Asia, Coal Fired

A land of both opportunities and challenges

Issue 8 and Volume 21.

Son La Dam
Son La Dam: power generation in Vietnam is dominated by hydro and natural gas
Credit: Alstom

For the past decade Vietnam has witnessed GDP growth in excess of 7 per cent, but this has not been matched by an increase in generation capacity. In order to achieve its ambitious capacity expansion goals Vietnam will need to restructure its regulatory policies, power tariffs and fuel linkages, as well as expand its financing and attract foreign investment, argues Ravi Krishnan.

Vietnam’s economy has been transformed by ongoing market-oriented reforms and recent rapid economic growth of over 7 per cent between 1990 and 2011. GDP has increased from $6.4 billion in 1990 to $141.6 billion in 2012. Demand for electricity in Vietnam is now at an all-time high due to the rapid growth in the last decade and expansion of the country’s economy. Many challenges have stood in the way of improving the country’s power system. Between 2007 and 2012 an average of less than 2000 MW were added annually, which was not enough to meet current demand, and with government projections of over 50 000 MW needed by 2020, Vietnam must address issues hampering the development of its power sector.

vietnam's current fuel mix

The Vietnamese government is in the process of deregulating the power industry which will increase competition and efficiency in the marketplace. While advances have already been made, the full realisation of a competitive retail market is not expected until 2022. Other contributing factors to the current shortfalls in capacity addition that must still be overcome are the shortage in domestic coal production, high prices for imported coals, administered natural gas prices discouraging investment, and water scarcity.

Low-reserve margins

Vietnam currently has approximately 23,000 MW of installed capacity and its annual power production is approximately 115 000 GWh. Vietnam has one of the lowest electricity consumption rates in Asia at just over 1000 kWh per capita. The current annual GDP growth rate is approximately 6 per cent, however the growth of electricity consumption is 12 per cent per year. This gap will continue to widen if construction of new power plant capacity does not increase. In the five-year span from 2007 to 2012, the total power generation capacity of Vietnam increased by 9500 MW. Yearly additions averaged under 2000 MW, which is well short of the average annual target of 4000 MW.

Looking forward, the power demand is projected to increase about 4100 MW every year between 2013 and 2015 based on an annual 7 per cent average GDP growth. The shortfall in power supply is especially prevalent at times of peak demand. Thirty-five per cent of the country’s installed capacity is provided by hydroelectric power plants which exacerbates the already poor situation during the dry season. One recent example was the 2010 drought, which resulted in significantly reduced availability at hydroelectric power plants, which in turn caused rolling blackouts and periodic load shedding, particularly in the major cities.

Not keeping up with demand

Vietnam’s ambitious plans to increase power capacity are marked by a proposed rapid build-out of thermal power plants. The long-term target by the government is to achieve 75,000 MW by 2020. According to the base case scenario of the 7th Power Development Plan, the overall domestic power demand is forecasted to increase by 14-16 per cent annually in 2011-15, and by over 11.5 per cent per year between 2016 and 2020.

On the other hand, the growth rate of the total power supply in the periods of 2011-15, and 2016-2020 are at least required to reach about 14 per cent and 10 per cent respectively. Within the eight years from now, Vietnam must construct an additional 53,000 MW to meet this goal. New coal-fired capacity requirement is targeted at 28,000 MW by 2020. New oil- and gas-fired capacity is targeted at 14,700 MW by 2020. In 2020, the first nuclear power plant with the designed productivity of 2000 MW in Ninh Thuan will commence operation. As per the Power Development Plan, by 2030, coal-based generation will increase to 56 per cent while hydropower and gas will drop by 15 per cent and 13 per cent.

Challenges to overcome

The bulk of Vietnam’s power challenges stem directly from how the country’s power sector is structured. The power industry is still dominated by public ownership. In its attempt to increase private sector participation, the country split its power sector operations into three state-owned companies in the mid-1990s: PetroVietnam, Vinacomin (former Vinacoal), and Electricity of Vietnam (EVN). Today, EVN and its affiliates generate 80 per cent of the nation’s electricity, 40 per cent of which come from hydropower.

vietnam's power industry

EVN is a state-owned enterprise which reports directly to the prime minister, and is currently the major producer of electricity. EVN also holds a practical monopoly on electricity transmission and distribution. This makes it effectively the controller of the existing energy businesses and prevents introduction of new players.

In 2006, the government approved a roadmap for establishing a competitive power market and began to restructure the sector, starting with establishing EVN as a private holding company.

This restructuring involves a move from the system of state-owned firms having direct market control to a system in which the energy supply and demand is decided by the market. The restructuring is intended to encourage fair and efficient competition, and some results have been achieved. Private investors are being encouraged to participate in power generation projects and trade in petroleum products. Prices are being benchmarked against international prices in the downstream market for coal, and benchmarking of oil and gas is planned to be established by 2015.

In accordance with the Vietnam Electricity Law, a roadmap has been set up that includes three phases for power market development. The first phase for a competitive power generation market, commenced in 2009, and is slated for completion in 2014. This will be followed by the second phase, beginning in 2014 and ending in 2022, establishing a competitive market in bulk power. Finally, the third phase is the introduction of a competitive retail power market, scheduled to take place from the year 2022.

The process of deregulation has been plagued by continuous delays due to bureaucracy and hold-ups in generating units in installing the required systems and processes to enable collection and processing of information to calculate their power prices

One of the biggest challenges for Vietnam is to satisfy the swelling coal requirement. A country that in 2008 produced 40 million tonnes of coal a year and exported nearly 80 per cent of it will witness a growing domestic demand for coal but cannot guarantee its future supply. The coal requirement for 2020 and 2030 will be around 78 million tonnes and 170 million tonnes respectively based on current projections.

Vietnam’s indigenous supply of coal increases only 5-8 per cent annually. Inadequate domestic supply will continue to challenge capacity expansion issues. It is estimated that over 30 billion tonnes are located in the northern Red River basin, but these are untapped because the region is one of the country’s largest rice-growing area. Additionally, Vietnam does not have the capital to develop new mines. Another reason cited is the high cost of producing Vietnam’s primary coal anthracite at $230/tonnes compared with an average $110/tonne for steam or thermal coal.

Imported sub-bituminous coal from Indonesia is the most likely source of coal to meet domestic shortfall. However, use of imported fuel will require tariff revisions. Either EVN has to implement a retail tariff mechanism that passes these costs to consumers or else government guarantees are needed. Domestic supply of coal is becoming more expensive and likely to be reaching production limits by 2020. Therefore, the government needs to develop policy that adjusts power prices to reflect the cost and a reasonable rate of return for private producers. Additionally, Vietnam’s ability to take equity positions in overseas coal mines is limited.

growth in vietnamese generating capacity

The government strictly regulates electricity retail prices, with adjustments recommended by the Ministry of Trade and Industry (MoIT) and requiring approval by the prime minister. A unified tariff is applicable across the country and is low in comparison with other regional countries. Both average urban and rural residential rates are cross subsidized by higher rates for industry, commerce, and foreign consumers.

To attract more investment from the private sector in developing IPP projects, MoIT and EVN have been working on a roadmap for price increases and gradual elimination of government’s control. Any initiative to increase tariff rates can be politically risky for the government. To harness foreign fuels, EVNs average tariff needs to be 30-35 per cent higher than current levels to make EVN a secure counter-party. Subsidies and price ceilings can potentially make EVN a risky off-taker.

Natural gas prospects are presently impacted by depressed prices paid to developers and poor pipeline infrastructure. Furthermore, meeting future power generation targets will be subject to gas volume and supply confirmation from southeast and southwest Vietnam. The policy of maintaining the low gas price tends to discourage investment in gas exploration and development.

As a result, gas supply will not be sufficient for economic development in the coming years, especially after 2015. Vietnam needs to make structural changes such as:

  • Institute a comprehensive national natural gas policy;
  • Establish a comprehensive gas law;
  • Open access and wholesale competition;
  • Remove gas price controls;
  • Reduce pressure on gas demand.

Today, power generation in Vietnam is dominated by hydro and natural gas. However, looking into the future, this southeast nation’s current Power Development Plan (PDP) is setting its sights on coal-fired power generation with proposed rapid build-out of thermal power plants.

Faster commissioning

The long-term forecast as per Vietnam’s Master Plan VII is targeting 75,000 MW of installed capacity by 2020 and 158,000 MW by 2030. Power projects will have to be commissioned at significantly faster rates as capacity grew by only 12,000 MW in the last ten years.

road map

Several challenges will need to be overcome, including diversifying its energy mix, securing future fuel supplies, increasing domestic coal production, power tariff revisions, raising investor capital to build new projects and controlling corruption. Due to subsidies, domestically-produced coal and natural gas are priced substantially lower than imports, which are at international levels. Dual pricing makes it difficult to determine the true cost of electricity. Further, electricity tariffs are still regulated by the central government, and are underpinned by significant cross-subsidies. This causes distortions in the energy market system dissuading international investment.

Additionally, the dominance of state-owned enterprises makes them effective controllers of the existing energy businesses and prevents the introduction of new players. Therefore, along with the deregulation, additional measures such as monopoly prevention, equitisation, and privatisation are needed in order to develop an efficient energy market.

About the author Ravi Krishnan is managing director of Krishnan & Associates Incorporated, a US-based market advisory firm providing market information, analysis, regulatory and technology assessments on various global energy markets. For more information, visit www.krishnaninc.com.

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