Wind power fuels green growth in Vietnam: IFC

Over the past three decades, an increasing number of natural disasters and extreme weather events in this Southeast Asian nation have caused on average 500 deaths annually while accounting for yearly economic losses of about 1.5 per cent of the nation’s GDP. Such impacts are expected to increase in frequency and strength as the effects of climate change accelerate.

On the bright side, Vietnam has a natural climate advantage. The country’s climate and diverse topography bring large-scale potential for renewable energy, especially wind power. Onshore wind is one of the quickest alternative sources of energy to develop and a new strategic source of clean energy in a power-hungry nation that has been heavily reliant on coal-fired power as well as hydropower for the past two decades.

Offshore wind has even more potential for the country, with a joint World Bank-International Finance Corporation (IFC) study identifying a technical potential of 160GW within 5 and 100km from shore. That is about two and a half times the total currently installed power capacity in Vietnam.

The country’s strong economic growth over the last two decades saw a massive expansion of coal-fired power generation, driven by a 13 per cent annual increase in demand for electricity. Currently, coal-fired power plants provide about 50 per cent of electricity – up from 17 per cent in 2010. As a result, Vietnam’s energy sector accounts for 65 per cent of its overall greenhouse-gas (GHG) emissions.

Wind farms will help the country ease its reliance on fossil fuels, supporting a smooth decarbonisation of the power sector. For example, two onshore wind power plants in central Vietnam – in Binh Thuan and Ninh Thuan – will generate about 170 million kWh of clean energy per year once they start operating later in 2021.

Developed by Thuan Binh Wind Power JSC (TBW), a subsidiary of Refrigeration Electrical Engineering Corporation (REE), the project will provide enough power for about 100,000 Vietnamese homes per year. Moreover, it will help avoid about 123,000 tonnes of GHG emissions each year, which is roughly equivalent to taking 27,000 passenger vehicles off the road.

“Increasing the sources of clean energy is essential for Vietnam considering its vulnerability to the effects of climate change,” said Nguyen Ngoc Thai Binh, REE deputy CEO. “In the past, we had invested in coal-fired power; however, it is clear that the future lies in renewable energy.”

Binh added, “The conditions in Binh Thuan and Ninh Thuan are ideal for wind power development and we look forward to completing the combined 54.2MW plants by October.”

Funding factor

Despite Vietnam’s huge potential, by the end of 2020, wind power accounted for less than 1 per cent (or 670MW) of the nation’s total installed capacity. The Vietnamese government aims to increase renewable energy capacity – mainly wind but also solar power, including rooftop solar – by 19GW to more than 36GW by 2030.

However, to realise that target Vietnam needs an estimated $20 billion in investment, not including the costs for the necessary transmission infrastructure development. Given the constraints on public resources and the economic challenges of an ongoing global pandemic, private sector engagement is essential to provide this funding.

While local banks have funded the considerable scale-up of solar power in the country over the last three years – their balance sheet, project tenor, and sector exposure limits are finite and international lenders are therefore needed to support the further scale-up of renewable energy.

Yet most international lenders have not been able to fund the sector with normal (non-recourse) project finance due to the high-risk power purchase agreement (PPA) between projects and the government-owned offtaker, Electricity of Vietnam (EVN).

IFC’s 12-year dollar-denominated financing package of $57 million, with corporate support from REE, is unusual for such corporate structures. Both projects will sell their energy to EVN through dollar-denominated PPAs, well-aligned with the currency of the debt.

“IFC’s long-tenor funding is key to the project sustainability. It demonstrates the viability of Vietnam’s nascent wind power sector while encouraging other lenders to participate and promote renewable energy solutions in Vietnam,” Binh said.

Local power

IFC has a track record of supporting transformational local renewable energy developers in Vietnam. In 2016, IFC’s equity investment in Gia Lai Electricity JSC (GEC) helped finance the country’s first private grid-connected solar farm. IFC also anchored the green bond issuance of AC Energy, a Philippine power company with a pan-Asian footprint: IFC’s investment of $75 million was earmarked to support AC Energy’s renewable energy projects in Vietnam.

The two TBW projects will be the first wind power projects in Vietnam adhering to IFC’s internationally benchmarked performance standards. IFC guided and supported the developer through this process, allowing TBW to adopt best industry practices and standards for its projects, now and in future.

Clean energy contributes to national power security, fueling economic growth and resilience. As local developers like TBW and REE scale up their renewable energy investments, it will help Vietnam move closer to energy transition success by achieving its target of reducing GHG emissions by 9 per cent by 2030, lower the contribution of coal-fired power to the country’s overall capacity, and ultimately shift to a low-carbon economy that is both sustainable and inclusive.

“This wind power project marks IFC’s first engagement in the wind sector and is part of our ongoing efforts in Vietnam to help the country transition away from a coal-dominated power sector to one that is dominated by renewables, with gas-fired power as a 'backbone' and to help integrate the intermittent renewable capacity. We look forward to doing more in this critical effort,” said Oliver Behrend, IFC Infrastructure Lead for Vietnam.