The price of power in Vietnam: not all dollars and cents

The price of power in Vietnam: not all dollars and cents

It's clear that meeting Vietnam's substantial energy demands over the coming
years is a tall order even in the best of circumstances. It is hoped that
renewable energy sources will play a large part in the country's energy
generation landscape, however, the dominance of large SOEs is blocking the
entry of more efficient private operations and slowing down the pace of
change.

Looking at recent trends in Vietnam's energy sector, it seems that these
state owned projects, backed by overseas development assistance, provide a
costly and sluggish source of electricity.

Such projects can be up to 40% more expensive to build and take 5 years
longer to power up than privately-developed plants. With demand surging,
these kind of timescales will prove problematic if supply is to keep abreast
of demand.

Bumps in the roadmap

Under the Electricity Law 2004 and Prime Minister's Decision 2005, the
Vietnamese government announced that the sector would move to a competitive
generation market (with EVN as the single buyer) from 2005 to 2014, a fully
competitive wholesale market from 2014 to 2022 and finally a competitive
retail market from 2022 onwards. Unfortunately, the liberalisation process
has been slow.

Vietnam's power sector is currently dominated by Electricity Vietnam (EVN),
an integrated state owned monopoly that covers all elements from generation,
to distribution, to retail. Herein lies the problem.

Not only does EVN routinely miss its main objective of ensuring a stable
electricity supply, but it also suffers significant annual financial losses
in the hundreds of millions of dollars. In response, EVN claims that the
average pricing of electricity is too low. In fact, the power giant is
experiencing a number of issues involving management inefficiencies, delays
in upgrading transmission and distribution systems and an inability to meet
national demand without relying on significant imports.

Financially strong foreign investors have the opportunity to invest in
EVN-funded distribution and transmission projects or BOT power generation
projects, but that doesn't go nearly far enough in introducing competition
to the wholesale market. Crucially, while the government wishes to encourage
foreign investment with BOT and PPP, procedures are often too complicated
and information not easily available. Foreign firms considering Vietnam as a
stepping stone into the Southeast Asian market, or as the next piece in an
international energy portfolio, can find themselves facing contradictory
information from diverse sources.

The public is well aware of the waste and inefficiencies that come with
state-owned power projects. Poor investment in infrastructure and inadequate
management have helped foster a negative perception of the electricity
sector's traditional monopoly structure.

The idea behind the country's reforms therefore, is to expose EVN to
competition by encouraging private and foreign investment, nudging the group
to improve its financial and operational performance. The ultimate goal
being to provide affordable and stably-priced electricity.

A distorted market

The 'iron fist' of EVN in Vietnam's energy sector presents a formidable
challenge to smaller private players. The barrier to entry is high, with the
group easily accessing foreign capital, as well as land and business
premises. Though current law does not discriminate against any entities
leasing land, it is estimated that SOEs hold 70% of production and business
sites.

Private firms in Vietnam struggle to join these markets as they lack the
favourable business conditions of the SOEs and lack the scale or resources
to fight it out. Energy is one of many SOE-dominated fields that lack
competitiveness, and recently-issued template PPA drafts for renewable
energy projects, dogged by claims of being 'unbankable', will do little to
change that.

Not only does this situation distort the market and pose problems for
reform, it does it at a premium. At the end of the day it is taxpayers who
pay the price for the outsized influence of SOEs like EVN. If the continued
dominance of SOEs suffocates the private sector and stifles innovative
technology the highest price could be an environmental one. As is clear,
weening Vietnam off coal is not an easy task and the country desperately
needs a private push.

Three decades of Doi Moi

The last thirty years have seen Vietnam undertake pro-growth initiatives
after a decade of post-war central planning. The liberalisation of markets,
shrinking trade barriers and the promotion of private enterprise in specific
sectors jumpstarted the economy and unlocked the potential of profit. The
huge project has progressed gradually, with the privatisation of SOEs an
example of later-stage reform.

The process inevitably puts financial and management practices under
scrutiny, and in turn promotes economic growth by increasing accountability
and incentivising efficiency. For success, it is important that Vietnam's
privatisation endeavours are partnered with internationally-recognised
standards of transparency.

A higher level of transparency will help foreign investors see examples of
'good governance', and thus attractive propositions in Vietnam. On top of
this, many of Vietnam's SOEs are laden with debt ($39.22 billion in 2015)
and structural inefficiency. A thorough understanding of the obstacles will
help in continuing the reform process successfully.

If Vietnam wants to ensure a competitive energy market that fosters the kind
of innovation needed to meet ambitious energy goals, transparency,
accountability and a commitment to strong reforms are key. Efficiency-driven
private sector projects, subject to greater market risk, will offer lower
cost per MW and strive for quick construction.

If Vietnam wants to hit the energy targets it has set, the dominance of
bloated giants like EVN will need to be curtailed, and favourable conditions
given to private firms. This will allow for more efficient capital
investment, more capable developers and more cost effective technology.
Vietnam's era of expensive energy should be brought to a close, especially
when there are better solutions on the table.

--- --- --- --- --- --- --- --- --- --- --- --- --- --- ---

Link to Original Article:
http://www.lexology.com/library/detail.aspx?g=fb317571-0958-4e99-8638-cd6b21
3a8e59&utm_source=Lexology+Daily+Newsfeed&utm_medium=HTML+email+-+Body+-+Gen
eral+section&utm_campaign=Lexology+subscriber+daily+feed&utm_content=Lexolog
y+Daily+Newsfeed+2017-08-03&utm_term=

--- --- --- --- --- --- --- --- --- --- --- --- --- --- ---

John Diecker
APT Consulting Group Co., Ltd.

www.aptthailand.com