Vietnam's proposed wind power price hike - is it enough?

Vietnam's proposed wind power price hike - is it enough?

One of the main criticisms levelled at Vietnam's wind power sector is the
relatively low feed-in tariff (FiT) introduced by the government in 2011.
With the country's rapid growth, energy demand is expected to soar over the
coming years. Coupled with international pressure to keep to its greenhouse
gas commitments, Vietnam is in desperate need of large-scale and long-term
investment in its renewable energy sector.

The buying price of VND1,614/kWh (US$0.078) was set for all land-based
projects in the country, with 6.8 cents paid by State-run power monopoly
Vietnam Electricity (EVN), and the rest coming from the country's
Environment Protection Fund.

However, the rate, intended to encourage the development of wind power
projects, was considered insufficient for investors to recover their
investment capital. The tariff is also much lower than in neighbouring
Indonesia (US$0.11), Malaysia (US$0.1476) and Thailand (US$0.19).

Change of direction

Vietnam's Ministry of Industry and Trade (MoIT) has recently proposed an
adjustment to the rate, asking the government to raise the buying price for
wind power in an effort to help investors cover high input costs. It is
hoped that such a move would push foreign firms to develop new wind power
projects or expand their existing farms. Accelerated development in this
sector is vital if Vietnam is to meet the energy targets it has set for
itself, as well as wean the country off dirty and expensive imports of coal.

The ministry has suggested the price be lifted to US$0.087 per kilowatt-hour
(kWh) for wind energy projects on land and US$0.0995 cents per kWh for
offshore farms. Such a rate would still lag behind regional competitors and
the global average of US$0.196 per kWh as reported by the World Energy
Commission, but may present a more feasible option to investors.

On top of the off-putting FiT, the number of wind power projects in Vietnam
remains low as only wind turbine towers, accounting for 20 percent of
production costs, can be produced locally, while investors have to import
the remaining components.

Not winding down yet

There's little doubt about the country's potential for wind exploitation -
according to a World Bank report, 8.6 percent of Vietnam's land mass is
suitable for the construction of wind farms, which would produce sufficient
electricity to meet a lot of current and future power needs.

Some of the country's currently operating wind farms, specifically in the
province of Binh Thuan, work with the previously promulgated FiT of US$0.078
per kWh, and the Bac Lieu wind farm enjoys US$0.098 per kWh due to its
offshore location.

The MoIT has highlighted these projects as part of the reasoning behind the
rate hike. Concerns have been raised by the investors behind the projects
over the time it would take to recover their investment capital. In fact,
the investors in question had previously requested authorities raise the
regulated FiT to $0.095 per kWh, but were unsuccessful.

According to the investor of the Phu Lac wind farm, the first phase of the
project, which came into operation in November 2016, has total investment
capital of VND1.1 trillion (US$48.4 million). With the existing FiT, it
would take around 14 years to recover the investment of just the first
phase. Considering the average lifespan of a wind farm is just 20 to 25
years, it's no wonder that developers are hesitant about breaking ground on
new projects.

As of now, there are 48 registered wind power projects with total capacity
of 5,000MW in Vietnam, 23 of which have had their pre-feasibility reports
approved by the MoIT and are patiently waiting for an increase in the FiT.
It remains to be seen whether the suggested increase is enough for the
projects to move ahead.

Incremental improvement

The proposal by the MoIT demonstrates an acceptance that despite a range of
tax benefits offered to foreign investors including exemptions from customs
duties, a preferential corporate tax rate of 10% and income tax and land use
fee exemptions, the government's initial energy strategy proved unappealing
to investors. To offset any complaints, the trade ministry has calculated
that the price adjustment they are proposing would raise EVN's production
costs by a slight VND0.08 per kWh this year and VND0.23 per kWh in 2019.

Even a light increase in the FiT, as put forward by the MoIT, could stoke
some growth in the sector. The attraction of foreign investors capable of
producing complicated parts could mean that the localisation ratio is bumped
to more than 40 percent. For example, China has reached a localisation ratio
of almost 100 percent for their wind power projects, but the selling price
of the energy stands at around US$0.08 per kWh.

In summary, the proposed hike seems insufficient to really improve Vietnam's
position as a renewable energy leader in Southeast Asia. The sector remains
riddled with problems of transparency and the perpetual presence of giants
like EVN is an obstacle for smaller private players looking to enter the
market. A meagre FiT does little to neutralise the risks faced by investors
and power producers, especially with more promising offers in the region.
The silver lining, however, is that authorities are open to change. The MoIT
is echoing the concerns of the renewable energy sector, from both
established and potential projects, and looking at ways to develop a more
favourable climate going forward. Even if they're not yet blown away by the
increase, investors would do well to watch this space.

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John Diecker
APT Consulting Group Co., Ltd.

www.aptthailand.com