Financing renewable energy development

Ousmane Dione- Country director, World Bank in Vietnam

Vietnam has been a global success story in developing the power sector over the last few decades. This success has been a key contributor to the country’s socio-economic development, high and sustained economic growth, excellent performance in terms of poverty reduction, and the general wellbeing of its citizens. Two areas need to be highlighted on this success story - one is on rural electrification, and the other on power sector reform.

On rural electrification, Vietnam’s access rate increased from 14 per cent in 1993 to over 99 per cent this year. Over that 25-year period, more than 14 million households or 60 million people have been connected to the grid. It is an incredible achievement.

Needless to say, the financing requirements of the sector have been huge. Only since 2010, the sector invested about $80 billion in generation, transmission and distribution, and between now and 2030, another about $150 billion needs to be raised. Electricity consumption remains comparatively low by international standards. For example, per capita electricity consumption is currently about 1,700-kilowatt-hour a year, which is one-third of China or one-fifth of Australia. As the economy continues to grow strongly and as the Vietnamese become more affluent, electricity demand will continue to grow at about 8 per cent per year for the next decade.

Electricity tariffs remain below full cost recovery levels and Electricity of Vietnam (EVN) does not receive direct subsidies from the Vietnamese government. Hence, let me stress that EVN and the sector have been highly effective and efficient using official development assistance (ODA) funds. Of course, this was only possible because of the leadership, dedication and technical capabilities of the Ministry of Industry and Trade (MoIT) and EVN management and its staff.

On power sector reform, about a decade ago the government set out a clear roadmap for implementing competition and restructuring the sector. The motivation was to move from a vertically integrated monopolistic market structure to a fully competitive power market. The government needs to be complemented to continue to be fully committed to introduce a competitive power market. We are half-way through implementation, and by 2020 the wholesale electricity market will be fully operational. Experience with market liberalisation have been positive to date contributing to a well-run power sector public utility EVN, which is technically and operationally sound, but also allowing private sector participation in generation.

I believe I can speak on behalf of all the development partner community that we have been privileged to contribute to that success story. International finance institutions and bilateral donors have provided technical assistance and financing over the last two decades to support the government on the rural electrification agenda, upgrade and expand vital transmission and distribution networks, develop public and private power generation projects and support the electricity and gas sector reform and restructuring agenda.

The challenge is the future and the energy sector cannot rest on past achievements. It is widely known that the challenges the power sector needs to overcome over the next two decades are substantial to ensure it achieves its goals to provide sustainable, clean, affordable and reliable power supply to the people of Vietnam.

One key question is how to meet future energy demand, while also complying with government’s objectives to reduce greenhouse gas emissions and meet its climate change targets. That of course refers to the contentious issue on the role of coal in the future energy mix.

Another challenge is how to mobilise the large investment requirements, estimated at around $8 billion annually to meet fast growing power demand. EVN and the public sector cannot raise those funds and private sector, both domestic and international, will need to play a more prominent role in power sector financing.

To tackle those two key challenges, the World Bank’s strategic energy engagement in Vietnam centers around two initiatives.

First, on the energy transition - we support the government to identify and implement technically, financially and socially sound solutions to reduce the future use of coal, primarily for power generation. While there are no quick fixes or a silver bullet to tackle the coal challenge, we believe there are four central activities that need to be implemented in parallel by the government to reduce coal update for power generation: scaling up renewable, especially wind and solar; promoting natural gas and liquefied natural gas; increasing energy efficiency investments; and promoting regional power trade, especially with Laos and southern China.

Second, the public sector and ODA financing will not be sufficient to meet the power sector’s huge investment requirements. Hence, under the bank’s Maximizing Finance for Development initiative, we are supporting the government to find and implement solutions to bring in more private and commercial financing for the energy sector.

This initiative is particularly relevant in the context of Vietnam’s recent IBRD graduation and sovereign borrowing constraints due to the government’s debt ceiling policy. Three key pillars need to be tackled to mobilise more private and commercial finance in the power sector. These are launching a competitive IPP programme in power generation as part of Power Sector Development Plan 8 with a contractual framework that attracts both international and domestic investment; preparing electricity and gas state-owned enterprises to access commercial finance through credit ratings and non-sovereign bond issuance; and supporting banking and capital market reforms to improve availability of local currency finance, which is critical for both projects and corporate finance for energy investment projects.