Vietnam looks to its next master plan29 April 2020
With the Vietnamese government in the process of formulating its Power Development Master Plan VIII (2021-30), due for completion in June 2020, the influential Vietnam Business Forum (VBF)* has launched its Made-in-Vietnam Energy Plan 2.0 (MVEP 2.0) (https://vbf.org.vn/2020/01/21/book-midterm-2019-eng-2-2-2/).
The basic thrust of MVEP 2.0 is that an energy strategy that focuses on renewables, natural gas, energy efficiency and battery storage will attract private sector investment.
MVEP 2.0 updates MVEP 1.0 (2016) and has been developed during a time of fast-paced transition in global and local energy markets, VBF says, noting that the sustainable energy technologies of the future, such as solar, wind, and lithium-ion battery storage – once thought only to become economically feasible by the late 2020s or 2030s – have drastically decreased in cost and subsequently accelerated in scale.
Today, they are now frequently outcompeting unsubsidised fossil-fuel-based power technologies across the world. Coal power plants that were once highly bankable and the lowest-cost option for rapidly developing economies are now harder to finance as investors see a trend in concerns over health and environmental degradation, the deterioration of plant load factors, and early plant retirements.
Vinh Tan coal fired power plant, Vietnam (EVN)
As sources of financing for coal thermal in Vietnam have declined, more reliable energy sources, renewables, and increased efficiency measures have continued to advance. Accurate assessment of cost, tariffs, taxes and pricing can lead to a regulatory environment that mobilises the private sector to meet Vietnam’s energy goals of reducing energy intensity and increasing clean energy production, MVEP 2.0 says.
In fact, as the cost of solar and wind has declined relative to other energy sources, investor interest in renewables has increased, despite the financial risks associated with Vietnam’s current regulatory environment. MVEP 2.0 recognises the rapid growth of solar and wind energy generation projected for Vietnam, but also recognises the need to get the regulatory structure right in order to extend the current boom in renewables to battery storage systems, increased energy efficiency and natural gas.
According to data from the Ministry of Industry and Trade as of January 2019, more than 330 solar power projects with a total registered generating capacity of 26 000 MW were in various stages of approval. Among them, 121 projects, with a total generating capacity of 6100 MW, had already been approved and added to national and provincial plans. Among these, one large private investment project located in Ninh Thuan province, with a cluster of three facilities and a capacity of 330 MW, was connected to the national grid in April 2019. This is the largest solar power facility in southeast Asia, MVEP 2.0 notes, with a total of more than 1 million panels and a total investment of more than VND 7000 billion (over $300 million).
This “ignition of interest in renewables” indicates the potential for rapid development under effective policies and current market conditions, MVEP 2.0 suggests. However, it cautions that any ambition to expand renewable energy generation further will be constrained by the barriers still facing both consumers interested in purchasing clean energy and producers seeking access to capital financing.
The target for coal power plants in Power Development Master Plan VII was reduced by a modest 2.2 percentage points in the most recent revision, MVEP 2.0 notes, from 56.4% to 54.2% of total generation by 2030, with an increase in coal generating capacity from the current 19 GW to 55 GW.
But rising generation costs suggests that the percentage of energy produced by coal can and should be reduced further, argues MVEP 2.0.
Currently, the expected generating cost of supercritical coal generation using imported coal exceeds 1800 VND/kWh, greater than the effective cost of solar energy installed as of 1 July 2019, MVEP 2.0 says (although intermittency needs to be taken into account).
Vietnam's power generation fuel mix, 2018 (Source: EVN)
Given the cost advantage of renewable energy and energy efficiencies (costs are falling and can be fixed) relative to fossil fuels (costs are increasing and are unpredictable), the limited available financing for a large buildout of coal-fired power plants coupled with related risks and costs to health and the environment, the beneficial current role of hydropower, and the diverse range of commercially available energy options in Vietnam, MVEP 2.0 makes what it regards as a compelling business case that the planned percentage of power generated from renewable energy, saved by energy efficiency technologies, and produced by gas can and should be increased further in Power Development Master Plan VIII.
And critically, MVEP 2.0 makes the case for an energy plan and policy framework that can substantially attract the private sector capital – both domestic and foreign – that will be needed to supplement government financing in order to build a robust power system for Vietnam.
In addition to the economics, MVEP 2.0 reasons that significant threats to energy security and financial risks would persist under a coal-focused energy plan. These concerns are related to the increasing need to import coal, threats to public health, environmental costs and degradation, and potential for abandonment of coal plants. Furthermore, the current coal-intensive pathway is at odds with global trends toward low-carbon economies, Vietnam’s national commitments to reduce carbon emissions, and industry demands for fulfilling corporate sustainability goals. Power Development Master Plan VII ran counter to these efforts and interests, which will continue to contribute to environmental and public health crises related to poor air quality, smokestack emissions, the dispersal of y ash, slurry ponds, and the siting of power plants, MVEP 2.0 argues.
MVEP 2.0 sets out what it calls an alternative plan for Vietnam’s energy future by recommending a cleaner, more affordable, and sustainable energy pathway with three primary goals: meeting growing energy demand; securing energy independence; and enabling consumer access to clean energy.
It recommends a diversified energy system that prioritises the use of Vietnam’s domestic energy resources.
MVEP 2.0 proposes six business-oriented measures that it believes would improve the reliability and affordability of Vietnam’s energy system:
• Prioritise renewable energy in national power planning
There are alternative scenarios where renewables (excluding hydropower) could account for up to 30% of capacity by 2030. These alternative scenarios, which are aligned with Vietnam’s Nationally Determined Contribution (NDC) commitments, require regulatory support and incentives to leverage private sector investment now seeking opportunities to invest in Vietnam. Engaging the private sector, with its experience in market analysis, finance, and serving consumers’ needs, in developing Power Development Master Plan VIII would increase the effectiveness of the planning process, MVEP 2.0 argues.
• Increase use of natural gas as the current best-fit baseload for renewable energy
MVEP 2.0 recommends tax levelisation for the development of certified domestic offshore gas and the importation of LNG as the current best fit baseload for renewable energy. Gas-fired electricity can easily scale to the size necessary to meet the significant demands of Vietnam and can respond to intermittent load fluctuations and outages more rapidly than coal. Furthermore, while battery storage can potentially provide Vietnam with intermittent load options, offshore gas and LNG projects have the developers, investors and financing to make them bankable now. Incorporating imported LNG into the mix enhances Vietnam’s energy supply while long-term supply contracts for domestic offshore gas are developed. LNG is much cleaner than coal and when disease, death and coal-ash cleanup are also taken into account, gas becomes even more affordable than coal, MVEP 2.0 argues.
Under the current tax regime, the development of offshore gas fields in Vietnam can either provide significant revenues to the government through taxes and royalties, or if taxes and royalties are reduced, more affordable energy for consumers, MVEP 2.0 suggests.
• Construct a regulatory and permitting environment that attracts private sector investment in clean energy generation and energy efficiency
PPA: MVEP 2.0 recommends that the standard power purchase agreement (PPA) for wind and solar energy projects be made internationally bankable by establishing feed-in tariffs (FITs) well in advance and reducing regulatory hurdles. MVEP 2.0 strongly urges transparency regarding any changes to FITs and encourages discussion on how to navigate the permitting process for master plan approval. Ultimately, these efforts should lead to a decline in investor risk and the ability to decrease FITs as renewable energy projects become simpler and more profi table. Additionally, definitive regulatory frameworks for floating solar, battery energy storage systems, offshore wind, and access to clean energy by direct power purchase agreements will unlock a much greater potential for renewables, MVEP 2.0 suggests.
BEHIND-THE-METER: MVEP 2.0 encourages the government to seize the benefits of facilitating easy investment in behind-the-meter solar, battery, biomass, and waste-to-energy plants developed by power consumers and specialist suppliers. This will foster a new dynamic market model while preserving a safe and reliable power supply. MVEP 2.0 recommends that behind the meter clean energy power generation, which exports no power to the EVN grid, be: exempted from the need to obtain an operating licence up to 50 MW capacity; not required to seek approval as part of the national energy development masterplan; and required to give EVN reasonable notice of when the power plant is to be commissioned.
TARIFFS: MVEP 2.0 recommends the publication of a roadmap for retail electricity tariffs, with particular focus on the commercial and industrial sectors. The roadmap needs to describe the move towards market-based pricing and should specifically address the occurrence of peak load on the transmission system during business working hours (9.30am to 12.30pm and 1.30pm to 3.30pm) and incorporate a differential retail price for power across the regions. To complement the roadmap, it is also important, MVEP 2.0 says, to have a promotional campaign aimed at educating stakeholders on the need for, and benefits of, energy efficiency. This will help electricity consumers engage with and understand the energy industry as tariff rates rise.
• Construct a regulatory and permitting environment that attracts smaller scale off-grid investment in clean energy generation and energy efficiency
ROOFTOP SOLAR: MVEP 2.0 recommends that the exemption from the requirement to obtain a power operation license should be increased from 1 MW to 3 MW to fully capture the benefits of investment in rooftop solar energy systems.
EFFICIENCY: Vietnam’s energy intensity (energy consumption per capita) is among the highest in the region - for the period 2009-2013 it was well above every country in the region, in particular higher than those countries with a similar level of GDP per capita. In addition to a public education campaign, MVEP 2.0 recommends the development and enforcement of regulations for building construction, appliances, and heavy machinery that reduce energy intensity at the manufacturing, commercial and residential level.
ESCOs (energy service companies): ESCOs, which develop, design, build, and fund projects that save energy, reduce energy costs, and decrease O&M costs at their customers’ facilities, can serve as a bridge between financial organisations and energy users, MVEP 2.0 argues. When an ESCO implements a project, the company’s compensation is typically directly linked to the actual energy cost savings. In Vietnam, this new business model is still at an early stage of development. Barriers that hinder the development of ESCOs need to be removed.
• Invest in grid infrastructure to improve stability and capacity
As the contribution of renewables to the grid grows, there are challenges associated with incorporating more decentralised plants providing intermittent power, MVEP 2.0 says, noting that, “given the surging increase in solar and wind generation, especially in the southern region, there is an urgent need for investment to strengthen and expand the transmission and distribution network”, with opportunities to include and leverage private sector and international expertise in the area of renewable energy grid integration, battery storage, and flexibility.
• Halt any new approvals for coal
Given the numerous concerns related to expanding coal capacity as proposed in the previous Power Development Master Plan, MVEP 2.0 recommends halting the approval of any new coal fired power plants and conducting a strategic review of those that are already approved but which do not have financing or power purchase agreements.
MVEP 2.0 recommends the following six key actions:
- Engage energy specialists from the private sector to assist in producing a Power Development Master Plan VIII with a strong prioritisation of investment in domestic renewable energy, natural gas, battery storage and energy efficiency. With the exception of battery storage, which has only recently become an affordable option, this mirrors the objectives set forth in MVEP 1.0.
- Implement regulatory frameworks and incentives that encourage investment in renewables, such as rooftop solar, battery storage, floating solar, and offshore wind projects, with simplified approval processes, while still maintaining safe power systems.
- Standardise the renewable energy PPA as an internationally bankable agreement.
- Publish a roadmap for retail electricity tariffs to 2025 that depicts the move toward market-based pricing, revising the number of peak tariff hours, and considering a differential retail tariff in different power regions and for disadvantaged households.
- Assess the urgent demands on the grid transmission system and the least-cost means of developing grid infrastructure to support increased renewable energy and increased distributed energy generation.
- Assess the causes of ways of addressing Vietnam’s extremely high and growing energy intensity relative to to neighbour countries with similar and higher GDP per capita and prepare a public education campaign on reducing energy waste.
These action items will result in six major outcomes, MVEP 2.0 contends:
- Enhanced energy security stemming from the inclusion of natural gas, energy efficiency and renewable power generation within the energy system. Redundancy and diversification are key to energy system security and resilience.
- Reduced power system costs relative to a coal-focused energy plan by limiting vulnerability to volatile coal markets, avoiding the financial liabilities of stranded assets, and reducing costs associated with public health and environmental impacts.
- Increased private investment in renewable energy projects that removes the generation burden from EVN and shares it with many power consumers and power producers in a distributed generation model.
- Emergence of a “socialised” electricity market that protects disadvantaged households with the least capacity to pay, but which is also financially sustainable for EVN and reflects a move to market-based pricing within the term of Power Development Master Plan VIII.
- Reduced greenhouse gas emissions and air pollution and the other costs relative to a coal-focused energy plan and alignment with Vietnam’s NDC (Nationally Determined Contribution) GHG commitments.
- Support for SME and other private industry initiatives that reduce energy intensity, enable use of residential rooftop solar and increase energy efficiencies through public education and regulatory procedures.
Vestas claims a lead in Vietnam
Vestas says it “leads the market for wind energy in Vietnam with almost 200 MW of projects won in 2019” after securing a 50 MW order with Cong ty Co Phan Dau Tu Dien Gio Hoa Binh 1 (Hoa Binh 1 Company), a company owned by Phuong Anh Group. The order marks Vestas’ third intertidal (close to shore) offshore project in the country, with three different customers announced in December 2019.
The latest project will be located in Hoa Bi`nh, a district of Bac Lieu Province, where the turbines will be installed in shallow waters close to shore to exploit the full potential of the Mekong Delta region’s good wind conditions.
The contract includes the supply and supervision of the installation of thirteen V150-4.2 MW wind turbines (pictured) with ten turbines delivered in 3.8 MW and three turbines delivered in 4.0 MW operating modes to optimise energy production for the site’s specific wind conditions. Each turbine will be equipped with a full-scale converter, enhancing the wind park’s compliance with grid requirements.
William Gaillard, sales VP, Vestas Asia Pacific said: “With Vietnam’s FIT deadline in November 2021, and longer lead-times for equipment deliveries due to high global demand, it is absolutely crucial for us to work hand in hand with our customers
to ensure a successful and timely project completion.”
The project also includes a 10-year Active Output Management 5000 (AOM 5000) service agreement, designed to maximise energy production for the project. With a yield-based availability guarantee, Vestas will provide the customer with long-term business case certainty. Turbine installation is expected to be completed in the third quarter of 2021.
The two other intertidal contracts recently won by Vestas in Vietnam were from Tra Vinh Wind Power Co Ltd and from EPC company Bac Phuong JSC, for similarly sized projects also in the Mekong Delta region.
The Tra Vinh wind farm project is the first in Vietnam where Vestas has full EPC scope. It will consist of twelve V150-4.2 MW wind turbines. They will be installed on reinforced onshore gravity foundations that are raised above sea level on multi-pile structures and connected to shore with link bridges that carry onshore power cables and facilitate easy access to the turbines for operation and maintenance purposes.
The order also includes a 10-year service agreement (AOM 4000).
Tra Vinh Wind Power Co is jointly owned by the Climate Investor One (CIO) Construction Equity Fund, a blended finance facility managed by Climate Fund Managers (CFM), specialising in renewables energy investments in emerging markets and Samtan, a Korean energy company investing in Energy Infrastructure and Renewable Energy. Construction will start in the first quarter of 2020 and turbine delivery is expected to commence in the third quarter of 2020.
Bac Phuong JSC’s intertidal wind farm, Dong Hai 1, will be located in Bac Lie^u Province. Vestas says it has developed a customised solution, “using onshore wind technologies to harvest wind resources from the sea.” The site is below water at high tide, while some of the turbines will be uncovered at low tide.
As with Hoa Binh, the wind farm will consist of thirteen V150-4.2 MW turbines, ten in 3.8 MW operating mode and three in 4.0 MW.
And as with the other intertidal projects site specific towers will be employed placed on reinforced onshore foundations raised above sea level, with each turbine having a full-scale converter.
The Dong Hai 1 project will also include a 10-year AOM 5000 service agreement. Turbine installation is expected to be completed in the first quarter of 2021.
* VBF describes itself as a channel for nurturing public–private dialogue to develop a favourable business environment for sustainable economic development.