Vietnam’s Energy Efficiency Project: Credit Guarantee for Energy Saving Businesses
The Vietnam Scaling Up Energy Efficiency Project (VSUEE) was approved to improve energy efficiency across Vietnam’s industrial sectors. Recently, the project announced a 50 percent credit guarantee for industrial enterprises (IEs) and energy service companies (ESCOs) involved in energy-efficiency sub-projects. Vietnam Briefing explores the project’s highlights and how enterprises can benefit.
Vietnam’s energy consumption has been soaring in the past decade as it establishes itself as a regional manufacturing powerhouse. The majority of its electricity is generated from burning coal, natural gas, and oil. National energy consumption has doubled since 2010, from 1.87 exajoules to 4.09 exajoules as of 2020, as shown below:
|Year||Energy consumption (in exajoules)|
Such high demand, however, has also come at a cost to the environment.
Currently, the industrial sector of Vietnam constitutes up to 47 percent of national electricity consumption, becoming the dominant energy consumer. While experts have held that between 20 and 30 percent of energy can be saved from the industrial sector, mainstream industrial enterprises have not done enough to invest in energy-saving technologies, given the lack of awareness and benefits.
The Vietnam Scaling Up Energy Efficiency Project
To promote sustainable energy consumption, in June 2019, Vietnam’s government officially approved the Vietnam Scaling Up Energy Efficiency Project (VSUEE). The project is led by the Department of Energy Efficiency and Sustainable Development, under the Ministry of Industry and Trade (MoIT). The aim of the VSUEE project is to promote energy efficiency within the industrial sector to scale up productivity while cushioning air pollution in the country.
However, it was not until March 2021 that the project received funding from international bodies. In March 2021, the World Bank (WB), on behalf of the Green Climate Fund (GCF) – a fund established under the United Nations Framework Convention on Climate Change (UNFCCC), signed a grant with the State Bank of Vietnam worth US$11.3 million, along with a US$75 million guarantee to promote the development of participating financial institutions (PFIs) supporting energy-efficient enterprises. The total grant, thus, amounts to US$86.3 million.
The VSUEE project has two components:
- The first component, the risk sharing facility (RSF), promotes the establishment of RSF to provide partial credit guarantees (RSF guarantees) – which have been officially announced as a 50 percent credit guarantee recently by the MoIT, for PFIs in providing loans for Industrial Enterprises (IEs) and Energy Service Companies (ESCOs) engaged in energy efficiency certified projects.
- The second component, technical assistance, leverages the success of relevant authorities in strengthening policy frameworks and regulations in the energy efficiency market in Vietnam; at the same time, providing funds for building capacities of private enterprises to develop and execute energy-efficiency projects).
The recent US$11.3 million grant will be split into two parts, for the two components of the project. US$8.3 million of the grant will be allocated for the second component to fund industrial enterprises in scaling up facilities and capacities in implementing energy-saving projects and adopting energy-efficient technologies while assisting the MoIT in enforcing policies and administration systems.
The remaining grant and the guarantee fund will be assigned for establishing RSF. The RSF will provide 50 percent credit guarantees to support local banks exposed to potential defaults on loans for energy efficiency projects of private enterprises. With reduced lending risks for banks and low collateral requirements for IEs and energy service firms, RSF is projected to mobilize approximately US$250 million of commercial financing.
It has been officially announced that the operation and management of the RSF fund will be implemented by the Saigon-Hanoi Commercial Joint Stock Bank.
The target sectors of the project are presented below.
|Public admin-energy and extractives||5%|
|Other industry, trade, and services||5%|
It can be concluded that the VSUEE is mainly about infrastructure finance, with a modest contribution to energy policies and reform.
VSUEE project sets its goals for the 2019-2025 period as follows:
|Projected energy or fuel savings||577 GW|
|Projected lifetime fuel savings||398 GW|
|Projected electricity generation savings||179 GW|
|Targeted commercial financing mobilized||US$251 million|
|Targeted number of IEs/ESCOs participating in trainings/workshops||200|
|Targeted number of bankable energy efficiency projects developed||100|
|Targeted number of training courses offered to women-led SMEs to become clean energy entrepreneurs||5|
|Targeted number of IEs adopting improved energy efficiency technologies||75|
How will industrial enterprises benefit from the VSUEE project?
The VSUEE project sets out to support and encourage mainstream enterprises in the industrial sector to adopt energy-saving technologies in their production.
Enterprises engaged in energy-efficient projects or energy service companies wishing to take out loans from local banks are backed up by the 50 percent credit guarantee from RSF. This will loosen the financial burden for firms when satisfying the collateral requirements while enabling them to gain access to a larger source of capital.
In other cases, the RSF mechanism will help cushion the financial distress if companies default on their loans from PFIs.
Enterprises and ESCO units will enjoy practical benefits from more investment in technology advancement, and reduced energy consumption, thereby minimizing production costs and greater competitiveness in both domestic and foreign markets.
In addition to the significant capital access of component 1, component 2 of the VSUEE project will provide technical support and capacity building for enterprises during their transition to economical and efficient use of energy.
From the perspective of financial institutions, namely banks, additional lending products and improved capacity to supervise and examine energy-efficiency projects are two merits they are able to grasp from the implementation of VSUEE.
The WB anticipates that Vietnam could save approximately 11GW of new generation capacity in the next decade should the industrial sector actively execute energy-efficiency projects while accelerating their transition to more sustainable energy consumption.
Aligning with Decision 450 on the long-term strategy on environment protection, economic gains should go hand in hand with decarbonization, which is also at the core of VSUEE, as Vietnam attempts to transform into a fast-growing, green, and sustainable economy in the region.
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