An extract from IEEFA‘s report on the same title
Vietnam has previewed its power development plans for the next decade, featuring a well-timed move away from over-reliance on inflexible coal-burning independent power projects (IPPs) and a pivot toward renewables and LNG. IEEFA has analyzed Electricity of Vietnam’s (EVN) financial outlook to understand how the company can manage the dual challenges of meeting its growing fixed payment obligations to independent power producers (IPP) and realizing the goals laid out in the country’s latest power development plan, PDP 8.
Given EVN’s constrained financial position, the key will lie in embracing flexibility and avoiding lock-in — a scenario where the build-up of high-cost fixed IPP obligations is so rapid it prevents Vietnam’s from implementing the cost-effective power market innovations that will certainly emerge over the next five years.
The most dynamic aspect of the PDP pathway will rest on the ability of EVN and the Ministry of Industry and Trade (MOIT) to optimize renewables—the best options for obtaining new sources of financing and a rapid pathway to low cost capacity. With the right policies to support market development, EVN has a unique opportunity to attract competitively priced investment in the most cost-effective renewables technologies and much-needed grid infrastructure.
Critical questions remain over EVN’s ability to win support for tariff increases and to find a cost-effective way to scale liquefied natural gas (LNG). Implementation risks may be higher than some analysts expect due to global market instability and geopolitical cross currents.
Vietnam’s power industry will be widely scrutinized this year as policymakers decide on the sector’s size and structure for the next decade. The policy choice in favor of a transition to clean, renewable energy is clear. The Power Development Master Plan for 2021-2030 with a vision to 2045 (PDP 8) will elaborate on the parameters of this transition, establishing the exact room for growth for each energy type, the accompanying infrastructure, and the role to be played by different market actors.
EVN will be at the center of this decision-making process, with the state utility group’s operational and financial capacities not only influencing the shape of PDP 8, but also determining how policies will be implemented. For the past decade, the Vietnamese government, led by the MOIT and EVN, has been in a race to expand capacity. Electricity consumption has grown by an aggressive 10% annually and the system has been under pressure to keep pace with the economy’s rising growth potential. Between 2015 and year-end 2019 alone, Vietnam’s installed power capacity grew by 42.3% to 54.9 GW while GDP grew 30.0%.
This pressure for rapid capacity build-up has triggered significant changes in market structure. EVN is financially constrained by limited sources of domestic funding and lacks direct access to international capital markets for low-cost financing. EVN has, therefore, had to rely on international developers with access to low-cost capital to finance power generation, retaining full control only in transmission and distribution activities, at least for now. Over the past five years, EVN’s own generation capacity shrank from 61% to 52% of the total system, a ratio we expect to fall even more rapidly in coming years.
EVN’s reliance on foreign-funded coal IPPs to provide baseload capacity has now resulted in the same financial and environmental problems that have undermined the growth of coal globally. Project development in Vietnam has slowed dramatically because of community push-back, opaque deal structures, and growing awareness of the risk of lock-in due to inflexible capacity payment structures. These issues have encouraged MOIT to develop incentives for the adoption of renewable energy.
In 2017, MOIT turned to renewable energy to quickly fill the gap left by unrealized fossil power plants and was proven right. Vietnam’s energy mix now has 5.1 GW of solar power, with the government intent on replicating this success in the future. These shifts in the market’s ownership structure and generation mix will have a highly material impact on EVN’s financial health and future planning of the system.
The state utility needs to anticipate the rapid build-up of guaranteed IPP obligations. This fixed cost structure is challenging to manage when revenues are reliant on politically sensitive tariffs that are more resistant to adjustments. At the same time, EVN also needs to prioritize a system infrastructure upgrade to manage load more efficiently and help optimize a new energy portfolio consisting of variable renewable energy sources. The latter has been a pain point in the past year.
Building on the last decade’s growth trajectory, the preliminary draft of PDP 8 published by MOIT in July put forward an aggressive capacity expansion plan for Vietnam’s power system. Total installed capacity is set to more than double to 138GW in 2030 and reach 222GW in 2040.
Unlike previous plans, however, the expansion will be driven primarily by new solar and wind energy projects and gas-fired power plants. These sources combined will make up 47% of the system in 2030, rising to 60% in 2040. Acknowledging the many problems with coal IPPs, PDP 8 cancels and postpones until after 2030 up to 17GW of coal-fired capacity, or nearly half of the pipeline.
Vietnam has vast untapped solar and wind potential and the commitment needed to ensure that the incremental 15.6 GW of solar and wind capacity expected by 2025 will attract funds from new and existing investors. It is, however, notable that PDP 8 relies on conservative estimates concerning cost improvements of only 26.8% for offshore wind, 30.5% for onshore wind, and 28.7% for solar over the next 25 years.
PDP 8 is a step change for EVN. Such ambition will naturally call for new policies. Luckily, the Vietnam market’s demand growth potential is well understood by potential partners, thanks to Vietnam’s strong track record of attracting investment in new supply chain manufacturing capacity and positive trends in the domestic consumer market.
Less clear is how much of this proposed growth can be funded directly by EVN and its ratepayers, and how much will be financed indirectly by IPPs and other funding partners. Setting realistic tariff and funding expectations will be crucial for both analysts and investors who want to understand EVN’s capacity to implement ambitious new system development plans.
The full report can be accessed by clicking here