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Banking Solar in Vietnam – a look at the next wave of renewable power projects in Vietnam

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Moncrieff Adam
Adam Moncrieff


Ho Chi Minh City

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Thuy Huynh

Senior Associate

Ho Chi Minh City

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13 May 2020

In this article Won Myong Hong, Tristan Knowles and Claire Alebik at Asian Development Bank, and Adam Moncrieff, Thuy Huynh and Alex Ross describe the challenges faced on the ground-breaking GTN2 Solar Power transaction in Vietnam and the innovative financing structure employed to overcome them.

Reproduced from Project Finance International Global Energy Report April 2020.

The development of Vietnam’s power sector over the last 35 years has indisputably been a resounding success. In 1986, less than 10% of Vietnam’s population had access to electricity. As of 2018, that figure had risen to nearly 100%.

In 1990, only 10,000 GWh of electricity was generated across Vietnam, with a significant portion of such generation coming from high-cost sources such as oil. By 2017, high rates of economic growth and industrialisation1 had led to total electricity generation in Vietnam reaching almost 200,000 GWh. Fossil fuels have until now powered this rapid increase in electricity generation.

In recent years, as a result of the limited potential to develop large-scale hydropower projects further, depleting domestic coal reserves, an undeveloped national gas market and growing public concern regarding the environmental impact of coal-fired power plants, the Vietnamese government has begun to encourage the development of renewable energy projects.

The 2016 Revised Power Development Plan set ambitious capacity targets for small-scale hydro, solar, wind and biomass.

For solar, the government hoped to increase installed capacity from 5MW in 2016 to 850MW by 2020, and rising to 12GW by 2030. In addition to helping Vietnam to meet growing energy demand, expanding the use of solar will contribute to national targets to reduce greenhouse gas emissions by between 8% and 25% by 2030.

In a now-famous move, the Vietnamese government put its money where its mouth is, announcing in early 2017 a feed-in tariff equivalent to US$0.0935 per kWh for new solar projects that were commissioned by June 2019. This feed-in-tariff outstripped regional solar tariffs available at the time.


However, there was a catch. The Ministry of Industry & Trade (MOIT) was offering power purchase agreements (PPAs) to solar developers on vastly different terms from the tried, tested and banked forms agreed with the large-scale BOT thermal generators.

Importantly, foreign power developers and lenders were familiar with the terms previously offered to build own and transfer (BOT) thermal generators. The solar PPAs looked weak by comparison and were available on a take-it-or-leave-it basis. Some of the critical issues with the template renewables PPA compared with the BOT power thermal sector are:

Onshore dispute resolution

International investors and lenders do not regard dispute resolution by the Vietnamese authorities to be an impartial mechanism, particularly because EVN is a state-owned entity affiliated with the regulator.

No political FM protection

The developer is not compensated in the event that its generating ability, or EVN’s ability to offtake, is affected by political force majeure within Vietnam.

No direct agreements or step-in rights

EVN is not willing to enter into a direct agreement to give step-in rights to lenders. Further, EVN’s consent is required to assign the PPA to a third party, even in an enforcement scenario, and there is no precedent of such consent being forthcoming.

No government guarantee of EVN’s obligations

EVN’s payment obligations under the PPA are not guaranteed by the Vietnamese government. As a result, the developer takes full credit risk on EVN, which is still making a loss on electricity sales although it is in the process of gradually increasing end-user tariffs.

No take or pay obligation

EVN is relieved from taking electricity generated by projects, and is not required to pay compensation where it is unable to take power due to a breakdown or overload of the transmission or distribution grid. The offtaker would ordinarily bear this risk.

Limited termination payments

EVN is not required to repay debt and equity upon termination of the PPA, even where the PPA is terminated due to political FM or EVN default.

Solar developers from around the region knew that this PPA would raise red flags for potential lenders, especially because Vietnam did not have a proven track record in wind and solar.

Despite this, the expected risk-adjusted returns and the lack of sizeable pipeline opportunities elsewhere in the region resulted in local and regional developers entering the market in droves.

The number of solar farms connected to the grid in Vietnam increased from four in mid-April 2019 to 82 – with a total installed capacity of 4.5GW – by the end of the allimportant commissioning deadline of June 30 2019. This was more than five times Vietnam’s stated 850MW capacity target for solar by 2020 and put Vietnam firmly ahead of other ASEAN countries in the solar power race.

Although this approach was successful in greatly exceeding the 2020 target for solar, it exposed developers to significant refinancing risks in a market that does not have wellestablished project finance structures for solar power projects.

While local financial institutions are more comfortable with the standard PPA, they lack experience with project finance, have limited financing capacity, and are unable to provide US dollar funding.

Without access to long-term US dollar debt financing, international solar developers would be unable to recycle capital into new project development, especially with lower feed-intariffs expected in future rounds. Without a viable project finance market for solar power in Vietnam, the initial surge of interest may not be sustained.

One of the projects that successfully achieved commissioning prior to the deadline was the 50MW GTN2 solar farm located in Tay Ninh Province. This project was developed by the Gulf Tay Ninh 2 Joint Stock Company (GTN2), a joint venture between Gulf Energy Development Public Company Ltd (Gulf), one of the leading energy producers in Thailand, and the TTC Group, a leading Vietnamese conglomerate.

Due to the need to develop the project quickly to meet the June 2019 deadline, the sponsors originally funded project costs with shareholder loans and equity. However, once commissioning was achieved and the USD0.0935 per kWh tariff was locked-in with a 25-year PPA with EVN, GTN2 and the sponsors sought to obtain a more sustainable long-term US dollar-denominated financing solution.

After extensive collaboration between Gulf, the Asian Development Bank (ADB) and three leading commercial banks, on December 30 2019 GTN2 and ADB signed a limited recourse financing package totalling USD37.8m. The signing ceremony was held on January 22 2020 in Bangkok, Thailand.

The financing package consisted of an ADB loan of up to USD11.3m, a loan from Leading Asia’s Private Infrastructure Fund of up to USD7.6m, and a B loan funded by Bangkok Bank, Siam Commercial Bank and Standard Chartered Bank (Thai) of up to USD18.9m.

Earlier in 2019, ADB led a group of concessional lenders in providing financing to the Da Nhim-Ham Thuan-Da Mi Hydro Power Joint Stock Company (DHD), a wholly-owned subsidiary of EVN, for the development of the first large-scale floating solar project in Vietnam.

The GTN2 transaction marks the first time that a privately developed solar farm in Vietnam has successfully attracted limited recourse financing from international and regional commercial banks without the benefit of a local bank guarantee or comprehensive ECA support.

The project

Located in an area with high levels of solar irradiation roughly 48km north-west of Ho Chi Minh City, the 50MW GTN2 project is connected to Vietnam’s national grid by a 3km transmission line. Electricity generated by the project is currently serving the demands of Ho Chi Minh City.

Ho Chi Minh City is the economic centre of Vietnam and has become a strategic base for international companies such as Samsung, Intel and Foxconn. However, power outages are frustratingly common, particularly during the dry season when Vietnam’s hydroelectric generating capacity10 is significantly constrained.

The financing

The financing package consisted of three US dollar-denominated, fixed interest rate facilities, sharing a common security package. A number of the most interesting features of the financing, and the most challenging hurdles that had to be overcome to get this project banked, are described below.

PPA deficiencies

The deficiencies of the template PPA are well-known, but lenders identified three key risks that needed to be addressed in order to make this project bankable: (a) the risk of EVN curtailing project output, for which compensation is not available under the PPA. This risk materialised in Southern Vietnam in late 2019, where some projects experienced daily curtailment of up to 80%; (b) the potential for the tariff to be reduced by way of a change in law and the lack of effective recourse for the project under the PPA if this happened; and (c) the possibility of the PPA being terminated, for whatever reason, including political FM or EVN default, with insufficient protection for lenders to recover their loans in such circumstances.

After extensive technical and financial modelling to determine the extent to which the project could withstand large curtailment events or a significant tariff reduction, the lenders and Gulf agreed on a set of limited circumstances in which Gulf would provide certain support to GTN2, designed to ensure debt serviceability in the event that one of the key risks under the PPA should put the project in jeopardy.

Achieving bankable debt service ratios

With a lack of an operating track record for solar projects in Vietnam, lenders required higher levels of comfort that the project’s cashflows would have a sufficient buffer for debt service.

The ADB loan and the loan provided by the Leading Asia’s Private Infrastructure Fund (LEAP) provided tenors of 17 years, which were two years longer than the tenor commercial banks were able to provide.

By offering a longer tenor, ADB and LEAP helped to reduce the debt service for the duration of the commercial bank loan tenor, which helped the project to achieve bankable coverage ratios. In addition, LEAP provided its loan in the form of a concessional non-parallel loan. This helped to further improve the bankability and financial viability of the project by reducing the weighted average cost of debt.

Catalysing commercial bank financing

In addition to the limited recourse structure and long-tenor financing, ADB structured its lending as an A/B Loan to encourage commercial banks to co-finance the GTN2 project.

Under this structure, ADB acts as the lenderof- record under both its direct A loan and the B loan, the latter which is funded by the participating commercial banks – Bangkok Bank, Siam Commercial Bank and Standard Chartered Bank (Thai).

This structure ensures that the commercial banks are still exposed to the credit risk of GTN2, even though they will benefit from the same protections available to ADB under the facility agreement. This approach provides lenders with some additional reassurance regarding political and currency risks.

Accounts structure

Vietnam has a strict regulatory framework limiting the remittance of payments offshore, the onshore accrual of foreign currency and the ability of Vietnamese companies to open offshore accounts, which would require approvals from the State Bank of Vietnam (SBV).

In line with the accounts structures used in large-scale, BOT thermal power project financings in Vietnam, the lenders sought a split onshore/offshore accounts structure. Under this approach, debt service would both accrue and be reserved in a jurisdiction where the lenders could have immediate recourse to such amounts.

However, there was considerable uncertainty as to whether the SBV would approve such an accounts structure, especially because this is the first project financing of its kind in Vietnam and there was no precedent for such approval.

In order to ensure that the SBV’s decision would not derail the financing, GTN2 and the lenders agreed on three different accounts structures and alternatives to offshore debt service reserve and accrual in the form of SBLCs procured by and offshore accounts held in the name of an entity affiliated with GTN2. This approach allowed the lenders to be comfortable lending even if SBV approval for the offshore accounts could not be obtained.

Collateral package

Under Vietnamese law, offshore lenders cannot take security over immovable property. While some financings in other sectors in Vietnam have employed a split onshore/offshore lending structure to ensure that the offshore lenders are nevertheless able to benefit from security over immovable property, such structures are time-consuming to implement, significantly increase transaction costs, involve complicated intercreditor mechanics and, ultimately, their legal validity is uncertain.

In the context of financing a solar farm, this restriction took on particular significance as under Vietnamese law it is uncertain whether solar panels installed in a solar farm, arguably the most valuable assets, would be considered to be immoveable property and thus excluded from the offshore lenders’ security package.

These factors all strongly pointed against putting such a structure in place for this relatively small value transaction. In addition, there was no direct agreement with acknowledged lenders’ step-in rights with key project counter-parties, such as EVN and the land lessor.

The lenders were eventually able to take comfort from the fact that they had comprehensive share security and that, despite the uncertainty, the solar panels were included in the moveable asset security package. This ensured that lenders had as comprehensive a security package as could be available for offshore lenders under Vietnamese law.

What next?

With its reputation as a leader in renewable energy in the region firmly cemented, the Vietnamese government has set its sights on the future. In late 2019, The Ministry of Industry & Trade (MOIT) released a draft decision announcing that all solar farms with EVN PPAs and that were already under construction would qualify for a feed-in tariff equivalent to US%0.0709 per kWh provided they reached commissioning by December 31 2020.

In the near future, the MOIT is also looking to transition to reverse auctions as a competitive and transparent process by which sustainable solar tariffs may be set for new projects.

The Vietnamese government is also acutely aware of the impact that sustained grid capacity constraints, and the associated high risk of curtailment, will have on renewable energy developers’ investment decisions in the country and has set a blistering pace in upgrading EVN’s existing transmission network in order to play catch-up with the unexpected surge in capacity during 2019.

These upgrades, in conjunction with the reverse auction mechanism that will allow MOIT to have more control over the location and commissioning schedule of solar projects coming online in the next few years, are set to ensure that the share of renewable energy in Vietnam’s electricity mix continues to increase.

On February 11 2020, the Politburo of Vietnam issued Resolution 55, which includes a renewable energy target of 15%–20% by 2030 and 25%–30% by 2045.

To facilitate this, Resolution 55 calls for developing a number of renewable energy zones to unlock resources, prioritising the development of capacity in line with the ability to ensure power system safety and maintain reasonable electricity tariffs; encouraging the development of rooftop and floating solar power; and providing supportive policies for offshore wind power development.

Vietnam’s 8th Power Development Plan is expected to be released in 2020 and is also expected to call for a greater role for renewable energy. In mid-June 2017, when the draft of EVN’s solar PPA was released for consultation, an industry commentator was recorded as saying “no foreign bank will touch this PPA”.

Through innovative structuring and comprehensive due diligence, Gulf, ADB, LEAP, Bangkok Bank, Siam Commercial Bank and Standard Chartered Bank (Thai) have all proven that this PPA can be an attractive revenue contract and the basis for long-term, limited recourse project financing at commercial rates.

It is expected that over the next few years, numerous other commercial lenders will follow in their footsteps and step up to the task of financing the next wave of renewable power projects in Vietnam.

This article was published in Project Finance International’s Global Energy Report 2020.

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