Vietnam’s renewables push faces lingering headwinds

A report by the Institute for Energy Economics and Financial Analysis sees renewables leading the way, strengthening Vietnam’s clean power lead in Southeast Asia, a region that’s one of the most vulnerable to climate change.

Vietnam’s stellar economic growth, one of the highest in the region over the past decade, and forecasted to grow at 7.5% for 2022, has also increased its power consumption. However, which fuel sources to use and how much of them remains in question.

A September 6 report by the Institute for Energy Economics and Financial Analysis (IEEFA), for its part, sees renewable power leading the way, strengthening Vietnam’s renewables lead in Southeast Asia, a region that’s one of the most vulnerable to climate change.

The IEEFA report points to Vietnam’s massive solar – and to a lesser degree its wind power development – over the past five years which has consistently “surprised energy planners and investors globally.”

Vietnam’s solar capacity bypassed Thailand in 2019 to take the top spot in the region, while its combined solar and wind power capacity reached 176 W per capita by 2020, the highest among ASEAN states, according to an ASEAN Centre for Energy report. By last year, the country had become the world’s tenth largest solar power producer.

“Vietnam’s 2050 net-zero emissions target is providing enough scale potential to accommodate sizeable players and bold ambitions,” says IEEFA Energy Finance Analyst Thu Vu, the report’s author.

She adds that building on recent success, some prominent domestic players have signaled a long-term commitment to the local renewable energy market.

Vietnam announced a net zero carbon emissions goal at the COP26 meeting in Glasgow in November, while the government approved the country’s National Climate Strategy in July, hoping to lower GHG emissions by 43.5% by 2030, peak carbon emissions in 2035, and reach net-zero by 2050.

However, these climate ambitions will remain hard to reach due to Vietnam’s over reliance on fossil fuels for power generation. Coal still makes up some 53% of Vietnam’s energy mix, hydro-power (26%), and natural gas (16%), followed by non-hydro renewables, according to the U.S. Energy Information Administration’s (EIA) most recent analysis of the country’s energy sector.

Much of Vietnam’s recent success in building out its renewables sector is attributed to generous government feed in tariffs (FITs) that were launched in 2017.

Under the FIT scheme, solar power projects that started operating prior to June 2019 could sell their power to state-run electricity distributor Vietnam Electricity (EVN) and its subsidiaries at a price of $93.50 per megawatt (MW) hour for 20-years.  This was followed by a reduced, albeit still market attractive second FIT for solar projects and a second FIT for wind projects.

These tariffs encouraged investment in renewable energy by guaranteeing an above-market electricity price for power producers. Since they usually involve long-term contracts, FITs also help mitigate inherent risk in renewable energy production.

Vu calls the FITs “an equal opportunity business initiative for the country’s many private sector companies,” adding that it led to hundreds of solar and wind farms licensed and built in Vietnam’s central and southern provinces which have favourable solar radiance levels and wind speeds.

Headwinds remain

However, she doesn’t mention that both solar and wind FITs have expired, creating the first of several headwinds for Vietnam’s renewables sector since EVN offers what most investors consider a non-bankable power purchase agreement (PPA). In other words, FITs helped offset EVN’s PPA.

Its template PPA simply doesn’t oblige it to contractually agree to purchase the entire yield generated from solar and wind power projects, making it difficult to demonstrate the effectiveness of investment projects to lenders due to the perceived risks.

Before the expiration of the FITs, both international and domestic investors were keen on funding Vietnam’s renewables projects. Now, however, that incentive has been marginalized, while many often look for other locations in the region to invest in.

Market participants, meanwhile, are calling for Vietnam to put in place a PPA that meets international standards.

Lam Tran, founder of Hồng Hạc Group, an investor in Vietnamese renewable projects told Gas Outlook that without the FITs, it’s been harder to attract foreign investors since they consider the EVN PPA undesirable, adding that he hopes the country doesn’t lose its  renewables edge to its neighbours in the region.

The government did put in place a new Public Private Partnership (PPP) law on January 2, 2021; however, it still doesn’t address international investors’ concerns nor expressively include a government guarantee to investors.

At the second Vietnam Clean Energy Forum on April 7, Pham Thi Thanh Tung, deputy director of the Credit Department under the State Bank of Vietnam said “[the government]  should revise the PPA to remove the regulation for stopping purchasing power.”

However, the Vietnamese Industry of Ministry and Trade (MOIT) is considering a virtual or Direct PPA (DPPA) scheme for the first time, Bruce Tsuchida, principal at the Brattle Group, told Gas Outlook.

In theory, it would enable renewable energy generators to sell and deliver clean electricity directly to corporate offtakers via a contract for difference (CfD) instead of going through a state-run electric company.

These are currently being piloted for two years with the hope that it could trigger more demand for renewable energy and stimulate new investment.

However, “it’s probably not going to change anything in Vietnamese law from having a separate contract and betting on a strike price of gas outside of the EVN framework, but just making it more structured to look nice from the outside,” Tsuchida said.

Others claim that it’s still a positive development and signal that the country is a serious and reliable renewables player that’s willing to implement supportive mechanisms to retain investor interest in its solar and wind power sector.

Grid curtailment

Another major hurdle facing Vietnam’s renewable energy ambitions is grid curtailment. Vietnam needs new transmission and distribution infrastructure to accommodate additional capacity and transmit the new power to where it’s needed the most.

The problem is already being felt by a number of power projects that were forced to curtail power production since transmission lines are already operating at capacity, especially in areas where there’s a concentration of solar power projects.

This has resulted in less electricity being produced, less revenue earned and an inability of some project backers to service debts incurred to build projects.

In a move indicative of the growing problem, 40 solar power operators in Vietnam’s second-largest province, Gia Lai, last year threatened to sue EVN after it told operators they had to reduce the amount of power they generated by up to 70%.

Moreover, expanding grid capacity isn’t only time intensive but costly. Development can take as much as two to five years, while solar and wind projects, depending on scale, can be built in months or just a few years.

Expanding that grid capacity will be expensive, Tsuchida said, as high as $30 billion spread out of the next ten years.

Vietnam’s draft Power Development Plan (PDP8) acknowledges that grid systems need to be developed and suggests a focus on smart grid development and use of 4.0 technology to manage supply and demand.

“Grid improvement is a major issue in Vietnam and both the MOIT and EVN are aware,” the government said recently. 

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