Commitment to net zero by 2050
The PDP8 continues to prioritise the development of renewable energy to further Vietnam’s commitment to reach net-zero emission in 2050. Renewable energy capacity is targeted to reach 40GW or 40 per cent of the national power capacity by 2030 and 360GW and over 70% by 2050. There will be no limit on the capacity of behind-the grid solar power projects. At the same time, no new coal-fired projects are added to PDP8. The coal-fired power capacity is targeted for reduction to 20 per cent of national capacity in 2030 (compared to 30 per cent today) and elimination by 2050.
At the end of 2021, the wind and solar energy capacity of Vietnam reached 20.6GW, or 27 per cent of national capacity. Doubling the current capacity in the next seven years is well within reach. After new regulation is enacted to permit corporate power purchase agreements (“PPA”) and realise the removal of the cap on the capacity of behind-the-grid solar power projects, there will be abundant new opportunities for investors who do not need to rely on Electricity of Vietnam (“EVN”) to offtake energy.
Although wind and solar energy comprises nearly 30 per cent of national capacity, their generation rate has been limited to 10-13 per cent. Main reasons include (i) the weather-dependent nature of those energy sources causing them to have the low generation during peak demand hours, (ii) an overloaded grid making it difficult to transmit energy from southern provinces where renewable energy were abundant to the north where demand was high, and (iii) regulatory issues especially the lack of clarity around tariff policies causing delay to projects.
A balanced development strategy between small renewable power projects and other more stable energy sources including offshore wind and gas-to-power will be important to address the ongoing supply crunch.
(Un)wavering commitment to offshore wind power
Compared to the first draft in late 2021, the final PDP8 has tripled the capacity allocated to offshore wind power projects to 6GW by 2030 or 4 per cent of national capacity. This target has driven increased investor confidence in the prospects of offshore wind projects in Vietnam.
The government will need to urgently develop the legal framework for, among others, granting site survey licences and selecting investors in offshore wind projects. Perhaps because the policymakers understand those regulatory developments will take time, despite the ambitious 2030 target for offshore wind, the PDP8 includes an initially confusing but ultimately logical provision that the government does not plan to develop major inter-regional transmission lines connecting central southern provinces (where all the major offshore wind power projects are being proposed) to the northern region (where electricity demand is highest) before 2030.
Priority for domestic gas projects
As coal-fired projects are phased out, development of gas-to-power becomes increasingly essential to ensure a stable base load. The PDP8 prioritises domestic gas to reduce the country’s foreign dependence. By 2030, power projects using domestic gas are targeted to have a total capacity of 15GW or 9.9 per cent of national capacity.
At the end of 2020, the total capacity of domestic-gas fired power projects was about 7GW: a result of over two decades’ development. History teaches us that doubling existing capacity to 15GW in seven years will require hard work. No new domestic gas fields have been developed in Vietnam in the last 10 years, and existing production is declining. The two major gas fields, Blue Whale and Block B, declared commercial discoveries more than 10 years ago but have not yet started production. Most recently, in May 2023, EVN requested PetroVietnam prioritise gas supply to power plants at the expense of temporary suspension of two important fertiliser plants in southern Vietnam, a proposal not well received by PetroVietnam and the agriculture industry.
One major bottleneck that has long delayed upstream domestic gas projects is difficulty in reaching an agreement on the gas offtake price with downstream power plants, most of which are owned by state-owned PVPower and EVN. To close the gap, a coordinated effort between the gas and power industries will be required, in which the Ministry of Industry and Trade (“MOIT”) as the regulator of both industries must be empowered (and shielded from liability arising solely for market reasons) to make bold decisions based on a realistic assessment of domestic gas supply capacity and electricity demand.
Brave dream of LNG-to-power
Perhaps the bravest ambition of the PDP8 is in its plan for liquefied natural gas (“LNG”) to power. In less than seven years, the LNG-to-power capacity of Vietnam is targeted to grow from zero to 22.4GW, accounting for 14.9 per cent of national capacity. By 2030, LNG-to-power projects are targeted to supply 14.7 per cent of the national demand.
The PDP8 includes a list of 15 LNG-to-power projects that will be prioritised before 2030. About one-third of those projects have not been awarded to investors and may be subject to competitive bidding for investor selection, a complex and time-consuming process. Some 14 out of 15 projects have not achieved financial close, let alone commenced construction. It is worth noting that prior thermal power projects in Vietnam consistently took 7-10 years to reach financial close.
Relying on LNG-to-power to supply over 14 per cent of national demand by 2030 could be either a risky bet or a brave decision of the Vietnamese government to phase out coal. If the latter, urgent actions will be required to assist the shortlisted projects to secure financing. In this regard, consistency and coordination amongst central governmental ministries, provincial authorities and state-owned companies such as PetroVietnam and EVN will be critical. Most importantly, EVN must be mandated to agree to a robust power purchase agreement with the investors setting out a well-balanced risk allocation mechanism acceptable to international financiers.
The PDP8 anticipates the potential delay of LNG-to-power projects by prescribing that if any of those projects are potentially delayed, the Prime Minister may decide to replace the delayed projects with others. But investors will not invest millions of dollars to prepare for a project if it is not listed in the plan. A replacement project at an interim stage of development may in reality be nowhere to find when the time comes.
Energy transition goals
PDP8 contemplates a longer term plan for energy transition. By 2050, Vietnam will no longer use coal for electricity generation. Coal-fired projects converted into biomass/ammonia fueled projects will have the capacity of 34GW or 6.6% of national capacity. Gas-fired projects (including domestic gas and LNG) converted into the use of hydrogen will have the a total capacity of 28.9 GW or 5.1% of national capacity. Sponsors of newly proposed projects should take into account those energy transition requirements when preparing the project proposals.
The Government aims to export 5-10 GW of energy to neighboring countries in 2030 and plans to develop the transmission facilities to connect with the neighboring grids. As cross-border interconnection may present national security concerns, foreign sponsors with support from their respective governments as part of an established diplomatic relationship with Vietnam may have a competitive advantage.
Awareness of capital needs but more actions needed
PDP8 estimates that Vietnam will require about US$12 billion of investment annually in 2021-2030 and over US$20 billion annually in 2031-2050 for developing power plants. In 2011-2020, capital expenditure from EVN made up only one-fifth of $75.5 billion investment capital in electricity generation. Private and especially foreign capital will continue to be critical to the growth of the power industry in the next decades.
As pointed out in the PDP8, it is important that the government creates better conditions for private and foreign investors and lenders investing in Vietnam. In addition to classic financing hurdles (e.g., non-bankable model PPAs, and challenges in taking and enforcing security interests), other issues have emerged in recent years:
- Uncertainty in the legal framework and its enforcement in the past few years has reinforced investors’ concerns about change-in-law and curtailment risks in Vietnam. If no compromise is offered by the government as seen in recent years, the prospect of finding financing for future large scale offshore wind and gas-to-power projects will dim considerably.
- Legal restrictions on offshore refinancing have materially affected the liquidity of projects.
- Inflexible interpretation of the law by certain government authorities when assessing the financial and technical quality of investors has failed to take into account different corporate structures commonly used in the international market, restricting the ability of certain types of investors to participate. For example, the requirement that an investor use its ultimate parent company (rather than a special purpose vehicle) to own projects would be commercially unacceptable for most international sponsors. The conventional assessment of equity capital of the investors based on their balance sheet may unfairly and unreasonably exclude investors structured as private equity funds, starving Vietnam’s power industry of an important source of funding. It is recommended that when evaluating investor capacity, the government should take into account the broader capacity of the ultimate investors in those funds and the track records of fund managers and their affiliated funds in developing and operating projects globally. The restrictions on transfer of project equity should also allow the those funds to restructure its investment portfolio amongst different affiliates where required to accommodate the funds’ capital commitments to its investors.
Commitment to legal reform
Following the enactment of PDP8, the MOIT is instructed to develop an implementation plan for submission to the Prime Minister in June 2023.
PDP8 highlights key regulatory reforms required to achieve the prescribed development goals. The Law on Electricity will be revised to improve regulations on investment approval, electricity tariff, development of the competitive electricity market, and separation between the role of regulators and state-owned utilities. New legal framework is required for (i) competitive bidding for investor selection and tariff determination, (ii) direct/corporate PPA scheme; and (iii) private investment in transmission lines. The Government also plans to develop a specific law dedicated to renewable energy.
Despite the legal reform commitments, previous draft legislation on competitive bidding for selection of investors or direct power purchase scheme shows many gaps which if not properly addressed when enacted may be counter-effective and further delay the relevant projects.
Growing pain
The success of renewable energy projects in the last five years has contributed significantly to the economic development of Vietnam. There is no doubt that the strong commitments and bold actions taken by the government, especially the MOIT and EVN, were among the most important success factors. Those actions should be appreciated in the context of the nascent legal framework, where the regulators and the market were left with no choice but to learn by doing.
However, growth has its inherent growing pain. If this pain is not managed appropriately, it may dissuade others from proceeding when there is a lack of clarity about the future. Following the PDP8, the market is looking for bolder and stronger actions from the government to push forward those aspirational goals, which cannot be achieved if key stakeholders, including regulators, are intimidated by, or punished for, taking actions required to achieve those goals.
To avoid the current situation in the north spreading further, any policies or political decisions taken during this critical time should take into account their impacts on the power industry with a longer-term view matching the ambition of the PDP8.
Authored by Ngoc Nguyen, Gaston Fernandez, and Jacky Scanlan-Dyas.
