By Fitch Solutions
- While we continue to maintain a robust growth forecast for Vietnam’s renewables sector, we believe that persistent regulatory and operational uncertainties will weigh on the near-term outlook and pose some downside risks.
- This stems from a lack of clear policy around the upcoming Power Development Plan, feed-in-tariffs for the wind sector, and procurement structure and bidding mechanisms for renewable projects going forward.
- Operational difficulties around grid bottlenecks for renewables integration will also pose a significant challenge to growth.
While we continue to maintain a robust growth forecast for Vietnam’s renewables sector, we believe that persistent regulatory and operational uncertainties will weigh on the near-term growth potential of the market and flag rising downside risks. We maintain our current forecast for non-hydro renewables capacity to more than double over the coming decade, to reach over 50.3GW by 2031. We expect growth to slow significantly over the near term (after the delivery of a backlog of projects due for completion over 2022), from levels seen in recent years, due to several regulatory and operational uncertainties. This will then pick up again towards the back end of our forecasts due to strong fundamentals and our expectations for an ongoing commitment for the sector, with more clarity going forward.
Although the government remains highly committed to boosting the market’s renewables growth, there appears to be continued disagreements between different governmental bodies around the trajectory of Vietnam’s power development plan. The government is set to announce a new National Power Development Plan 2021-2030 (PDP VIII/PDP8), however, at time of writing the specifics still remain uncertain. We note that the plan has already been revised four times since the first draft was released in February 2021, with notable differences across each revision, in terms of the roadmap that government wants to adopt for the sector. We believe the lack of a clear policy direction will weigh on near-term investor sentiment. Earlier this week, the Deputy Prime Minister said that the solar capacity targets are “too high” and should be lowered in favour of offshore wind power. Previously in December 2021, the Ministry also said they were looking to modify the PDP8 following Vietnam’s net zero pledge at the COP26 Summit, and will reduce the share of both liquefied natural gas and coal in its future energy mix. The Ministry of Industry and Trade (MOIT) has asked for the implementation of the plan to be deferred to Q2 2022, although we remain cautious on this timeline at present.
Renewable Capacity Additions To Slow
Vietnam – Net Non-Hydro Renewable Capacity Additions, MW
There also remains uncertainties around feed-in-tariffs (FiT) for wind projects, which have grown increasingly controversial in the market. The latest FiT rates expired on November 1 2021, and investors have been waiting for a final decision on the commercial operational deadline (COD) extension and revised FiT rates, which have already undergone several different proposals by the Ministry of Industry and Trade (MOIT) since 2020. This follows after strong appeals from several wind energy developers, industry associations and local governments from nine provinces over the past year, after the Covid-19 outbreak caused near-term headwinds to the sector. This is largely due to project delays stemming from supply chain disruptions, labour shortages and construction being forced to stop temporarily amid the Covid-19 outbreak, as well as delays to several wind project approvals. It remains unclear what the rate will be for projects that have missed the deadline. Several developers have now warned of a potential risk of bankruptcy if the deadline is not extended, and are making very strong coordinated appeals for it. In the latest proposal, MOIT had requested for a six-month extension with several staggered rates up to 2023, but this has yet to be finalised by the government.
As at end-October 2021, state-owned Electricity Vietnam (EVN) announced that 84 out of 146 wind projects have received a COD acceptance and signed their PPAs, with the remaining 62 projects, with a combined capacity of 3479MW, unable to meet the COD. Previously, EVN had reported that there are wind developments with a total combined capacity of over 5.6GW that have registered to begin commercial operations before November 1, 2021, which means that more than half of the projects (in terms of capacity) that were initially scheduled to receive the original FiTs now face financial risk. While many of these projects would have been accelerated to attain more favourable power purchase rates, we believe that it is unlikely that all of these plants would be able to achieve the COD. Across many sites, projects have yet to complete site clearance, land acquisition or attain relevant equipment, while deteriorating weather conditions in the wet season will also make it difficult to complete construction. We note that something similar also took place in 2019/2020 around solar FiTs, with disagreements between the MOIT and the Prime Minister’s office, causing significant uncertainties and multiple policy reversals. We believe that this sets a bad precedence for the market, and highlights the regulatory risk in the market, which may erode investor sentiment.
In addition, the government is looking to replace both solar and wind FiTs with a bidding mechanism but have not announced more details on it. The sudden shift toward auctions and uncertainties around bidding mechanisms could turn away some investors with a lower risk appetite, as it remains uncertain on how prices and returns will fare in Vietnam. The extent to which falling technology costs may offset the likely erosion of profit margins on projects under competitive auctions still remains in question. Furthermore, Vietnam still has a challenge in developing an auction and PPA framework that will be transparent, bankable, and limit the risk for investors. It remains unclear how the government intends to approach the implementation of the auction scheme for both solar and wind. We believe that some investors might adopt a wait-and-see approach before making their final investment decisions over the near term, until there is more clarity around a procurement framework.
Grid Capacity Limit Robust Renewables Expansion
Vietnam – Total Installed Non-Hydro Renewables Capacity, MW (LHS) & % Share of Renewables Generation (RHS)
We stress that Vietnam’s underdeveloped grid capacity will also continue to pose a challenge to growth. Vietnam’s MOIT have reportedly announced in January 2022 that the market will not add any more wind and solar power into this year’s power dispatch, due to a “lack of input facilities” to the national grid. We have long highlighted that Vietnam’s transmission infrastructure has not kept pace with its rapid capacity growth, and presents significant risk of bottlenecks to growth. The rapid build out of renewable projects have already caused grid overload and renewables curtailment, with wind and solar plants across many provinces, particularly in the southern regions, reportedly forced to reduce their output to maintain grid stability in recent years. Under the latest draft PDP 8, MOIT estimates the need for USD32.9bn to develop its power grids between 2021-2030. The plan proposes to continue the expansion of 500kV transmission systems to transmit power from power source centres in the central and southern regions to larger load centres in Ho Chi Minh City and the Red River Delta. The ministry is also mooting the application of smart grid and the 4.0 technology into the transmission network. In addition, the government is also considering to allow private investments into transmission lines and substations below 500kV, which is now controlled exclusively under state-owned EVNNPT. We believe that if the proposal is approved, this will encourage more growth and opportunities for investors, amid the government’s commitment to develop and improve grid infrastructure. This will support continued power expansion across the market and integrate the intermittent nature of renewables, underpinning our growth forecasts for the market.
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