Investors wait for power market reform

11:42 | 08/12/2015
Inflation in 2015 could be as low as 4 per cent and with falling interest rates the future looks relatively bright for the attraction of investment to Vietnam, yet there is one part of the economic jigsaw that has so far seen a puzzling lack of investment and is looking increasingly unsustainable – the electricity supply.

As an investor in sustainable electricity generation, water supply and energy efficiency at the Clean Development Fund managed by Dragon Capital in Vietnam, we see a significant risk in the under-supply of electricity in the south, especially during the dry seasons from 2015 to 2022.

With general inflation at the lowest level since 2003, this is a perfect time to reset electricity prices to a level that will attract the substantial investment which is needed for a reliable and resilient supply of energy to fuel economic growth until 2030. But barriers to investment exist, ranging from  government subsidies to reduce/on coal and gas fuel prices and the focus on large scale centralised power projects that take a decade to commission, slowed by highly complex land, licensing and contractual issues.

Furthermore, after 60 years of tremendous growth and with a grid-connection to 96 per cent of consumers, EVN has achieved miracles,  but it will be unrecognisable in 10 years from now, according to government plans. It will become an equitised, de-centralised set of power companies competing for market share with other power producers and suppliers on efficiency, prices and product quality. The deregulation process to achieve the transformation of the largest power producer and seller in the country is the final barrier to stimulating investment in the power market.

Vietnam also needs to face a number of other complicating obligations, such as the pressures to moderate the levels of greenhouse gas emissions, to protect the country from the threat of climate change and to balance the national finances. These, when combined, are formidable challenges. But the Clean Funds’ goals are all smart choices for a sustainable future and contribute to achieving all these objectives via attracting foreign investment to promote energy efficiency and to generate electricity from the sustainable, national and endless resources of wind, sun and water.

The Clean Fund works in cooperation/tandem with the government, donors, private and public entities, embassies and multilateral agencies to attract private investment into the transfer of clean technology, and to support Vietnam’s green growth commitments. This includes advocacy to reduce the incentives for the preservation of the status quo which is currently failing to attract the investment needed and favours unsustainable growth.

In view of the electricity sector, while Vietnamese energy consumers enjoy the lowest energy unit costs in the ASEAN region, these artificially low energy prices maintained through government subsidy has deterred investors from creating new facilities of electricity generation. The main thrust of the revised Power Development Plan VII, currently being redrafted, is to add a large number of thermal coal fuelled power plants, burning imported coal, owned and operated by foreign investors from China, Korea, Taiwan, Singapore and India. This seems to contradict the strategic commitments towards green growth and carbon emission. More critically, the thermal coal development plan has fallen far behind the original schedule as foreign power investors try to manage unfamiliar investment processes and negotiate complex contracts. 

Thus, while the coal plan proceeds at an unpredictable pace, large energy consumers are looking to take action to ensure a resilient power supply at a predictable price. Be it warehouses, factories, hotels, or commercial office buildings, the Clean Development Fund offers practical solutions, such as having your own power supply – working with energy efficient technology and using  biomass, biogas and solar or wind power. Investment in distributed energy generation using resources located close to the consumer is an effective measures of self-protection and can be implemented quickly, tailored to specific needs and use reliable technologies.

Electricity production costs will resolutely increase from 2015 to 2024. That was the conclusion of a recently produced energy experts report commissioned by Dragon Capital and its partners. The report concluded that all future fuels for electricity generation are more expensive than the existing ones we rely on today. The removal or revoking of subsidies of gas and coal prices has already begun and its effect on the real production costs of energy will be transferred to the consumer rather soon.

Adding to this upward price momentum is the reduced contribution from cheap, indigenous hydropower plants which have fuelled economic growth until now: the contribution of hydropower will fall away gradually.

Finally, investors in new power plants expect a reasonable profit on their investment and whether they are imported coal or renewable energy, each will require high levels of private investment to execute.

The timing is critical. Imported coal, gas and nuclear plants have a very long development period of seven years for coal and gas and up to 15 years for nuclear power. The Smart Choice options, wind, solar and biomass are much quicker to develop, require less land and can be contracted, financed and commissioned in less than two years. An assessment of the impact of coal also needs to take into account the negative effect on human health and the economic costs of sickness, loss of productivity and premature deaths from air and water pollution that China is currently experiencing.

Vietnam’s growth needs a resilient, well-balanced and abundant energy supply. The southern region which does not possess rich coal resources  is particularly needs it .

Will private investment come to avert the negative impact on growth?

Perhaps the answer lies in a political will to reform the power market to make it more attractive to investors. If not, then investors, technology traders, service providers and power consumers should prepare to weather some difficult years.

By Gavin Smith Clean Development Fund, Dragon Capital

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