiated because it determines
the future income from the project. It is crucial that, according to the PPA, the project enterprise
cannot be burdened with a penalty if the power supply is affected by small amounts of biomass.
In view of the fact that at the moment there is only one buyer (EVN) for network-dependent

3. power projects, the negotiations may be sometimes unilateral. Moreover, the electricity
producers have to consider that the consumers (according to the Electricity Law) have a
statutorily regulated right to renegotiate the purchase price in the medium term. They have to
take it into account in their project planning.
The land or real estate lease contract in Vietnam should be kept rather simple, though the aspects
of land sale approval and compensatory payments may be fraught with difficulties. Usually, the
duration of such contracts should correspond at least to the loan repayment plan and, in addition,
a considerable period for profit generation after the repayment of the loan should be agreed (as a
rule 25-30 years). Furthermore, it is important to make sure that the land use rights of the project
enterprise can be provided for the lender as security and are transferable.
Small scale biomass power project in Vietnam – How to structure it right?
Considering the monopoly role of EVN as well as tough negotiation of the PPA, investors could
still get out of this trouble. According to Article 1.2 of Circular No. 56/2014/TT-BCT
promulgating methods to determine electricity generation price and examination steps of the
PPA, the important requirement to negotiate with EVN is whether it is an on-grid or off-grid
project. If it is an on-grid project with capacity of more than 30 MW or under 30 MW but
voluntarily participating in the power market, the investor must negotiate with EVN. This
indicates that if the project is off-grid, there will be no requirement to negotiate with EVN.
Moreover, in order to operate small scale biomass power project, the investor needs to obtain a
power operation permit issued by the local People’s Committee or the local Department of
Industry and Trade as authorized by the local People’s Committee.To get such permit, the
operator has to negotiate (or sign in principle) a PPA with a buyer. In case the project is off-grid
and renewable energy project (biomass), the operator can negotiate with a local distributor/buyer
assigned by the local People’s Committee.
Please do not hesitate to contact Oliver Massmann under omassmann@duanemorris.com if you
have any questions or want to know more details on the above. Oliver Massmann is the General
Director of Duane Morris Vietnam LLC.
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THANK YOU VERY MUCH!