Energy Transition in Vietnam Market and Policy: An Outlook
by Joyce Huyen Do | Feb 7, 2022 | Editorial | 0 comments
Energy strategy has always been the tenet of a country's drive for industrial prowess. Nowadays, it is impossible to keep sustainable growth out of the equation. This article attempts to examine Vietnam's renewable energy strategy to see how the country is balancing adequate energy supply for its booming economy while keeping environmental issues at bay. The case of Vietnam might resonate with other developing countries as the world seeks to reduce emissions and grow sustainably. The legislations focused on here include the Decision No. 2068/QD-TTG, the blueprint for the country's energy transition; Law of Electricity (2004 and 2012 Amendment); and the first draft of the 8th Energy Master Plan, which is planned to be ratified in 2022. Other relevant legislations on Enterprise, Construction, Investment and Land will be briefly touched upon as well.
Framing the Issues
Since it transitioned to a hybrid socialist-capitalist market economy in 1986, Vietnam has made significant efforts to secure sufficient energy supply for its thriving industrial sector. Despite the fact that Vietnam's geographical qualities present opportunities for growing renewable energy ("RE"), this young economy primarily relies on electricity supplied by traditional thermal power and hydroelectric projects. As the green energy waves have reached Vietnam's shores, the country is preparing to face the shift and the challenges that come with it. The amount of progress Vietnam can achieve will be determined by technological breakthroughs, but more crucially by strategy and attention from the Vietnamese Government.
Vietnam's Potential for Renewables
Vietnam has great potentials for several sources of renewable energy. It is a coastal country with over 3000 kms of seashore. As a tropical country, it enjoys a lot of sunlight all year round. It also has an intricate network of rivers and waterfalls.
There are several reasons for Vietnam to join the RE revolution. The country's agriculture sector is extremely sensitive to the volatile effects of climate change. Moreover, its air quality, especially in urban areas and provinces where industrial zones are located, has been deteriorating dramatically. Its conventional energy structure will not be able to answer the climbing energy needs in the next decade. Nevertheless, the national power grid mainly sources its electricity from fossil fuels, such as coal, oil and natural gas.As of November 2021, fossil fuels power plants generate the majority of the country's electricity, 56.8% of the national electricity production, among which coal powers 46.4% of the national grid. Meanwhile, hydropower makes up 30.8% of Vietnam's electricity network. All other renewable sources are underrepresented, taking up about 11.5%. It is clear that there is much to be done for the country's transition to renewable energy.
Preliminary Regulatory Frameworks: Rather Pristine
In November 2015, the Prime Minister, in response to the Minister of Industry and Trade, delivered a decision on behalf of the Vietnamese Government. This decision sets out the blueprint for RE transition up to 2030 with an outlook to 2050. It emphasised the simultaneous advancement of renewable power, environmental protection and socio-economic needs. Decision No. 2068/QD-TTG (hereinafter "Decision No. 2068") officially kickstarted the country's energy transition. It remains deeply relevant and essential as it sets out the roadmap for Vietnam policies in the upcoming decades. The decision was formulated on the grounds of the Law on Government Organization 2001; Law on Electricity 2004; the Amendment and Supplement to the Law on Electricity 2012. At the moment, Vietnam does not have any law which specifically regulates renewable energy, although the government had receiveda proposal for such a law at the end of 2021. Therefore, in the mean time investors will be relying on a combination of Decision No. 2068 and current legislations on Electricity, Enterprise, Construction, Investment and Land to navigate the Vietnamese RE landscape.Law on Investment 2020: regulates eligibility for investment, procedural matters, investors and state conducts; operation and termination; restriction; dispute resolutions.
Law on Enterprise 2020: governs the establishment of a Vietnam-based entity, corporate governance, winding up, rescue and restructuring activities
Law on Construction 2014 and 2020 Amendment: lays out legal and engineering requirements for infrastructure, planning permissions and operation of projects and the energy market.
Law on Land 2013: governs eligibility for the right to use public land, purpose of the land use, lease of right to use land, and permitted duration of land use.
Law on Environment Protection 2020: sets out criteria for the environmental license, emission limit, carbon tax and trading, state's enforcement of environment policies
Law on Electricity 2004 as well as the 2012 and 2018 Amendments: governs legal requirements for operation of power plants, electricity generation, transmission, distribution and sale.
Other relevant legislations: International Law: Vietnam is a party to several free trade agreements, notably the CPTPP.
a) Investors might seek protection under the Dispute Resolution clauses of these agreements. Vietnam is also a signatory to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards
b) Law of Sea 2012: Regulated economic activities on Vietnam's Sea. This is quite relevant to offshore wind projects.
Decision No. 2068 provides a general picture of how future RE policies would be implemented:
1. The Government will first be formulating a RE market: At the moment, the RE market in Vietnam has not taken shape. The state plans to prioritise RE investment and the interests of investors to accelerate growth in this sector.
2. Vietnam will then construct new policies targeting electricity tariffs in investment deals. The Ministry of Industry and Trade ("MoIT") is tasked with coming up with a pricing and tariff framework for electricity from RE projects. This framework was expected to be built with investors' cost recovery, RE capacities and technological development in mind.
3. The framework will ascertain that organisations or individuals operating in the sector shall be responsible for making their contributions to the country's RE development. Power generation/distribution entities shall be subjected to a Renewable Portfolio Standard ("RPS"), which monitors the consistency of these projects' output. Their production and purchase capacity will also be reviewed annually by the MoIT.
4. There will also be a RE buy-back scheme in place. End-use purchasers of electricity, e.g., households with solar panels installed, will also be entitled to sell electricity back to the power traders and distributors through the net-metering mechanism. Power purchased by the distribution/trading entities is also counted towards their RPS. This scheme will boost small-scale private RE production.
5. The Government will allow certain preferential policies in terms of import, corporate tax incentives, and import duties exemption for certain goods and raw materials serving the construction of RE projects. Preferential exemption or reduction of land usage or rental costs will also be introduced to accommodate investment in RE, in accordance with the existing Law of Land Usage and Law of Investment.
6. Policies for environmental protection are also included in the development strategy. The Vietnamese government will impose an "environmental fee" on organisations and individuals that generate power using fossil fuels based on the volume used. Part of this income will go towards the Sustainable Energy Promotion Fund to finance promising projects and research activities in relation to RE.
Decision No. 2068 is a solid move by the Vietnamese government to accelerate the country's energy transition. However, to make practical progress on the transition, Vietnam first needs to tackle its single-player electricity market. If RE pricing is at the disposal of the companies with dominant positions, it will deter new entrants in the market. A competitive energy market is crucial for the success of this initiative, and Vietnam has not achieved that criterion.
Monopoly of EVN
Vietnam Electricity ("EVN"), a state-owned Limited Liability Company, has been the sole player in the electricity market since its establishment in 1994. Its facilities have been operating across the country for years, through several regional networks covering even the most remote regions of Vietnam's territory. Thus, addressing the monopoly of EVN is crucial for the transition to RE in Vietnam.
Chapter IV-Art.19 of the Law of Electricity (2004, amended and supplemented in 2012 and 2018) identifies the participants of the Vietnamese Electricity Market:
1. Generation Units
2. Transmission Units
3. Distribution Units
4. Wholesale Units
5. Retail Units
6. Load Dispatch Regulatory Centers
7. Market Regulatory Authorities
8. End-use customers
At the present,Vietnam Electricity Group (EVN) still dominates over electricity transmission, distribution, wholesale, retail, and load dispatch regulation. The state-owned corporation has expanded outside of energy production into the construction of grid networks, energy export and import. It also controls the National Load Dispatch Regulatory Centre, which is responsible for managing power generation, transmission and distribution activities and safety within the national grid. Whether EVN's dominant position can be dismantled to introduce a fairer electricity market is the key to developing a future market for RE. As the industry's only player, EVN has the liberty to influence electricity pricing. On the one hand, it was and is able to offer a lower retail price to customers to compete with newcomers or increase the price to make up for any decrease in revenue. On the other hand, it has the leverage to impose a lower wholesale buy-in price on competing generating units while increasing the retail price. Meanwhile, the costs as well as risks for new entrants to the energy market will be significantly higher, considering the initial costs of investing in new projects, building new facilities, then facilitating transmission of electricity from scratch or rent or take over EVN's resources.
Kicking Off a Multi-Player Market
With the introduction of the 2004 Electricity Law, which took effect from July 2005, Vietnam laid out a road map for switching to a competitive market viaDecision No. 26/2006/QĐ-TTG. The most significant point in this decision was the top-down approach to a multi-phase shift from a state-run electricity market to a more liberal competitive model. Art 1(2) of Decision No. 26 sets out the timeline for each phase:
1. Phase 1: From 2005 to 2014, reforms would start with the energy generation segment. There would be several electricity-generating corporations selling their product to a sole state-owned wholesale buyer, EVN. Power plants and power transmission companies under EVN will be reorganised as independent state-owned companies or be offered to the public. EVN will then sell wholesale power to distribution companies and major consumers. Independent power plants (IPPs) that are not owned will join the bidding process. All generating units will sell electricity to the market through PPA contracts. Pricing will be regulated by the Electricity Regulatory Authority. The aim of this phase is to encourage more independent private power plants to take up market shares.
2. Phase 2: From 2015 to 2022, a competitive wholesale market will be established. EVN's monopoly will be gradually dismantled as the government initiated restructuring its subsidiaries. Distribution units under EVN would be converted into independent companies (state-owned or joint-stock) to purchase electricity directly from generating units and vice versa. In this market model, multiple wholesale buyers, such as power distribution companies and factories, can choose among a pool of several sellers (generators) based on their pricing and service package.
3. Phase 3: After 2022, there will be a competitive retail market where retail end-use consumers will be allowed to directly buy electricity from generating units or choose a retailer nationwide. Furthermore, organisations and individuals that meet the qualifications of an independent private seller, can establish new electricity retailing units. The conclusion of this phase will bring about an objectively competitive electricity market across all levels.
In 2013, this decision was replaced withDecision 63/2013/QĐ-TTG ("Decision No. 13"). Decision No. 13 alters the reform timeline and focuses more on the wholesale and retail electricity market. Phase 2 was carried out from 2015 to 2021 and Phase 3 from 2021 to 2023.
Progress so Far
Phase 1 has seen positive progress as there is a lot of dynamics in the generating segment. In 2012, there were only 32 power plants with a total capacity of 9,200 MW. By March 31, 2020, a mix of 98 state-run and independent power plants were churning out a total capacity of 26,895 MW. Regarding Phase 2, EVN is no longer the only electricity wholesaler, but participation is still limited; only five other entities directly trade with power plants. The final phase of the reform is supposed to be well underway and coming to its conclusion next year, 2023. Unfortunately, Vietnam's competitive electricity retail market inPhase 3 is rescheduled to 2024. Furthermore, there are still undone works in Phases 1 and 2. Despite actions by the Government to diversify participation, the electricity market in Vietnam is still state-dominated. By the end of 2021, power generation was the only segment having visible participation from other domestic and foreign corporations. EVN's withdrawal from its former subsidiaries has been unhurried. According toVietnam Tenders Report, only 1 out of 3 EVN generators have completed their restructuring process to depart from EVN and become independent entities as of April 2021.
As interest in RE grows significantly, it seems like the realisation of Decision No. 13 is more pressing than ever. Vietnam is making its best effort to welcome foreign and private investments in the energy sector with favourable policy packages. For the last five years, the country has also seen an uptick in the number of RE projects it has secured with foreign investors. Nevertheless, any investor would be hesitant to enter a market where they have little market shares and bargaining power over pricing and profits. Thus, a crucial task for the government is to guarantee a truly competitive electricity market at both wholesale and retail levels. Vietnam's transition to RE will not be as successful if the country is not adamantly picking up its market reforms.
Last but not least, to streamline Vietnam's present and future transition to RE options, it is important that the new legislations are tailored for RE activities in Vietnam. Vietnam often looks to developed countries for inspiration for its laws, which is advisable. However, it needs to adapt the imported rules while incorporating the unique characteristics of an emerging economy. The country will surely benefit from a comprehensive set of Energy laws that place more emphasis on concrete rules for foreseeable developments and reflect the current state of the market accurately.
Moving on from the de-concentrating process in the electricity market, this section looks into upcoming events in the RE scene of Vietnam. In light of the recent COP26 in Glasgow in October-November 2021,the Vietnamese Government is aiming to achieve carbon emission neutrality in 2050. This sets the scene for Vietnam to ramp up its productivity in the RE sectors. Notably, the MOTI has submitted the first draft of the 8th Power Development Master Plan ("Master Plan VIII") in 2021. Master Plan VIII is expected to come into force in 2022 and pilot the energy sector in multiple aspects up to 2030, with provisional planning up to 2045. The plan will revolve mainly around utilising clean energy at an affordable price for consumers while generating attractive returns for investors. The government hopes to show that Master Plan VIII will also reaffirm Vietnam's commitments to international environmental standards and beckon a fresh stream of investment into the economy.
Nevertheless, it is easier said than done. Vietnam is under a lot of pressure to account for its burgeoning manufacturing prospects since this is a golden key for its labour market. More multinational corporations, such as Samsung Electrics Fuji Xerox, Canon, or Foxconn, are creating jobs for hundred thousands of Vietnamese. In the process of increasing the output of its green energy projects, the country will have to rely on its existing hydropower projects and conventional coal power plans. This explains why the capacity of coal-generated electricity is anticipated to keep its upwards trend. In the Master Plan VIII first draft, coal energy plans will not reduce output up to 2030, while Vietnam will cut back on hydropower in favour of onshore and offshore wind energy.The plan proposed around 19 to 20 GW of solar, 18 to 19 GW of wind, while thermal electricity remained dominant at 39GW, within which 22 GW is of gas-fired, and 17 GW is of coal-fired capacity. This point of Master Plan VIII runs a risk of pivoting the country back to its reliance on fossil fuel, which goes back on Vietnam's commitment to zero-carbon and the progress with RE it has made so far. The MOTI is amending the draft, and the new version is anticipated to be submitted for approval in Quarter I 2022.
In a nutshell, Vietnam has shown its proactiveness and formidable potentials for renewables development. On the one hand, the country will be welcoming unprecedented opportunities to transform its energy sector and expand its renewable options beyond hydropower. On the other hand, Vietnam will be confronted with multiple challenges since the legislative framework for RE is basically non-existent. It will have to play its game wisely. In the near future, Vietnam is expected to continue its ongoing tasks: introduce a competitive electricity market, cater to its busy manufacturing industry, streamline foreign investment and reduce ongoing and looming damages to its nature. Finally, the case of Vietnam, though unique, might resonate with other developing countries as the world seek to reduce emissions and grow sustainably.
Ms. Joyce Huyen Do is an LLM Student at the University of Cambridge.
Managing Editor: Naman Anand
Editors-in-Chief: Jhalak Srivastav and Aakaansha Arya
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Associate Editor: Kshitij Pandey
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Preferred Method of Citation
Joyce Huyen Do, "Energy Transition in Vietnam Market and Policy: An Outlook" (IJPIEL, 7 February 2022)
<https://ijpiel.com/index.php/2022/02/07/energy-transition-in-vietnam-market-and-policy-an-outlook/>
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