The sun rises on Vietnam's energy sector

The sun rises on Vietnam's energy sector

Over the past three decades Vietnam has witnessed startling economic success
thanks to the country's openness to international trade and investment. The
energy sector in particular has grown rapidly, with abundant hydrocarbons
and hydropower resources allowing the country to keep pace with the energy
demands of a rising population.

However, there may be clouds on the horizon. The most easily-accessible
resources are running out and imports of coal and gas will be increasingly
needed to keep industry chugging along. To maintain its high rate of growth
Vietnam will be looking for huge investment over the coming years. In order
to do this, and keep to its international greenhouse gas commitments, the
government has set its sights on some ambitious targets for solar power
generation.

Recent decisions issued by the government represent baby steps in this
direction. Evidently, there is some enthusiasm for a solar-powered future,
but is it enough?

Keeping the lights on

The country's energy needs are immense. Rapid industrialization and
urbanization has increased energy consumption growth to an average of 12
percent per year - almost double GDP growth. Vietnam has risen to the
challenge, hooking up almost all households to the national grid, with the
remaining rural villages expected to be powered up by 2020.

The country's power production is expected to grow at an annual rate of 14
percent between 2015 and 2030 in order to fuel its expected economic growth
and supply energy to its population of over 90 million people.

Fossil fuels are still the dominant sources of energy, generating over 66.2
percent of the country's power, according to the World Bank. Coal has taken
over from hydropower as the leading source of electricity, and more
coal-fired thermal plants are being built to meet demand. Vietnam is also
buying electricity from neighboring China to stem the outages that sometimes
hit rural areas.

However, the government, proud of the country's currently low carbon
footprint, is intent on decreasing reliance on fossil fuels. It has
committed to cutting coal consumption 30 percent by 2030 and is turning to
renewable energy to help provide its power needs.

A Renewable Energy Development Strategy, published in 2015, is evidence of a
growing appreciation for the part alternative sources of energy will play in
the nation's power production. The revised Power Development Plan 7 (PDP 7)
targets a 6.5% share of electricity generated from renewable energy by 2020
and 10.7% by 2030. Such achievements would have a side benefit of reducing
greenhouse gas emissions by 25 percent.

A step in the right direction

While wind has been the main focus up until now, 2017 may well be the start
of Vietnam's solar future. Geographically, Vietnam is well positioned to
achieve these goals, having one of the highest number of annual hours of
sunshine globally, approximately 2,000 to 2,500, on average. The country
racks up solar radiation of 4.5KWh per sq metre per day, so the sunlight is
there for the taking.

According to PDP 7, the capacity of solar photovoltaics (PV) is slated to
grow to 850MW by 2020 and 12,000 MW (12 GW) by 2030, accounting for 3.3
percent of total energy production that year.

In April, the government confirmed a feed-in tariff (FiT) scheme for
utility-scale solar projects and a net metering scheme for rooftop PV
systems. The proposed FiT has been set at VND2.086/kWh (US$0.0935). This
tariff has been set according to the current exchange rate and would only
apply to projects where cell efficiency is more than 16% or module
efficiency more than 15%.

The government followed up on the announcement in May with the Ministry of
Industry and Trade of Vietnam (MOIT) releasing a draft circular providing
some more details on the direction for solar power projects in Vietnam.

The circular released included a solar power purchase agreement (PPA),
providing some insight into the kind of deals the government would be
pursuing when it comes to Vietnam's energy sector. The most important
factors in the development of renewables will be attractive tariffs and
incentives that offer a better choice over Southeast Asian neighbours.

The draft circular, although warranting optimism, leaves certain key issues
unresolved, which will have an impact on the bankability of solar projects,
especially for large utility-scale solar power plants. Some adjustments may
be needed if this effort to bolster the domestic renewable sector is to be
successful.

How to fix the PPA in 3 easy steps

Out of the information released in the draft circular, the proposed PPA is
attracting the most attention. Once agreed upon, investors will have to use
the PPA to sell the electricity they generate in Vietnam, and it is unlikely
that major changes will be permitted.

Three elements in particular stand out, and improvements on these could
ensure Vietnam's solar sector shines for investors.

A fair rate: As mentioned previously, the government has set the FiT at
$0.0935/kWh, based on the VND/USD exchange rate. Although this is a
reasonable rate for the region, the proposal means that significant risk is
shouldered by investors. Lacking an escalation clause, the PPA proposes no
indexation of the rate according to CPI or inflation.

FiTs are the most widely used policy in the world for accelerating renewable
energy deployment. To encourage solar sector growth in Vietnam, policies
need to offer investors stable, long-term revenue streams. In uncertain
times, it's crucial to protect the real value of project revenues from
changes in the broader economy. A number of approaches can be used to adjust
for inflation, and many countries use one form or another to give investors
some added security.

Reducing risk: Under the proposed PPA, Electricity of Vietnam (EVN) is named
as the sole purchaser of energy generated from solar power projects.
Particularly problematic is the fact that the purchaser has the right to
stop purchasing electricity in circumstances that are outside of the control
of the seller, and without having to provide any compensation.

This lack of payment protection in instances of force majeure shifts a large
portion of risk onto investors. In general, and as per comparable agreements
worldwide, the power producer is rarely required to take on such risks. In
fact, the Vietnamese government knows this well and there are multiple
examples of it agreeing to international-standard force majeure terms in
other project financed energy deals. So why not for solar? As with the FiT,
the bankability of the PPA will depend on investors seeing a stable revenue
stream for the lifetime of their projects. Too much risk, and producers will
look elsewhere.

A firm future: If the PPA is terminated by EVN the seller will only be able
to recover payment for 1 year of electricity generated, and will not be able
to recover any outstanding debts. This limited protection will mean
investors are less likely to put cash down on pricey projects for fear
they'll be unable to recoup costs if EVN backs out.

In summary, solar power projects in Vietnam face significant shortfalls in
protection under the government's proposals, and investors may be wary of
shouldering such risks when looking to make long-term investments. The
recent decisions are an acknowledgement of Vietnam's solar potential, and we
hope that the issues mentioned are taken into account so that the country
can become a poster child for renewable energy in the region and the wider
world.

Adjustments on the three points listed above would certainly make the
government's proposition more attractive, and ultimately ensure that the sun
doesn't set on Vietnam's clean energy future.

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John Diecker
APT Consulting Group Co., Ltd.

www.aptthailand.com