How Vietnam can lure private funding to cut GHG emissions

08:00 | 25/07/2020
Vietnam used to be a poor country with only negligible greenhouse gas (GHG) emissions, but that has changed dramatically in recent decades. In 2015, Vietnam published its Nationally Determined Contribution (NDC) to the Paris Agreement on climate change. This set GHG emission mitigation targets for the period to 2030, of 8 per cent reduction compared with business-as-usual (BAU) emissions by using Vietnam’s own resources, and 25 per cent reduction if it receives substantial international financial and technical support.
1501p6 how vietnam can lure private funding to cut ghg emissions
By Koos Neefjes Director, Climate Sense Ltd

BAU is the situation if all policies in 2015 would remain unchanged, which would make it one of the world’s main emitters of GHG per capita by 2030.

The energy sector has and will produce a very large part of GHG emissions, and roughly two-thirds of all emissions within the energy sector are from power generation. In the BAU this is because of a strong increase in coal-thermal power production. It also envisages power from natural gas and liquefied natural gas (LNG), and these are less harmful. In the NDC target scenarios, there are reductions in the projected use of coal, but coal-power emissions would remain dominant, even if it achieves the 25 per cent conditional reduction target.

Changed views

However, in 2019 and 2020 the mood began to change. The Ministry of Industry and Trade has reviewed the causes of delays in coal, natural gas, and LNG power plant construction, suggesting that some coal-thermal power plants might be substituted for LNG. Export guarantee funds of rich nations as well as private equity holders are banning new coal mining and coal-thermal power investments; indeed, financing difficulties of coal-thermal plants that are under construction are one cause of delay in Vietnam.

Experts are warning of premature death from air pollution associated with coal-thermal power, and so-called solutions such as dumping solid waste in the sea can have devastating effects on biodiversity and fishing-based livelihoods. Encouragingly, in 2019 and 2020, investment costs for solar photovoltaic (PV) and wind power have become cheaper. Thus, many small- and medium-sized plants were built, and several are under construction.

Businesses and households are also installing small rooftop solar PV systems that can be interconnected with the national grid and reduce their power purchase from state-owned Electricity of Vietnam (EVN), or even sell to EVN.

One explanation of the recent success with solar PV and wind power plants are the favourable feed-in tariffs (FiTs) that the government issued. These have limited duration, meaning the current FiTs for solar PV and wind power will expire in late 2020 and 2021 respectively, so they stimulate only small- and medium-scale investments. According to some, these FiTs are too high and indeed they are slightly above the average retail price in Vietnam.

But they do not have the transport challenges of LNG and coal supply. Their ‘levelised cost’ (of a unit of power over the lifetime of a power plant) is below LNG-thermal power already. And a modest carbon-tax on coal-thermal power, to ‘internalise’ pollution, would make the levelised cost of that also higher than solar PV and wind power.

Analysis by the United Nations Development Programme demonstrates that Vietnam has substantial potential to increase energy efficiency and thus reduce energy demand and GHG emissions. They show that not only would achieving the conditional NDC target be most favourable, a further tripling of renewable energy generation compared to fossil fuel-based power generation would be even better.

The GDP growth rate and employment opportunities would go up, compared to the BAU. GHG emissions and local pollution would reduce, as would dependency on fuel imports. In other words, ambitious greening of power generation would be a win-win situation.

1501p6 how vietnam can lure private funding to cut ghg emissions
Vietnam is determined to cut down its greenhouse gas emissions, following its commitment to the Paris Agreement

Attract private investment

The paper does pose the challenge that this will only be possible if there is high private sector investment into renewable energy, including additional foreign direct investment. Therefore, policies must help mobilising private sector investment at all scales of power generation. So how can private investment in renewable power generation be made attractive and increase further?

One strategy is known as “reverse auctioning”, which is being prepared by the government with some international support for renewable power projects. This is about auctioning the right to build certain renewable power production capacities in certain locations. It might be applied after the expiry of the current FiTs for solar PV and wind power.

International experience demonstrates that it is a clever way of attracting international, private capital and bringing cost prices down. Capacity auctioning requires preparing a level playing field with transparency for all bidders to have the same information. That playing field should also enable low investment costs, meaning that investor risks must be low.

Low risks for developers and foreign investors reduces interest rates on loans, which leads to offers of low prices they expect to receive for power production. A low and level playing field for bidding can be developed with some up-front investment by the agency managing the bidding.

For example, it could finance and prepare the environmental impact assessments, do wind speed measurements, a seabed survey and/or flood risk assessment, and offer permits to for example the use of certain land, lake water surfaces, or seabed to the winner of a bid for capacities. The development process will be simplified, bidders have limited pre-investment costs, and their regulatory risk will be reduced substantially.

International investors are interested in renewable energy but they need opportunities and good business plans that can be financed. Investment into renewable energy in Vietnam instead of other countries depends to an extent on the stipulations in the power purchase agreement (PPA) that foreign investors can expect to negotiate.

The PPA must be bankable, which for international investors means access to international-quality arbitration in case of disputes between the power generator and buyer, for example. Currently, EVN is the single buyer, and in some cases EVN is not buying all power generated, notably with the argument that transmission capacity is inadequate. Domestic as well as foreign investors have demonstrated willingness to invest in transmission infrastructure to avoid such curtailment, for example in the south-central province of Ninh Thuan.

A further way to encourage foreign and domestic private investment in renewable power is the need for clear regulation on dual land use, for instance for power generation combined with transport infrastructure, industrial zones, agriculture and aquaculture, and also coastal protection and conservation of biodiversity and fishing grounds.

This reduces investment in the cost of land for the power generator and it reduces the pressure on land conversion. Dual land use is interesting at both a small and medium scale. For example, solar PV on rooftops of houses and factories, on aquaculture farms, vegetable farms, even over rice fields (at limited “shade intensity”) can give additional income to the house and building or landowner.

Wind turbines can be installed in windy harbours and along expressways, and they can be combined with pastures and agriculture in certain mountain ranges. Off-shore wind power can be combined with protection of marine biodiversity, including creation of artificial coral and breeding grounds, or near-shore conservation of mangrove and construction of wave breakers to enhance coastal protection.

I believe that investment in solar PV and wind power is already cheaper than coal and natural gas/LNG-thermal power, and very attractive to the private sector and foreign investors with the right regulation. This is even more so if there would be higher taxes on the use of coal, diesel, natural gas, and LNG as they lead to real costs to people, companies, and the government because of pollution, transport of fuels, and waste management.

Renewable energy is cheaper to society even if we consider the need for more transmission infrastructure and generation capacity for balancing in cases of combined low wind and solar power output, or adding power storage capacity. It is cleaner and more convenient for workers, and there is no nuisance for citizens in the vicinity. Importantly, it will improve national energy security because there is no dependency on fuel import.

By Koos Neefjes

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