Taking advantage of vast potential of renewables

Taking advantage of vast potential of renewables

Nonetheless, the domestic fossil fuel output is unable to keep up with the demand as well as climate change, and the dependency of Vietnam on imported energy to run its power infrastructure are driving forces for the government to leverage and shift towards renewable energy.

The Vietnamese government, led by Prime Minister Pham Minh Chinh, pledged carbon neutrality by 2050 in November 2021. In order to achieve this aim, Vietnam would need to phase out coal plants and upgrade its national grid.

By the end of 2021, renewable energy sources had a total installed capacity of 20,670MW, accounting for 27 per cent of the total installed capacity of the entire system (76,620MW); renewable energy sources’ electricity output reached 31.5 billion kilowatt-hours, accounting for 12.27 per cent of the total electricity production of the whole system.

In particular, Vietnam has 70 wind power projects with a total capacity of 3,987MW in commercial operation, with electricity output reaching 3.34 billion kWh in 2021, accounting for 1.3 per cent of total system-wide production energy. Regarding solar power, the electricity produced by solar power sources alone accounts for approximately 10.8 per cent of the total electricity output of the entire system in 2021.

Renewable projects in Vietnam have attracted a high level of foreign investment and private-sector investment in recent years, implying their financial sustainability. In 2021, with the total investment of over $5.7 billion, accounting for 18.3 per cent of the total registered foreign capital, the power production and distribution sector captivated a large number of new and large-scale projects, ranking second among sectors attracting the highest amount of foreign capital.

Billions of dollars from private investors have been poured into solar and wind power projects, which shows that Vietnam has enormous potential for renewable energy, especially solar and wind power.

Vietnam’s solar photovoltaic (PV) development has recently been tremendous, and this is only the beginning of the country’s massive energy transition away from coal and fossil fuels. Solar PV capacity in the nation expanded from 86MW in 2018 to almost 16,500MW in 2020. Rooftop solar also makes for a significant share of Vietnam’s overall solar capacity. Therefore, Vietnam surpassed Thailand to become the ASEAN country with the largest installed capacity of solar power.

The wind power sector in Vietnam has been considered a fast-rising star recently. With 8.6 per cent of land and water area suitable for major wind farms, Vietnam offers enormous potential and investment opportunities. As of the end of October 2021, 84 wind power projects out of a total of 106 have been put into commercial operation.

Offshore wind power’s potential in Vietnam is even substantially greater than onshore wind. According to the World Bank Offshore Wind Roadmap for Vietnam, by 2030, Vietnam’s offshore wind power capacity might expand to 5-19GW from 1GW, while onshore wind power capacity could increase to 17.34GW from 1.26GW.

According to international market professionals, if Vietnam continues to expand rapidly in renewable energy, it will reach substantially much higher in the rankings, perhaps overtaking nations like Australia and Italy in terms of innovation and renewable energy development solutions.

Many drivers have contributed to the rapid growth of renewable energy in Vietnam. The first factor is the high energy consumption in this nation. According to the International Energy Agency, Vietnam is Southeast Asia’s second-largest electricity user. That leads to the large potential for foreign corporations to invest in power in general or renewable energy in particular.

Second of all, Vietnam enjoys various natural geographical potentials that are ideal for the growth of the renewable energy sector, especially solar and wind power. According to international analysts, Vietnam enjoys some of the most sunlight hours in Asia (1,500-1,700 hours per year), notably in the central and the south, where the majority of the country’s manufacturers are located. Over the year, the intensity of solar radiation stays constant.

Also, thanks to Vietnam’s long and narrow geographic configuration, which includes more than 3,000km of coastline and a combination of hills and mountains, the country has a significant wind resource. According to the World Bank, wind speeds of more than 6m/s at 65m are found across 40 per cent of Vietnam’s land, equating to 512GW of capacity.

Last but not least, dedicated support from the government, including attractive tax incentives and the implementation of generous feed-in tariffs (FiT), have made a significant contribution to Vietnam’s rapid expansion of renewable energy.

Renewable energy projects are subject to import tax exemption for imported fixed assets and imported construction materials that cannot be produced domestically. They are also eligible for considerable corporate income tax (CIT) incentives, including a preferential tax rate of 10 per cent for 15 years (rather than the usual rate of 20 per cent); four years of CIT exemption; and nine years of 50 per cent CIT reduction. Furthermore, other incentives such as preferential credit loans and exemption/reduction of land use tax and land leasing are also available.

The Vietnamese government implemented FiT that supported renewable energy, particularly the growth of wind and solar installations. The generous FiT rate is one of the key drivers that creates a boom in solar PV installations. Wind power FiT rates have been less effective than solar power ones as solar schemes are easier and quicker to implement.

However, the government still has certain actions to support wind power investors. Many onshore wind projects were delayed because of the pandemic in 2021, and they were unable to achieve the October 2021 FiT deadline. As a result, despite not having any official decisions or announcements yet, the government has proposed pushing back the deadlines from 2021 to the end of 2023.

However, because renewable energy is still considered a young sector in Vietnam, both domestic and international players face several hurdles while investing in this market. The FiT rates applied evenly across the country are causing a phenomenon of concentration development in areas with high economic potential (high solar radiation or high average wind speed) and overloading the power grid in some areas, or investing in areas with low electricity demand, requiring electricity to be loaded from afar. This boosts competition for land leasing as well.

To offset this disadvantage, the government must have stronger long-term strategies and policies that stimulate efficient growth by region.

Le Khanh Lam - Tax Partner, RSM Vietnam