Direct Power Purchase Agreement A Leap in Clean Energy Transition

On July 3, 2024, the Government of Vietnam issued Decree 80/2024/ND-CP, which regulates Direct Power Purchase Agreements (DPPA) between renewable energy generators and large electricity consumers. This decree is important for the future of the electricity sector, significantly influencing both domestic and international investors and electricity users. It aligns with global sustainable development goals and reflects the broader global trend toward sustainable energy practices.

The Direct Power Purchase Agreements (DPPA) aim to reduce reliance on Vietnam Electricity (EVN) and the national grid, boost market competitiveness, and address EVN's financial issues

Great benefits from the DPPA

Decree 80/2024/ND-CP assists the government in achieving multiple objectives simultaneously. It supports the shift toward clean energy usage among electricity consumers, fosters investment in sustainable renewable energy to protect the environment, and moves toward establishing a competitive retail electricity market in Vietnam. Additionally, the decree enhances the effectiveness of state management over direct electricity trading activities between renewable energy generators and large electricity consumers.

The development of the decree aligns with Vietnam's policies to encourage both domestic and foreign enterprises to invest in the country, particularly those employing modern and environmentally friendly technologies. It also adheres to the provisions of the Electricity Law and related directives, thereby promoting sustainable environmental development and enhancing the efficiency of Vietnam's electricity market.

The DPPA mechanism is designed to reduce dependence on Vietnam Electricity (EVN) and the national grid, fostering a more competitive environment for market participants to address some of EVN's financial challenges problems.

The Power Development Plan (PDP) 8 aims to achieve net zero emissions by 2050, as well as continue to expand power capacity (reaching over 150,000 MW by 2030 and reaching nearly 600,000 MW by 2050), with renewable energy expected to play a major role in the implementation of this roadmap.

Encouraging the expansion of renewable energy (especially in the North) can reduce or solve Vietnam's power shortage problem in the long term. In addition, this mechanism also allows for risk hedging through the provision of forward contracts.

Based on a survey conducted by the Ministry of Industry and Trade at the end of 2023, among the 67 renewable power projects surveyed, 24 projects (with a total capacity of 1,773 MW) expressed interest in participating in the DPPA mechanism as sellers, while an additional 17 projects (totaling 2,836 MW) were considering participation. On the buyer side, 20 out of 41 surveyed representatives (representing a total capacity of 996 MW) indicated a desire to engage in the mechanism.

In the long term, this mechanism could be one of the first important steps to encourage the development of the Vietnam Wholesale Electricity Market (VWEM) and later move toward the Vietnam Retail Electricity Market (VREM).

According to US Ambassador to Vietnam Marc Knapper at the announcement of the Direct Power Purchase Agreement, the Vietnam-US Comprehensive Strategic Partnership opens a new era in cooperation between the two countries and the Direct Power Purchase Agreement is a testament to the increasingly deep cooperation and shared commitment between the two countries for sustainable development.

When implemented, the new policy will allow businesses in Vietnam to purchase electricity directly from private companies that produce renewable energy, enabling them to use 100% renewable energy to meet their business needs. This will help Vietnam attract private investment in renewable energy, while meeting the needs of businesses looking for solutions to integrate renewable energy into their operations and achieve their corporate emission reduction goals.

The U.S. Mission to Vietnam, through the United States Agency for International Development (USAID), has provided technical assistance to the Ministry of Industry and Trade since 2017 in the design, development, and refinement of this agreement. “The direct power purchase mechanism will help businesses reduce greenhouse gas emissions while helping Vietnam accelerate its transition to clean energy and advance its goal of achieving net zero emissions by 2050,” said USAID Vietnam Mission Director Aler Grubbs. “The United States will continue to work with Vietnam to implement this important initiative and expand Vietnam’s access to clean and renewable energy.”

Challenges remain

According to SSI Research, the implementation of DPPA still faces some challenges in the short term, such as the need to maintain a more stable power source and develop power sources from battery energy storage systems (BESS) to support the stability of the national grid and reduce power loss in the context of unstable renewable power sources.

The potential to increase renewable energy capacity on the national grid in the future from the implementation of the DPPA mechanism must be accompanied by more reasonable dispatch policies to address the problem with the load capacity of the grid, as well as the development of more stable power sources on the grid such as gas/LNG power and the deployment of BESS technology into electricity production. However, according to EVN's assessment, the current retail electricity price is lower than the production cost of gas/LNG electricity (one of the more stable sources) and electricity from BESS technology, creating barriers to the development of these power sources.

In the medium and long term, SSI Research believes that further adjustments or the implementation of a two-component model for retail electricity prices will help alleviate and resolve this situation. However, because the DPPA is quite new, some unavoidable problems may arise during the implementation process. For example, for the form of direct purchase and sale through dedicated transmission lines, buyers and sellers may encounter difficulties in negotiating contracts due to the lack of a guiding mechanism.

According to the assessment, the direct electricity purchase and sale mechanism will help domestic and foreign enterprises in Vietnam achieve greater carbon emission reductions, toward the goal of net zero emissions, while accelerating the country's transition to clean and equitable energy. Vietnam is taking a huge step forward in its clean energy transition with the issuance of the decree regulating the direct power purchase agreement.

By Lan Anh, Vietnam Business Forum