Direct Power Purchase Agreement (DPPA) - A New Electricity Sale Model for Renewable Energy Projects

Published on 5th December 2024

DPPA, or Direct Power Purchase Agreement, is a mechanism for selling electricity directly from power generation units to large electricity consumers through the national power transmission system. Previously, in National Power Development Plan 8, the DPPA direct power purchase agreement mechanism was proposed for pilot implementation. However, National Power Development Plan 8 left open the question of how the DPPA mechanism would be implemented.

Decree 80/2024/ND-CP regulating the mechanism for direct power purchase between renewable energy harnessing units and large electricity consumers, has officially taken effect since July 3, 2024 („Decree 80/2024/ND-CP”) has addressed the above concerns with the following notable points:

Forms of direct power purchase

Decree 80/2024/ND-CP introduces a direct power purchase mechanism under which renewable energy generators are for the first time allowed to sell electricity directly to large electricity consumers, creating proactiveness for the parties involved in buying and selling electricity. Before, electricity consumers could only buy electricity from the Vietnam Electricity (EVN), now, they can negotiate and buy directly from the renewable energy generators.

It is important to note that to participate in the DPPA mechanism, customers must have an average monthly electricity consumption of 200,000 kWh/month, i.e. be large electricity consumers. Meanwhile, renewable energy generators eligible for the DPPA mechanism include solar, wind, small hydropower, biomass, geothermal, wave, tidal, ocean current, and rooftop solar power systems. These projects are not limited in capacity but must be granted an electricity generation license or be exempt from licensing in accordance with regulations.

Under the new regulations, direct power purchases can be made in two forms: through private transmission lines (not through EVN) and through the national power grid.

Direct power purchase through a private transmission line

Under this method, the parties will sign a power purchase agreement and deliver electricity through a private transmission line between the renewable energy generator and the large electricity consumer. Such a power purchase agreement is a civil agreement that is freely agreed upon by the two parties in accordance with the provisions of Law on Electricity. It includes provisions on the parties to the contract, the purpose of use, service standards and quality, electricity prices, payment methods, and other content. Depending on the demand, the duration of the contract can also be negotiated.

Direct power purchase through National Power Grid

According to Decree 80/2024/ND-CP, when buying and selling electricity through the national power grid, renewable energy generators and large electricity consumers (or authorized retail electricity providers in zones and clusters) will sign forward contracts. Under this model, renewable energy generators sell all produced electricity into the spot electricity market of the competitive wholesale electricity market. In addition, large electricity consumers or authorized retail electricity providers in zones and clusters sign power purchase agreements with the Vietnam Electricity (or an authorized/decentralized entity) to purchase all the electricity needed to meet their demand.

It is worth noting that for customers purchasing power through the national power grid, electricity prices to be imposed will follow the spot market, which can expose renewable energy generators to price fluctuations. In contrast, the price of electricity delivered through a private transmission line is negotiated between the parties involved which allows for more flexibility and customization in pricing arrangements.

Significant meaning of DPPA

The DPPA mechanism can help to unlock renewable energy projects that have been stalled due to a lack of financing or offtake agreements. This could lead to a significant increase in renewable energy generation in Vietnam. While Vietnam is facing an electricity shortage, the DPPA mechanism can help to address this shortage by bringing more renewable energy onto the grid and encourage the development of rooftop solar power, as it allows businesses and households to sell their excess solar generation to the grid.

The DPPA mechanism can also promote the development of natural gas and LNG power projects, as these projects can provide a reliable source of electricity to complement renewable energy sources.
Despite the potential that DPPA can bring to the economic, the regulatory framework for the DPPA mechanism is still under development, and there is some uncertainty about how the mechanism will work in practice. This could deter some investors from participating in the mechanism.