Japanese power giant dips toe into Vietnam hydropower

The acquisition of a 33.4% stake in Viet Hydro by Tokyo Electric Power Company (TEPCO) marks a profitable turnaround in a distressed infrastructure asset. Will others follow?

Taking over a struggling hydro-electric project in the remote northern mountains of Vietnam and successfully selling it on to one of Asia's largest power companies within six years is every infrastructure investor's dream.

Earlier this month that dream became a reality for one investor when the Tokyo Electric Power Company bought into the Coc San Hydropower project.

Early work on the plant – a $44.5 million, 29.7 megawatt (MW) run-of-river plant located in the Lao Cai Province – stalled in 2011 after the project's local developer fell victim to the Vietnam banking crisis when it failed to secure long-term debt financing.

But then in 2012 in came Singapore-headquartered Infraco Asia Development, a subsidiary of the Private Infrastructure Development Group (PIDG), to assess the commercial viability of the project. After conducting a full review of the business, it began addressing some of the issues holding back the project.

Topping the concerns of prospective Vietnamese bank lenders was the high proportion of debt on the initial project developer's books allied with that year's adverse economic conditions.

Infraco Asia, after conducting an environmental and social impact assessment, became a majority shareholder of Singapore-based Viet Hydro, pumping in an initial $4 million in July 2013. Viet Hydro received a further $5 million in Viability Gap Funding (VGF) from another subsidiary of its parent group. 

Leveraging its local and international banking relationships, Infraco Asia was able to restart work on the project by December 2013, with $23 million of debt funding from Saigon Hanoi Commercial Bank and a 20-year power purchase agreement (PPA) with Vietnam’s Northern Power Corporation.

It was around this time that Infraco Asia also injected further equity capital into the venture taking its total stake up to 77.9%, worth approximately $16.4 million.

Unfortunately for Infraco Asia and its investors, its newly signed PPA was quickly undermined by a proposal from the Electricity Regulatory Authority of Vietnam to leave tariffs flat for the duration of the 20-year PPA rather than the index-link them as agreed.

“This was a major concern for the sponsors," Allard Nooy, chief executive officer of Infraco Asia, told FinanceAsia on the sidelines of a conference in Hong Kong last week. "It would have killed the economics of the project obviously because your operating costs will increase, your maintenance costs will increase.”

Working with the stakeholders their concerns were conveyed to the Vietnamese government, and after several meetings and numerous hearings, the proposed tariff amendment was rescinded.

“And that is another part of the role that we and our owners play – working together to act as a catalyst to crowd-in private investment into these projects,” Nooy said.

Parent PIDG is funded by a series of foreign government bodies including the UK's Department for International Development, Switzerland's State Secretariat for Economic Affairs, and Australia's Department of Foreign Affairs and Trade, as well as the World Bank.

With construction at the Coc San Hydropower project underway again, Infraco Asia brought in other private investors. NEXIF Energy obtained a majority stake in February 2016, while Infraco Asia cut its stake to 33.4 %.

The project became operational in April 2016 and qualified for the World Bank Renewable Energy Development Programme due to its high environmental standards, allowing it to refinance its loan on more favourable interest rates.

“By identifying and mitigating risks early on, we attracted private sector investment to a project that was once considered too risky,” Nooy said.

STRONG PERFORMANCE

From its first day of operation, the plant has outperformed initial expectations in terms of performance and reliability.

It generates over 120-gigawatt hours (GWh) per year of clean energy, immediately benefitting 87,000 people, with 76,000 tonnes of carbon emissions reduced per annum.

And Vietnam's demand for electricity has been growing at 15% annually, with 49% of the nation's installed capacity provided by hydropower. But the current 15 GW installed is only a fraction of the of the 200 GW that the country's hydropower could yet supply, according to Electricity of Vietnam, the state-owned power company. 

Two years after the plant became operational, Infraco began exploring the possibility of exiting the project to reinvest the money elsewhere.

“We thought that as we co-owned a 30MW operating hydropower plant in Vietnam, would there be any takers if we came to market to sell our stake," Nooy said.

And takers there were.

In the initial bidding round for the minority stake in Viet Hydro there were more than 10 indicative bids. This was then whittled down to a shortlist of five bidders for the second round, who were each given greater access to data sets and to the site itself.

“What took us by surprise was the interest from outside Asia. We had interest from utility companies, private equity funds, specialised renewable energy funds, family offices – [and] from North America, Europe and Asia,” Nooy said.

In the end it was TEPCO, Japan's largest power company group, that emerged victorious from the bidding process.

To be sure, the increased investor interest in renewable energy in Vietnam is partly down to the government's desire to achieve a high reliance on renewable energy.

But buying into an operational and well-developed asset, generally, is also a draw for potential investors, Nooy said.

Luring the likes of TEPCO into making its first major overseas hydropower investment and drawing interest from around the world during the bidding process hints at the deep wells of investor interest yet to be tapped as the renewable energy sector in Asia continues to develop.

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