Vietnam urged to avoid fossil fuel lock-in
State utility EVN must attract investment in cost-effective renewables, says IEEFA report
22 Sep 2020 | The Asset

Implementing Vietnam’s new power development plan for the next decade will ultimately depend on the country’s ability to mobilize more innovative sources of offshore financing, the Institute for Energy Economics and Financial Analysis (IEEFA) says in a new report.

Vietnam is poised to launch Power Development Master Plan 8 (PDP 8) for 2021-2030, which features a departure from reliance on coal-burning independent power plants and a move towards renewable energy and liquefied natural gas (LNG).

Melissa Brown, co-author of the report, says the ability of state utility Electricity of Vietnam (EVN) to embrace renewable energy technologies and avoid lock-in will be key to the success of the new strategy. “EVN has a unique opportunity to attract competitively priced investment in cost-effective renewables technologies and much-needed grid infrastructure,” says Brown.

“With the right policies to support market development, EVN can avoid locking in high-cost baseload fossil fuel power projects with high fixed-cost financial burden, which will become a barrier to integrating cleaner cheaper energies. Instead, EVN will be ready for the cost-effective renewable energy innovations that will certainly emerge over the next five years.”

The report suggests the most dynamic aspect of the power development plan’s progress will be how well EVN and the Ministry of Industry and Trade can optimize renewable energy sources that will unlock low-cost investment capital and cheaper power generation.

EVN’s constrained financial position means the utility has little margin for error, particularly if its investment in long-lived power assets fails to produce a cost-effective solution for future power needs. “Due to Vietnam’s limited domestic funding and lack of direct access to international capital markets, EVN has relied on international developers to finance new generation capacity, only retaining full control of transmission and distribution,” says co-author Thu Vu.

“Over the past five years, EVN’s generation capacity shrank from 61% to 52% of the total system, a ratio we expect to fall even more rapidly in coming years. Consequently, EVN now faces the risk that if tariff increases cannot keep pace with independent power producer (IPP) charges, new debt will be needed to help meet growing payment obligations.”

The authors estimate that EVN’s cost of purchased power might account for 60% of operating costs by 2023, up from 43% in 2019. “And due to the impact of Covid-19, unit sales growth is forecast to rise only 2.2% this year compared with the usual double-digit rise of recent years,” says Vu. “At the same time, forecast revenues have been hurt by a tariff rebate programme and a tariff freeze order. Taken together, EVN is expected to report a net loss in 2020 as well as a significant drop in cash.”

With the pandemic continuing to unfold in unpredictable ways, the authors note it may be time for planners to reset future tariff and demand expectations. Any review should also include consideration of the way that transparency and competition can support more cost-effective and flexible development options.

Vietnam’s LNG focus is backed by the country’s political leadership and has been formalized in Resolution 55. Offshore gas output, the majority of which is used for power generation, had been expected to peak by 2026. However, this timeline may change with the recent announcement of a new offshore gas discovery which may permit EVN to defer new commitments to LNG facilities, according to the IEEFA report.

“Experience with PDP 7 has shown that sectoral master plans in Vietnam are best understood as being aspirational in nature. They are significant because they serve the administrative purpose of laying the legal basis for project approvals. But, when market conditions change, revisions are to be expected," says Brown. “If the past three years have been any indication, provincial and central authorities are willing to revise power master plans if new investments make socio-economic sense.”

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