Removing the mechanism for LNG electricity from the lesson of Nhon Trach 3&4 Power Plant

Challenges in the implementation of Nhon Trach 3&4 Power Plant project

Nhon Trach 3 Power Plant is preparing for first fire in the fourth quarter of 2024 and the entire project is expected to enter commercial operation in 2025.

Nhon Trach 3 & 4 Power Plant located in Nhon Trach District, Dong Nai Province is a national key project, invested by PV Power, with a total investment of 1.4 billion USD, capacity of 1,624 MW. This is the first LNG fueled power plant project in Vietnam, with modern technology (gas turbine) provided by GE (USA) with the highest capacity and efficiency today. It is expected that when officially generating commercial electricity, the project will add more than 9 billion kWh of commercial electricity/year to the power system, ensuring national energy security and socio -economic development of the country.

Implemented since 2017, this project not only marks the first time Vietnam uses imported LNG in electricity production but also reflects challenges in mechanisms, finance and legal procedures.

Currently, the plant is preparing for the first firing in the fourth quarter of 2024 and the entire Nhon Trach 3&4 power plant project is expected to go into commercial operation in 2025. This is the first project in Vietnam to build two plants at the same time. However, despite the technical and construction success, Nhon Trach 3&4 has encountered many obstacles related to legal procedures and mechanisms.

One of the biggest challenges is the lengthy time it takes to complete legal procedures. From the preparation of the feasibility study report, negotiating the power purchase agreement (PPA), gas purchase agreement (GSA), EPC bidding to arranging capital and construction, the process takes up to 8 years. Of which, the legal procedures alone consume up to 2/3 of the total project implementation time. This shows that there is a need for a policy mechanism and a reasonable legal corridor to shorten the time and increase the efficiency of other LNG power projects.

Instead of using the project finance model, for Nhon Trach 3 & 4, PV Power applies a different business model, mainly relying on the use of loans from domestic and international financial institutions without the need for government guarantees. This model is different from previous projects, in which enterprises such as Petrovietnam or EVN often rely on government guarantees to attract loans.

PV Power has successfully arranged capital for NT3&4 with a ratio of 25% equity and 75% loan capital. Specifically, PV Power has signed a loan worth 200 million USD with SMBC/SACE, a loan worth 4,000 billion VND with Vietcombank and recently a credit contract worth 521.5 million USD signed with a consortium of two banks Citi & ING insured by KSURE & SERV.

Mr. Nguyen Duy Giang, Deputy General Director of PV Power, shared about the challenges in the implementation of Nhon Trach 3&4 Power Plant project.

Mr. Nguyen Duy Giang, Deputy General Director of PV Power said, “The loan contracts for Nhon Trach 3 & 4 Project are the first contracts in which Vietnamese enterprises have borrowed export credit without government guarantees. Previously, all power projects had government guarantees. PV Power has used its existing resources to push the project and ensure its ability to repay the debt.”

According to Mr. Giang, the power purchase agreement (PPA) is not a standard contract that international lenders recognize. According to him, the PPA must satisfy the transfer price of electricity and the commitment to annual gas consumption output. However, everything is still at the level of research and revision, without a policy mechanism.

In addition, the negotiation of PPA and GSA encountered many difficulties due to the fluctuation of LNG prices in the international market. At the same time, although the financial regulations of Nhon Trach 3 & 4 project were approved by the Government, they were not guaranteed for foreign loans, making it difficult for PV Power to arrange loans from credit institutions. In addition, the issue of commitment to hand over land as well as ensuring the ecological environment is a particularly important factor in borrowing foreign capital. For LNG projects, Vietnam's environmental standards only reach about 7% of international standards. Therefore, to meet the requirements of international donors, PV Power had to carry out very strict environmental assessment procedures. To complete the environmental assessment for an LNG project, it usually takes about two years.

“We had to hire leading consulting firms from the US to ensure that all environmental impact assessment processes were conducted comprehensively and accurately. From measuring biodiversity, monitoring the ecosystems around the industrial park from source to source… this process requires a lot of effort and time. Credit approval depends entirely on the environmental impact of the LNG power project,” Mr. Giang added.

Mr. Le Nhu Linh, General Director of PV Power and Mr. Le Khac Hung, Director of EVNEPTC signed the PPA Contract for Nhon Trach 3&4 Power Plant.

Recently, PV Power has officially signed the PPA contract for Nhon Trach 3 & 4 Power Plant, which opens a "new door" for LNG power projects as it can promote the early signing of GSA Contracts associated with annual LNG purchase volume, confirmation period, stable gas delivery plan with the most reasonable gas price. In addition, the PPA Contract of the project is also a prerequisite for international credit institutions to consider for PV Power in particular, and electricity businesses in the coming time can borrow capital to implement similar projects.

From practical lessons to amending the Electricity Law

From the difficulties that Nhon Trach 3 & 4 Power Plants encountered, PV Power has made practical recommendations to remove difficulties and barriers, contributing to the revised Electricity Law to make it suitable and create more favorable conditions for future gas-fired power projects.

Actual investment statistics of power plants show that the investment time for a power plant from the time of preparing the feasibility study (FS) report until completion lasts from 6 to 8 years. Now when the Government does not guarantee loans, the total time can be up to 10 years. Therefore, planning and scheduling need to be about 10 years in advance to ensure feasibility and implementation on schedule.

Based on experience from the Nhon Trach 3 & 4 Power Plant project, businesses believe that the 6-month time limit stipulated in the draft revised Electricity Law for preparing and approving the feasibility study report is unrealistic, and should be extended to 14 months, including the time needed for the investor to approve and submit to specialized agencies for appraisal.

One of the major difficulties that businesses in the electricity sector face is capital arrangement due to the lack of government guarantees. Therefore, credit mechanisms or government guarantees are needed to facilitate international financial institutions to participate and support capital for power projects, minimizing risks for investors.

Finally, having long-term Qc in LNG purchase contracts is very important. If there is no Qc, it can lead to increased power generation costs and pose great risks to future LNG projects. The output commitment will help the power generation unit have a basis to arrange and purchase LNG long-term, ensuring stable supply and reasonable production costs.

From the challenges and difficulties of Nhon Trach 3 & 4 Power Plants, necessary directions will be given to remove barriers in the LNG power industry in Vietnam. And from these practices, there will be directions to pave the way for the next projects; actively contribute to the revised Electricity Law, create favorable conditions for future power projects, ensure national energy security and sustainable development for the electricity industry as well as the overall picture of national energy.

Chang'e

Source: https://www.pvn.vn/chuyen-muc/tap-doan/tin/5c18b1b4-ee65-4e58-9851-b94cf240df85