Fresh policy route jolts investors

September 26, 2021 | 10:00
For years, numerous foreign financiers have been interested in developing onshore and offshore wind farms worth billions of US dollars in Vietnam, with its great potential for the renewable energy and a transition from coal. However, a new policy direction dampening down of ambitions may close the door on some new funding waves.
Fresh policy route jolts investors

Most wind investors in Vietnam, and in global wind communities as a whole, were taken aback last week when the latest draft of the National Power Development Plan VIII (PDP8) revised down long-term targets for wind power.

Under the latest draft, onshore and near-shore wind power will only be 11,820MW, down 4,190MW, while offshore wind power decreases from 3,000MW to about 2,000MW. This would make the total electricity produced from wind power hit around 5.6-6.5 per cent by 2030 – much lower than the 8.1-10.3 per cent level aimed for in the previous draft.

The changes, if approved, are likely to deter some foreign investors. The timing is also deemed unfortunate, as almost at the same time as the draft was released for comments in the country, T&T Group was signing MoUs in Europe with the world’s leading offshore wind power corporation, Ørsted, and others to implement projects in Vietnam with an estimated installed capacity of nearly 10,000MW and the total investment value of up to $30 billion.

“Energy is a strategic focus for the T&T Group, and with this collaboration with Ørsted, the global leader in offshore wind, we look forward to accelerating our plans and bringing valuable experience and international investment capital to the offshore wind sector in Vietnam,” T&T Group chairman Do Quang Hien said just days before the latest developments.

T&T Group also signed an MoU with Malaysia’s JAKS Resources Berhad, with the companies discussing collaboration on development of the 1,500MW Quang Ninh 2 liquefied natural gas-to-power project in Vietnam.

However, the potential new targets for wind power development in particular is low compared to the series of projects that are currently being surveyed, and the change may create tough completion for investors that are trying to get a slot in the nation’s master plan for wind power. Liming Qiao, Asia director at the Global Wind Energy Council (GWEC) remarked, “The new draft is a backward movement on the government’s resolution to embrace energy transition.”

Signalling risk for investors

Sean Huang, development manager of Copenhagen Offshore Partners – which is investing in the La Gan offshore wind power project in the south-central province of Binh Thuan – noted that a World Bank study shows Vietnam has an estimated potential of 160GW of offshore wind capacity within 5-100km of the shoreline. “Therefore, we think the current target for short-term offshore wind is, unfortunately, not ambitious enough for what could be achieved,” Huang explained.

With an estimated capital expenditure of up to $10 billion and a capacity of 3.5GW, the La Gan offshore venture has undergone a series of developments this year involving the signing of million-dollar survey contracts with Vietnamese contractors and new office openings.

“However, a clear consenting framework is critical for investors to understand how to secure the project exclusivity and commence any meaningful development work,” Huang said. “Uncertainty about the project or an unclear consenting route makes it really difficult for any investor to commit fully or plan their next steps.”

He added that in the latest PDP8 draft, it is “still unclear how and when the government plans to implement and select investors for the offshore wind projects”, which would add further concerns for existing developers.

Other large-scale offshore wind farms, notably Enterprize Energy’s 3.4GW Thang Long offshore wind farm – one of the earliest projects in Vietnam to carry out surveying and licensing procedures in this area – may also face many difficulties in supplementing the master plan.

“Building offshore wind farms in a new market, where the legal framework and the supply chain is immature, is already a risk for developers,” Huang explained. “The government and the local industry both need room to troubleshoot issues and learn from the process. Therefore, a feed-in tariff mechanism for the initial 4-5GW is an important transition to support the early development of a new industry, mitigate the risk, and provide incentives to developers.”

Fresh priorities

Shifts are not just being made in terms of wind. According to the Ministry of Industry and Trade’s (MoIT) base scenario, with coal-fired power, it is expected to install 40,650MW by 2030, an increase of more than 3,070MW compared to the previous draft. Another power source that also saw increased numbers is hydroelectricity – but not significantly, at an additional 600MW.

“Offshore wind projects offer lots of new opportunities with clean, local, and reliable energy supply, but what’s most important is that it has the highest cost reduction potential as observed in other markets,” said Qiao from GWEC. She explained that every 3-4GW of installation in a local market will bring the maturity of the local supply chain and a huge cost reduction of 20-30 per cent.

“A 67-per-cent cost reduction has happened on a global level for the offshore wind industry and another 30 per cent will take place in the next five years,” she added. “The PDP8 is the best time to strategically deploy offshore wind to let it become an alternative to other projects.”

Elsewhere, a representative of another wind power project in the country raised concerns about the tough race between investors to get a slot in the PDP8 following the lowering of targets.

“Most international banks and export credit agencies have already stopped financing fossil-fuelled energy projects. It will only become more and more difficult for coal projects to be financed and delivered,” the representative said. “On the contrary, renewable projects have proven to be the future trend and are successful in securing international financing.”

A representative of the MoIT said that the latest draft followed the government’s instructions after receiving the previous draft, and continuously making announcements requesting reviews of goals such as the highest balance of supply and demand; long-distance transmission minimisation; local demand; and economic, technical, and price analysis.

“After collecting comments and organising an additional appraisal council, we will finalise the draft and plan to submit it to the government in September,” the representative said.

Tran Dinh Long, vice chairman of the Vietnam Electrical Engineering Association, told local media that the general trend is to develop power sources based on factors of environmental protection, taking advantage of natural resources, and prioritising renewable energy. However, in terms of operating safety, coal power can be more secure.

Long explained that solar power is still fairly new in the country, while wind power has more advantages currently, but with conditions such as reducing the cost of long-distance transmission and ensuring regional balance and cost of electricity, it is clear that coal-fired power has the most advantages today. “The planners base decisions on market information and investment projects. The scenarios and advice given are optimal at that time,” said Long.

Meanwhile, Qiao explained that challenges in coal and fossil fuel financing will continue to challenge projects being carried forward from the PDP7. “These projects will continue to face delays as the international financial community is determined to pull out from fossil fuel finance,” she warned.

“There are coal projects being carried forward to the PDP8 because of different challenges facing them, financing being the top one. In the past few months, we see only increasing difficulties for coal financing from both public and private financial institutions, rather than any chance of it being alleviated.”

Multilateral banks and government restrictions on coal/fossil finance:

- Asian Development Bank: ending coal, oil, and gas financing as announced in May 2021;

- Asian Infrastructure Investment Bank: no new coal finance for China overseas energy investment;

- World Bank Group’s International Finance Corporation: adopts new climate rules to deter lenders from backing coal;

- South Korean government: officially announced the country will no longer invest in new coal-fired power plants overseas as of last year; and

- United States: restricting lending from overseas fossil fuel projects, while US Treasury rules restrict oil and coal finance.

Commercial banks under government pressure or pledging to go climate-friendly:

- Standard Charted Bank: pulling out of Southeast Asian coal projects including Vinh Tan 3 and Vung Ang 2 in Vietnam;

- Three biggest Singaporean banks of DBS, OCBC, and UOB announced in 2019 to stop financing coal projects in Southeast Asia;

- Japanese-based Sumitomo Mitsui Banking and Mizuho Bank withdrew from domestic and overseas coal-fired power development projects in 2019;

- Mitsubishi UFJ Financial Group exited Vinh Tan 3 coal power project in Vietnam; and

- HSBC pulled out from Vinh Tan 3 coal project in Vietnam.

By Nguyen Thu

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