Power sector – The transitional framework requires optimal operational ability from renewable developers

• On Jan 07, the MOIT issued the official price framework for transitional RE projects, the new prices are 21%-29% lower than the previous FIT.
• We see the new price framework somewhat dashed investors’ expectations with a low price. However, this is a necessary steppingstone to trigger the price mechanism of newly developed projects.
• We see M&E firm and company with transitional RE project to be benefit soonest including PC1, BCG, GEG, Trung Nam, T&T…

The new price framework has dashed investors’ expectations

Following the calculation from EVN, the Ministry of Industry and Trade issued the price bracket for transitional RE power projects on Jan 07,2023, effective right on the decision date. Accordingly, the new price framework provides a 21-29% lower than the previous FIT price. We see the new price to be the first rescue signal for transitional RE developers, as their projects have been stalled for a long time since the FIT expiration. However, with this price bracket, we believe not every project will enjoy optimal profitability.

The transitional price requires operating ability at optimal level

We conduct an internal rate of return (IRR) test of a RE project, using assumptions for standard RE power plant and pull out a result that: The new price will significantly reduce the IRR of these projects. Particularly, solar farm IRR locates at 5.1%, while onshore and nearshore IRR decrease to 8.0% and 7.9% from around 12.0% in previous FIT. In order to enhance the profitability under the new price framework, RE developers need to put hard effort to cut investment cost, operating costs and loan interest. Therefore, we see enterprises with experiences in developing and operation projects, as well as the ability to access low-cost capital will have advantages during this period.

There are still factors that help reducing cost for RE power in the future

In the next five years, Vietnam is expected to moblilize about US$15.5bn from the financial package provided by the G7 countries and the European Union. We see this as an abundant capital source with low interest rates, and this is the huge opportunity for efficient transitional projects to restructure its debt in the future. Besides, according to the Power Development Plant 8 draft (PDP8 draft), investment cost of RE power will reduce sharply in 2022-30 period, which can partly offset the damage for being mobilized at low price level.

PC1, GEG, BCG to be the soonest firms that benefiting from the new price

We see PC1 – one of the top players in wind power EPC contracting and substations & transmission line M&E, will be benefited soonest thanks to new backlog growth. In addition, we name some prominent RE developers including BCG, GEG that owned transitional RE projects will expand its capacity as well as releasing cash flow pressure in near-term. Besides, some of the unlisted giants such as Trung Nam Group and T&T Group also benefited by owning finished transitional projects, ready to sell into the grids. Although we see the transitional RE price framework somewhat lower investors mood, we believe this to be a necessary premise for the MOIT to pull out the official price mechanism for newly developed RE projects more considerably and objectively. With Vietnam’s strong commitment in COP26, we expect a formal RE price that is still attractive yet competitive and long-term, to encourage qualified investors countinue to participate in this field in the upcoming years.

Please follow this link for the full report