Businesses stuck in negotiating LNG power prices

According to the National Power Development Plan for the period 2021-2030, with a vision to 2050 (Power Plan 8) announced by the Prime Minister on May 15, 2023, the total installed capacity of power sources by 2030 would be 150,489 GW (almost twice the present installed capacity of roughly 80 GW).

Of this, the total capacity of new gas-based power sources is 30,424 MW.

The Ministry of Industry and Trade has refined and presented an action plan for Power Plan VIII in accordance with Decision No. 500/QĐ-TTg to the government.

The Ministry of Industry and Trade has scheduled various meetings to debate and gather ideas on LNG power from ministries, sectors, local governments, specialists, the business community, and relevant organizations. All viewpoints agreed on the importance of establishing a structure for the development of LNG power to solve specific concerns.

To date, the Ministry of Industry and Trade has finished the draft rules on the power trading mechanism for gas, which it will transmit to the government before asking public feedback. The issues covered include power production units that possess gas-fired power plants connected to the national electricity system, as well as power units (Vietnam Electricity Group, Vietnam Oil and Gas Group, electricity system dispatch unit, and electricity market transaction management unit).

The system also requires imported gas-fired power plants to actively negotiate, sign, and be accountable for contracts and commercial agreements. The competent authority has reached an agreement in principle on how to convert gas pricing to electricity rates of power plant.

The proportion of electric power purchased through long-term electricity purchase agreements (PPAs) is determined appropriately during the LNG project's debt repayment period to ensure feasibility in attracting investment for the LNG gas electricity project, minimizing impact on retail electricity prices, and ensuring fair competition with other types of power sources in the market.

For the mechanism for domestic natural gas-using power plants, the competent authority agrees in principle on the mechanism for transitioning gas prices to power plant electricity prices, and guides relevant agencies and units on the mechanism for consuming upstream gas output from the Blue Whale gas field and Block B gas.

Electricity trading must still be undertaken in accordance with the model contract established by the Ministry of Industry and Trade in order to participate in the competitive wholesale electricity market and sell energy from power plants into the immediate electricity market.

The expenses of obtaining energy from natural gas-extracted domestic and imported LNG power plants are acceptable and lawful, and are included into retail electricity pricing.

Furthermore, the mechanism specifies the language used in contracts, payment mechanisms, dispute resolution (where applicable), and payment guarantees...

Meanwhile, in a recent document sent to the Prime Minister, Vietnam Electricity Group (EVN) stated that it had received documents to negotiate the PPA of the Nhon Trach 3 and Nhon Trach 4 projects, Hiep Phuoc, Bac Lieu.

Only the PPA for the Nhon Trach 3 and Nhon Trach 4 projects, with the Vietnam Oil and Gas Power Corporation as the investor, was negotiated in accordance with the PPA model outlined in the Ministry of Industry and Trade's Circular No. 57.

"The parties essentially agree on the details of the PPA, with the exception of the project's power pricing, which is currently being negotiated," EVN stated.

As a result, while negotiating the PPA, investors in LNG power projects usually suggest that EVN agree on a share of electric power through long-term electricity purchase contracts ranging from 72-90% throughout the contract period.

Accepting this requirement, according to EVN, increases the danger of rising electricity costs and is unfair to other types of power plants participating in the market.

According to EVN, the price of imported LNG to Vietnam's ports is now $12-14 per million BTU, resulting in an electricity generating cost of 2,400-2,800 VND/kWh, which is much higher than the electricity generation cost of other existing power sources in the system.

By 2030, LNG power sources are estimated to account for around 15% of the national power supply.

"With the high and fluctuating cost of electricity generation, combined with the requirement for a long-term output commitment, the cost of purchasing input electricity for EVN will be significantly affected, with a strong impact on the retail electricity price when these LNG power sources come into operation," EVN stated.

Based on the foregoing assessments, EVN suggests a 65% committed electric power ratio in the contract to secure the financial arrangement capability for LNG power projects, as well as the power supply capability for the period after 2028.

Furthermore, with some suggestions from investors beyond the authority of EVN, EVN also requests the Prime Minister to consider and decide on the ratio of electric power through long-term contracts and approve the price of imported LNG and related costs (storage, regasification, transportation...), considering the cost of purchasing electricity from LNG gas electricity projects as reasonable, legitimate costs that are calculated for adjustment in retail electricity price.

EVN also wishes to hear comments and make judgments on investor proposals for foreign exchange guarantee policies and project compensation mechanisms in light of the aforementioned law amendments.