Draft Decree on the mechanism for trading gas electricity in Vietnam

This Decree applies to organizations and individuals investing in power plant projects using domestic natural gas and imported liquefied natural gas (LNG). Concrete as follows:

- The electricity generation unit owns the gas power plant connected to the national power system.

- The Electricity units include The Electricity of Vietnam, Vietnam Oil and Gas Group, The electricity system dispatcher and electricity market transaction operators.

Mechanism for gas power plants using domestic natural gas:

- For the key oil and gas projects that contribute significantly to economic development, ensure national energy security, and national defense security and protect Vietnam's sovereignty, the Government agrees to the principle of transferring gas price to the electricity price of power plants.

- The MOIT guides the mechanism for consuming gas output upstream of the Blue Whale gas field and Block B gas.

Mechanism for gas power plant projects using imported LNG:

- Organizations and individuals investing in power plant projects using LNG must proactively implement projects included in the Power Development Planning, according to regulations to ensure effectiveness. Agree that enterprises must proactively negotiate, sign and take responsibility for contracts and commercial agreements.

- The Government agrees in principle on the mechanism to transfer gas prices to electricity prices of power plants.

- In the period up to 2030, the Government stipulates that the rate of electricity through long-term power purchase contracts is at least 70% of the debt repayment period of the power plant project, but not exceeding 7 years to ensure feasibility in attracting investment, avoiding strong impacts on retail prices, as well as ensuring equal competition with other types of power sources in the electricity market.

Some main contents applied in electricity purchase contracts:

- The power generation units sign a contract with The Electricity of Vietnam (EVN) according to the form issued by MOIT to participate in the competitive wholesale electricity market and sell the power plant's electricity to the spot electricity market.

Electricity purchase costs of power plants using domestically exploited natural gas and imported LNG are reasonable, valid, calculated, and adjusted in the retail electricity price.

- The contract language used is Vietnamese. The buyer and seller can agree to supplement the contract with the language used in English, and the parties can agree that English will prevail.

- Governing law and dispute resolution comply with Vietnamese law. The parties can agree to apply appropriate foreign law to issues that are not fully regulated by Vietnamese law.

The electricity price in the electricity purchase contract is calculated in USD, and payment is made in Vietnam Dong.

Expert perspective:

As well now: Currently EVN is negotiating a power purchase agreement (PPA) with the Nhon Trach 3 - 4 gas power project and has started negotiations with the Hiep Phuoc gas power plant. However, EVN encountered difficulties due to not being able to agree on the product consumption rate - that is, the commitment to mobilize electricity output from these plants.

Normally, for LNG power projects, the number of hours using installed capacity is about 6,000 hours/year - which means the committed coefficient of mobilizing installed capacity from these plants is about 68.5% and with a reasonable electricity price, it will bring efficiency to investors. However, LNG power investors always recommend this ratio at 72-90% for the entire contract term. (This requirement comes from lenders, to ensure stable cash flow for investors to repay debt).

If EVN accepts this condition, there will be a risk of increasing electricity prices. With high electricity generation costs, large price fluctuations (depending on imported LNG prices) and the requirement for long-term output commitments as above, EVN's input electricity purchase costs will be greatly affected strongly affects the retail electricity output price when LNG power plants come into operation (by 2030, accounting for 14.8% of the entire system).

For example, with the average LNG price currently at 12 USD/million BTU, calculated at a power plant capacity factor of 70%, the cost per kWh of electricity from this type is up to 2,780 VND/kWh. And with the average retail price in 2023 being 2006.79 VND/kWh, EVN's loss due to the difference in purchase price compared to the retail price is 773.23 VND/kWh (not including management costs and transmission distribution...losses) In addition, if EVN accepts this condition in the PPA, it will create a new and unfair precedent for other types of power plants operating in the Vietnamese power system. Currently, operating power plants do not have long-term commitments, but are implemented annually according to the actual balance of supply and demand. Even as planned, this ratio will have to gradually decrease to increase the amount of competitive electricity through the spot market.

Because of the deadlock in PPA negotiations with LNG power plant investors, EVN had to ask for help from the Prime Minister. On April 12, 2024, in document No. 1986/EVN-TTD on "some problems in implementing LNG power projects in Power Development Planning VIII", EVN proposed the Prime Minister consider and decide the ratio of electricity through long-term contracts is at an appropriate level during the project's debt repayment period to ensure feasibility in attracting investment in LNG power projects, avoid impact on retail prices, as well as ensure equal competition with other types of sources in the electricity market. EVN proposed that the LNG power source capacity factor could be about 65% (equivalent to 5,690 hours/year of installed capacity usage hours).

According to experts from Vietnam Energy Magazine: When MOIT has not yet issued the electricity generation price framework for LNG power plants, EVN's refusal to commit to long-term total annual electricity output (Qc) is reasonable. Reasonable, because there will be a big risk in the future when EVN has to pay corresponding to the committed Qc output with an electricity price higher than the selling price. If the mobilized LNG power output is too low to bring in cheaper sources, EVN still has to pay for this source according to the committed output.

Looking at Thailand shows that the electricity system of this country relies mainly on gas power (accounting for 53% of the output of 215 billion gwh in 2022), playing a key role in the power system. However, Thailand's gas power plants that were initially planned to run on the base load chart have had to switch to back-running, or peaking with a mobilization rate of less than 50% of installed capacity usage hours, due to load demand is lower than forecast, but investors of gas power plants still ensure profits because Thailand implements two-component electricity prices. Specifically, payment for electricity availability (electricity availability to cover basic investment costs, fixed maintenance costs) and payment for electricity output.

China also has a similar two-component electricity price policy, because the number of LNG electricity operating hours is less than 2,500 hours/year.

More specifically, we can refer to the Shanghai Lingang combined cycle gas power plant in Pudong - the plant that sells the most electricity in Shanghai today: With 4 combined cycle units with a total installed capacity of 1,400 MW, in 2023 the plant generated 3.26 billion kWh of electricity (equivalent to 2,329 hours of generation). If the March 2024 price was applied, the income from selling electricity at the price is 0.6283 yuan/kWh, which was 2.048 billion yuan/year (equivalent to 284 million USD). Revenue from capacity at the price of 36.5 yuan/month/kW was 613.2 million yuan (equivalent to 85 million USD). Thus, the plant’s revenue for the year was more than 2.661 billion yuan.

Currently, our country has not piloted the implementation of two-component electricity prices, so experts from Vietnam Energy Magazine believe that: EVN's request to the Prime Minister to decide the rate of electricity through long-term contracts with LNG and electricity at an appropriate level to remove bottlenecks in PPA negotiations between EVN and project investors to ensure project implementation.

LNG gas power plant according to Power Development Planning VIII was on schedule, ensuring electricity supply security for the period 2025-2030. But in the long term, it is necessary to accept the impact of LNG electricity prices increasing retail electricity prices. Furthermore, for the electricity market to truly operate, it is necessary to soon implement two-component electricity prices, first of all for electricity supply sources, ensuring equal competition of source types in the Vietnamese electricity market. The next stage is to consider applying two-component electricity prices (capacity and electricity) to large electricity consumers.