Vietnam’s Electricity Sector: Challenges and Prospects for Foreign Investment

Last week Vietnam approved the Power Development Plan 8 (PDP8). This decision follows reports northern Vietnam may experience power shortages this summer. Both events signal investment is sorely needed in Vietnam’s electricity sector. Here’s a rundown of where and why.

It’s hard to imagine summer in Hanoi without an air-conditioner. The 40-plus-degree heat coupled with 90-plus percent humidity makes life in the city unbearably uncomfortable.

But for most Hanoians, this is a thing of the past.

Indeed, rapid economic development has put temperature control literally in the hands of Vietnam’s booming middle class who are increasingly turning their backs on toiling in the fields, in favor of cooler, air-conditioned offices.

But this is coming at a cost.

As more and more air-conditioners come online they draw more and more power from an electricity grid already under strain from one of the fastest-growing economies in the world.

From the manufacturing plants churning out the billions of dollars of goods Vietnam makes and ships out and around the world every year, to the booming tech sector with its server-packed, power-hungry data centers, to the exploding demand for consumer electronics that all need to be charged every day, Vietnam’s demand for electricity is enormous.

To meet this demand, Vietnam has invested billions of dollars in a range of power projects from hydropower to liquefied natural gas (LNG) and everything in between. That said, Vietnam has always been partial to coal, one of the world’s oldest and historically cheapest, yet also dirtiest, sources of electricity.

But once quite popular, coal started to lose its luster toward the end of the last decade in Vietnam. The impacts of climate change were becoming increasingly clear and economies around the world were shirking off coal in favor of renewables like wind, solar, and hydro.

Vietnam was no exception. Keen to make its own clean energy transition, in March 2021 a draft of the country’s 8th Power Development Plan (PDP8) listed no new coal projects in favor of gas and wind instead. This was a welcome development among advocates of sustainable energy.

The excitement, however, was somewhat short-lived.

Power Development Plan 8, March 2021

Dubbed ‘obsolete before publication’, the initial draft of the PDP8 was marred by concerns from a broad range of stakeholders.

Proponents of renewable energy remarked that there was too much coal and gas, whereas proponents of coal and gas argued there was too much wind and solar.

It was clear that creating a five-year plan for a sector that had become very dynamic and very prone to change very quickly, was going to be a challenging task. That said, the PDP8 was to be more of a roadmap or a guide rather than strictly-to-be-adhered to policy.

That is not to understate the importance of this particular document. With so much investment needed and so many firms willing to invest, clarity on what policymakers were thinking and the projects they were likely to approve, was needed to create a stable investment environment.

But the overwhelming response from various stakeholders and special interest groups made it almost impossible to approve without taking some time to consider their assessments.

Consequently, the approval process was put on hold as the plan’s architect, the Ministry of Industry and Trade (MoIT), sought to collect, analyze and incorporate this broad spectrum of feedback. The result several months later, however, was somewhat confusing.

The pivot back to coal

It’s not entirely clear how or why but a revised draft of the PDP8, in October of 2021, saw a shift away from renewables and back to fossil fuels with coal use to double by 2030.

This was a ‘surprise’ according to the Institute for Energy Economics and Financial Analysis (IEEFA) which went on to assess the coal component of the new draft as ‘unrealistic’. It estimated that of the 30 GW of new coal power outlined in the draft, Vietnam was likely able to realize just 12 GW.

Those 12 GW were what was already in the pipeline–new projects would likely run up against funding challenges with a number of big lenders choosing not to finance new coal-fired power plants overseas–South Korea and Japan, for example.

But coal, it was argued, was Vietnam’s best option for shoring-up baseload power supply with renewables argued to be unreliable. In Vietnam, however, this was not because of the erratic nature of the wind or unpredictable cloudy days, but rather the result of policies that had allowed renewables to proliferate without sufficient regulation.

Solar boom hits infrastructure snag

Over 2020 and 2021 Vietnam experienced a rapid explosion in renewable energy generation. Most notably solar power. Favorable policies, specifically generous feed-in-tariffs for new solar projects in Vietnam’s central region, drove investment sky-high. In 2018 Vietnam had just 105 MW of installed solar power capacity but by the end of 2020 that number had ballooned to 16 GW.

But there was a problem. Too many projects had been approved without consulting the electricity regulators and this was leading to an increasingly overloaded grid, Tran Dinh Long, Vice President of the Vietnam Electricity Association remarked in May of 2021.

Despite this red flag, projects continued to come online and to come online quickly. Per policy limitations, projects that were not online by December 31, 2021, would not qualify for the aforementioned FiTs. If this happened, there would be no pricing mechanism and without a pricing mechanism power generators could not be paid.

Renewable energy, initially seen as a solution, was now posing its own challenges. A shift back to tried and trusted coal could have been one way to mitigate these risks.

However, the pivot back to coal in the October 2021 draft of the PDP8 was to prove short-lived too. Just one month later, Vietnam attended the Conference of Parties in Glasgow (COP26) and added a net zero commitment to the mix.

See also: Vietnam’s Solar Industry: Bright Prospects for Investors

Vietnam makes net zero commitment at COP26

In Glasgow, in November of 2021, Vietnam announced it would aim to be net zero by 2050. This was alongside a complimentary commitment to build no new coal power aside from what was already in the works–notably this may have been an easier commitment to make knowing the aforementioned funding challenges new coal power plants would face.

Regardless, Vietnam received plaudits from all around the world. But for a country significantly at risk from the impacts of climate change, reducing its carbon emissions was in the burgeoning Southeast Asian nation’s best interests too.

More to the point, it would mean a significant reworking of the PDP8 which was at this point now almost two years past due.

See also: COP26 and Climate Change: Vietnam’s Commitment to Reducing Emissions

Power pricing structure sees projects delayed, postponed

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Back in the central region, December 31 came and went with an additional 2.5 GW of solar power added to Vietnam’s capacity before the FiT deadline.

There were, however, a number of projects that failed to meet the deadline.

Whereas some of these projects were abandoned, others were put into action but would not be paid until a pricing agreement could be reached. Negotiations, however, between the operator and the state electricity provider, Electricity Vietnam (EVN), could not begin until MoIT developed a pricing framework.

But a much bigger challenge was on the horizon for Vietnam’s electricity supply. Energy prices were already inching their way up as the likelihood of Russia invading Ukraine became more and more likely. The impending war would be disastrous for EVN’s bottom line.

Russia invades Ukraine, energy prices spike

When Russia invaded Ukraine in February 2022 energy prices, already on the way up, skyrocketed. Over the first six months of the year, both gas and coal prices doubled. This put tremendous pressure on power providers the world over, with their profit margins quickly diminishing.

As the war wore on, the financial pressure on power providers became more intense, and action needed to be taken. This saw Thailand increase power prices by 18 percent, Malaysia introduce an energy surcharge, and Indonesia raise prices between 7.6 and 36.6 percent for some power users.

In Vietnam, however, despite an estimated increase in input costs of 9 percent, there was no power price change. Instead, the increased costs were absorbed by the state power provider. This was to the tune of up to 3 cents per kilowatt-hour (kWh) sold in some instances with EVN going on to report a US$1.5 billion loss in 2022.

Note, that EVN can only increase the retail price of electricity by 3 to 5 percent. If a price rise between 5 to 10 percent is needed it must be approved by the MoIT. Subsequently, a price rise higher than 10 percent must be approved by the Prime Minister.

For context, the Northern Electricity Corporation (EVNNPC) a subsidiary of EVN, was reportedly buying power at 10.8 cents per kWh but retailing that electricity at 7.7 cents per kWh. If these figures are correct, to break even, the retail electricity price would need to increase by 3.1 cents per kWh or 40 percent–well above EVN’s purview.

JETP agreement provides clarity, power plan back on track

While EVN was struggling to make ends meet in Vietnam, in the United Arab Emirates, in November 2022, the 27th Conference of Parties (COP27) was taking place. On the sidelines, Just Energy Partnership Agreements, that would provide funding for green energy transitions in developing nations, were high on the agenda.

At the time, there was a US$5 billion deal on the table for Vietnam. However, Vietnam would not sign on, with it rumored that key decision-makers were waiting for something bigger and better.

This was a clever move on the part of negotiators with a deal reached one month later in which the funding on offer had tripled.

Broadly, US$15.5 billion was now on the table split between private and public sector funds from around the world. Specific details were somewhat scant, however, coal was to be capped at 30 GW by 2030. This was considerably lower than the 40 GW outlined in the PDP8 in October 2021.

With this key cornerstone of Vietnam’s future electricity funding secured, another round of revisions would need to be made to the PDP8. However, the MoIT planners could now move forward with some degree of certainty.

See also: Unpacked: Vietnam’s US$15.5 Billion JETP Agreement

Electricity price rises, power plan approved

At the beginning of 2023, change was in the air.

On January 7, MoIT announced the FiTs for solar and wind projects that had failed to meet policy operational deadlines. EVN could now negotiate power agreements with power generators so that they could get paid potentially increasing the power supply from renewables.

This good news for power generators, however, was overshadowed by a warning from EVN that its losses in 2023 could be double what they were in 2022. It also expressed concerns that it could run out of money by May if retail electricity prices did not increase.

That was in February but it was not until May 4, that action was taken. This was in the form of an electricity price increase of 3 percent markedly lower than what analysts had predicted would be needed.

This bad news for consumers was further compounded by a warning from EVN that there may be power shortages in northern Vietnam in the coming summer months. This was attributed to water levels in its reservoirs being low and domestic coal production insufficient to meet demand.

That said, shortly thereafter, on May 15, it was announced that the government had given final approval to the PDP8. This was met with an almost audible collective sigh of relief from power providers and investors.

With a framework now in place, investors and developers could move forward in building, developing, and securing Vietnam’s energy infrastructure.

See also: Vietnam Government Approves Power Development Plan 8

See also: Feed-in Tariffs for Solar and Wind Power Projects in Vietnam

So, what does all this mean for foreign firms?

Securing Vietnam’s electricity supply will require huge sums of investment. The JETP agreement contains US$15.5 billion of support, though achieving the goals outlined in the PDP8 will require US$135 billion. Ergo, private capital will be needed and in huge sums.

Renewable assets in Vietnam may be available at a discount. Several power producers in the central region, in particular, are facing bankruptcy and looking for investors or buyers. In this sense, discounts may be available on some projects, though notably, it may take some time before infrastructure is sufficient to take that power where it needs to be. Investors may need to be patient.

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Location selection is important for renewable energy projects. This is not just weather related either. Policies can sometimes be linked to specific provinces like they were in central Vietnam, and power infrastructure often varies from province to province. Finding enough space for a large energy project that is close enough to key manufacturing and population centers can be challenging too. In this light, expert advice can make the crucial difference between success and failure.

Opportunities in grid infrastructure development may be on the cards. In 2022, the Law on Electricity was updated to allow for private investment in the construction of power grid infrastructure. It also allows private investors to operate the grid that they invest in. Whereas in the past grid infrastructure was commanded by the state power provider, these amendments could present a wealth of opportunities for private power infrastructure firms.

Electricity prices will likely increase again. With the vast disparity between retail price rises and rising input costs it’s likely that there will be some hefty price hikes in the not-too-distant future. Firms should be mindful of this, particularly those in high-energy manufacturing.

Moving forward

With a booming economy and an average GDP growth rate of between 6 to 8 percent a year, Vietnam’s thirst for electricity is seemingly unquenchable. Supplying this huge demand will take huge amounts of investment and foreign firms are well poised to benefit.

That said, the sector does face many challenges and there are a number of hurdles that investors may find need to be cleared to be successful in Vietnam. In this respect, the right support and guidance can be crucial. Foreign firms looking to access this dynamic and potentially very profitable sector would do well to make contact with a professional consultancy.

The experts at Dezan Shira and Associates are well-positioned to provide foreign energy firms with the advice and business intelligence they need to thrive in Vietnam. They can be contacted via email at: vietnam@dezshira.com

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