New biomass FiT promises a green economic future

Adam Ward, the Global Green Growth Institute’s country representative for Vietnam

The Vietnamese prime minister has issued Decision No.08/2020/QD-TTg on increasing the feed-in tariff (FiT) for biomass co-generation heat power to 7.03 US cents per kilowatt hour (up from 5.8 US cents), and for other types of biomass projects to 8.47 US cents per kWh (up from 7.3 to 7.5 US cents depending on location). This is a welcome increase of the FiT and should help expand biomass energy generation in Vietnam.

Biomass energy has the potential to be an important part of Vietnam’s renewable energy transformation by providing a stable power source, which will reduce carbon emissions while creating green jobs and providing Vietnamese farmers with an extra income stream.

Further, given that Vietnam’s around 40 sugar mills are located across the country, and the relatively small individual size of projects in terms of megawatts, power generated should be more easily integrated into the grid’s current capacity. It is therefore a welcome development that Vietnam has made biomass energy a priority, with an aim to generate 2.1 per cent of electricity from biomass by 2030 – the same as wind power.

To recap, in 2017 the Global Green Growth Institute (GGGI), together with GIZ, undertook the development of five pre-feasibility studies for combined-heat-power projects with five sugar mills across Vietnam. These pre-feasibilities involved us building detailed financial models and better understanding the sugar mills in question and their plans. However, once the financial models were complete, including an analysis of the market and future demand and costs, the stark reality was that under the previous FiT level of 5.8 US cents none of these projects were bankable.

This showed a clear market failure. The enabling conditions were simply not there to make the government’s 2030 target for biomass energy a reality – indeed our analysis showed that at the previous FiT level we would not expect to see any additional generating capacity added. To delve into this a bit deeper, and to provide concrete recommendations to the government, we scaled up our findings from the five pre-feasibility studies to the whole market to examine what FiT would be necessary to capture the potential of this sector.

We recommended to increase the FiT, with corresponding benefits to generating capacity, emissions reductions and green jobs. The FiT increase that was recently approved is at the lower end of our recommendations, but after examining the details of our model we can make four recommendations.

One important point to note about our analysis: We have examined the benefits to the sugar industry, with their ready supply of biomass (bagasse), they are poised to be at the forefront of this energy revolution, and we have not looked at other potential biomass power producers.

Our model shows that those sugar mills that have the crushing capacity of around 3,000 tonnes per day and above, and an overall production of around 400,000 tonnes per year and above, the new FiT should be attractive enough for them to make the investment provided that a number of other steps are taken.

First, sugar mills should utilise other sources of biomass to extend the runtime of their plants, solely utilising bagasse plants will only run during the harvest season (typically around 110 days a year).

However, by including wood chip, rice husk, or rice straw, runtime can be extended beyond 300 days – providing more income for the sugar mills and more renewable power for Vietnam. This will require partnerships to be forged between suppliers of these different sources of biomass, which the government should encourage and support.

Second, the Ministry of Industry and Trade, the Ministry of Planning and Investment, and other relevant government bodies must strengthen the power purchase agreement (PPA) – improving grid connection provisions, process for dispute resolutions, extension and termination rights – and streamline and simplify the approval process for biomass energy projects, including swiftly adding to the provincial masterplans and granting of investment licenses. This will lower the costs associated with preparing projects, and by strengthening the PPA decrease the cost of finance.

Third, sugar mills should adopt the special purpose vehicle (SPV) approach and establish a separate entity for generating power. By establishing a separate SPV, sugar mills will find it easier to raise the necessary finance and manage the expansion of this part of the business.

Fourth, it will be crucial for sugar mills to tap into the readily available climate finance. The GGGI has specialised in accessing green finance for Vietnamese entities (and those globally across our country programmes with over $1 billion raised in the last three years alone), and funds such as the Green Climate Fund – which we have extensive experience working with – would be a great source to provide softer terms to make projects more profitable and support the green economic revolution.

Finally, given the removal of trade barriers across the ASEAN in the future, the sugar industry in Vietnam must modernise. Part of this process will be a consolidation of the industry – as encouraged by the prime minister. With larger farm sizes and an increase in crushing capacity and overall production, this should make more biomass power projects bankable.

I am optimistic that this FiT will support further expansion of biomass power in Vietnam, and the GGGI is ready to support this transition through developing projects and accessing finance. Vietnam has made renewable energy a clear priority, and it is time for biomass energy to also come to the table and play its important role in securing Vietnam’s green economic future.