Securing long-term interests of Vietnam in energy transition

February 25, 2022 | 13:00
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The government has taken a step-by-step approach that includes comments and discussions with Vietnam Business Forum’s Power and Energy Working Group and other private sector power and energy organisations. Based on the November draft, meetings, and follow-up requests for comments, we have the Power Development Plan VIII (PDP8) that is addressing the country’s economic, environmental, and social needs in line with international climate agreements.
Securing long-term interests of Vietnam in energy transition
John Rockhold - Head, Power and Energy Working Group, Vietnam Business Forum

We can always discuss percentages of different tech, but as we realised in the PDP7, actual technologies, financing, and social and environmental circumstances at the time of implementation will drive the actual mix. At the end of the PDP7, Vietnam installed renewable power mix was at 55.3 per cent or 38362MW, taking the lead in Asia.

The government must be congratulated on kick-starting renewable energies with subsidised feed-in tariffs and making power purchase agreements (PPA) backed by the state-owned Electricity of Vietnam (EVN) bankable with a Moody’s rating.

This has allowed Vietnam to attract and develop renewable energy investors and manufacturers. However, a financially strong EVN for a bankable PPA is a prerequisite for sustainable power development. Thus, EVN cannot continue to pay substantial subsidies and take losses in the sale of electricity.

International rates for electricity from renewables and gas are compatible with Vietnam’s road map to electricity pricing and meeting its international climate agreements. In addition, green financing is offering favourable rates to private investors to reduce CO2.

The Power and Energy Working Group welcomes the opportunity to provide continued realistic input into the policy dialogue regarding the development of the country’s energy sector, particularly as it relates to achieving appropriate support for ongoing economic development whilst addressing environmental concerns.

The recent draft of the PDP8 has an estimated investment cost of $131.79 billion ($117.82 billion for power generation/sources and $13.97 billion for the grid) for the next 10 years – the vast majority of which must come from the private sector. Hence, any policies put in place must serve the long-term interests of the country as well as private sector contributors.

If it was not already clear, COP26 made it certain the world has turned to phase down use of coal. Governments, multilateral partnerships, the private sector, banks, and all major institutions with a stake in energy have agreed that the negative environmental impacts far outweigh short-term economic gains, and there are sufficient, more sustainable alternatives to pursue. To attract the funding necessary to move away from coal, Vietnam will require bankable and economically feasible energy projects. However, to maintain grid strength and growth, the country must also secure a baseload sufficient to replace coal.

This means the transition towards renewables such as hydro, wind, and solar with appropriate storage will have to be done in a flexible way in which gas and eventually much else is replaced by hydrogen as a baseload, scaled with behind-the-meter renewables solutions, and substantive energy efficiency programmes. We would also like to see progress in the discussions to consider a bankable legal framework for high-quality energy projects to receive funding from the international financing market.

We recognise that offshore wind has a high potential in Vietnam and could contribute a baseload to the national grid. Those offshore wind projects are now being built with power storage capacity in the form of ingenious green hydrogen. This would be used to reduce Vietnam’s CO2 as a replacement fuel for gas-fired power plants.

Many foreign investors are interested in large offshore wind farms in Vietnam. However, to develop a large infrastructure project such as offshore wind farms, Vietnam must address the current legal uncertainties. This starts with an inadequate legal framework on the use of the sea under the Law on the Sea 2012 and related decrees. Because without any property right over the allocated sea area, a project’s developer may not be able to mortgage the area (as part of the security package) to project lenders.

Batteries will eventually play a more important role in the country’s power sector. However, they are currently still expensive for other than industrial use, with low storage and low lifetime, unless stacked. They would largely come from one source, and the high fossil fuel use of mining of rare earths also contributes to environmental degradation. Thus, there is potential for local iron/saltwater batteries, which we think Vietnam would benefit from in the long run.

Hydrogen is another important part of the long-term solution. While too expensive for power plant use today, development, research, and international investments should make prices affordable in the not-too-distant future. Vietnam should therefore ensure that gas-to-power and offshore wind projects are built with hydrogen in mind.

The private sector welcomes the government’s commitments in the current PDP8 draft for direct PPAs (DPPA) for behind-the-grid renewable energy. Especially, rooftop solar in the form of DPPAs and self investments by the private sector continues to grow.

We look forward to the government’s continued engagement in the introduction of a DPPA using the national grid between power producers and users. The behind-the-grid models have shown that producers and users are able to develop sustainable long-term agreements, and these should be reviewed to allow EVN to work out pricing.

From an economic development perspective, we urge the government to ensure that new power projects are driving Vietnamese private sector capacity. Such massive international investments have huge potential for not only driving the tax base and providing the energy necessary for economic growth but also training entire Vietnamese generations of future companies with the needed technical and managerial leaders.

Therefore, all new power projects should engage domestic companies wherever possible, from planning to building and on to operation and assisting in on-the-job and institutional capacity building. This should be a consideration for any new power project.

However, one of the great challenges is to ensure they can pass international financial due diligence. International financiers will not support companies that cannot demonstrate bookkeeping and accountability at international standards. Hence, the government should ensure local companies leading these projects will be able to meet international standards with adequate support for enhancing bankability where necessary.

This can be done, but it will require projects that include strong consortiums between Vietnamese and international companies; that demonstrate operational experience and technical capacity; are ready for financing and equity provisions; have the ability to pass international due diligence; and can scale to grid development.

By John Rockhold

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