Recently Carbon Tracker’s power and utilities team travelled to Vietnam to market our latest analyst note, Here Comes the Sun (and Wind). During this trip we met with government officials, local experts and renewables originators. In this blog post we summarise what we learnt and what’s next for our work in the region.
We’re not in Kansas anymore
Researching Southeast Asia is as intimidating as it is exciting. The Southeast Asian region is a geographically expansive and populous region characterised by social and cultural variation. Being predominantly European power analysts, analysing the Vietnamese power market is a daunting task due to the lack of transparency around data and vastly different market structures. Moreover, in stark contrast to Europe, Vietnam’s rapid economic growth, demographic profile and manufacturing base means power demand will grow at 5-10% for the foreseeable future as the nation prioritises building out its capital stock. Without help from our local partner, Green Innovation and Development Centre (GreenID), we would have been fish out of water.
Renewables have the potential to become the least-cost option for Vietnam to meet its energy needs
“We would take a price 35% below the current tariff if the government amended the PPA.”
Panel participant, Global Wind Energy Council Vietnam Wind conference
Amongst all the noise about the implications of the Paris Agreement, Vietnamese policymakers have two core priorities: provide cheap energy and use this energy to build out the nation’s capital stock. Any policy that gets in the way of these priorities will likely be marginalised or rejected. The challenge for policymakers is how to provide least-cost electricity while also keeping debt within the ceiling of 65% of GDP and managing socio-economic priorities, such as strengthening commodity-price security? How policymakers meet this challenge will have far-reaching implications for the nation’s economic growth, public debt and energy security.
After the roadshow we are more optimistic on the potential of renewable energy. There is no shortage of interest from industry. For instance, with over 400 participants, the Global Wind Energy Council (GWEC) Vietnam Wind conference showed that there is huge interest in growing Vietnam’s renewable market to become a regional leader. During a panel discussion at the GWEC conference one panel participant stated they would take a price 35% below the current tariff if the government amended the power purchase agreement (PPA). Presuming this statement is true, the cost of onshore wind has the potential to be around $55/MWh or over 10% below the cost of new coal today (based on a levelised cost of energy analysis from Bloomberg NEF).
Policy reform is vital to realising the low-cost renewable revolution
Many interpret policy reform as code for the need to subsidise renewable energy. The reality could not be further from the truth. Vietnam’s high feed-in tariffs for wind and solar are the result of significant investment uncertainty. The PPA for wind and solar is high risk relative to the PPA for coal and gas, meaning capital raising is currently skewed in favour of thermal capacity. The table below highlights the major differences between PPAs for renewable and thermal capacity.
|Risk||Wind and solar PPA||Coal and gas PPA|
|Curtailment risk||EVN can curtail without compensation i.e. “take or leave” contract.||EVN subjected to restrictions on curtailment i.e. “take or pay” contract.|
|Government guarantee||No guarantee in the event of EVN default.||Previously the government has guaranteed part of the project risk.|
|Fixed tariff||Potential interest rate exposure.||Historically negotiated with EVN.|
|Transmission and interconnection risk||Seller liable for transmission and interconnection risk.||Historically negotiated with EVN.|
Source: Carbon Tracker analysis
Note: McKinsey & Company, Baker McKenzie and the World Bank offer a more thorough review of investment risks.
Vietnam should transition from feed-in tariffs to reverse auctions. However, while reverse auctions can encourage least-cost deployment, without wider policy reform, they will unlikely stimulate developer and investor demand. Successful reverse auctions are characterised by a high rate of failure. This is a challenging problem for policymakers as the Power Development Plan (PDP) stipulates the amount of capacity and who will build it. For instance, for grid-connected solar PV projects, developers can only finance projects that have been included in the relevant PDP.
More data transparency = more low-cost capital?
Energy infrastructure is not the only reason why regional and international investors are interested in Vietnam. Most notably, Vietnam stands to benefit from the so called ‘tariff war’ between the US and China. As capital surges towards Vietnam’s low-cost manufacturing base, policymakers can leverage this interest to get the best possible financing terms for energy. While this is a smart negotiating tactic, policymakers also need to focus on greater data transparency. Transparency is essential for the creation of efficient, liquid and competitive power markets. It is also critical for creating a level playing field between participants and avoiding the scope for market power to be abused.
This is a particularly sensitive issue for renewables originators in Vietnam as (i) EVN is a vertically integrated utility, meaning it often has little incentive to be more transparent; and (ii) power demand is increasing rapidly and therefore the reliability of grid infrastructure could be changing as a consequence. Many factors (both internal and external) influence the working cost of capital (WACC) of renewable energy projects, including country risk. However, greater data transparency would allow policymakers to identify and regulate market abuses and, in doing so, create a more level playing field for renewables. The table below contrasts data transparency in Vietnam with Europe, which has a mature and competitive renewables market.
|Plant generation||Half-hourly publicly available data at unit-level.||Yearly publicly available data at plant-level.|
|Plant revenues||Wholesale power price data publicly available in real-time; capacity market revenues made publicly available; and balancing market data made publicly available.||PPA date publicly unavailable; revenues partially available via weekly videos on the EVN website.|
|Transmission and distribution||Publicly available data on high-voltage cables with towers designed for voltages of 220kV and higher. Publicly available data on all existing power plants and those under construction with generation capacity equal or higher than 10-200 MW and 10-100 MW for renewables even if they are not connected to the high-voltage network. Regularly updated.||A static map of transmission is publicly available. This data was initially published in 2005 and updated again in 2016.|
|Working cost of capital (WACC) for renewable energy projects||>2.5% per annum for utility-scale onshore wind and solar PV projects in Germany.||Long-term rates charged bystate-owned commercial banks remain in the 8–10% per annum.|
Source: Carbon Tracker analysis based on various sources
Concerns about balancing renewables will die hard without greater data transparency
Many people we spoke to expressed concerns about integrating wind and solar without costly and untimely investments in transmission and storage. Concerns about integrating wind and solar are not new. In 2003, when wind made up 2% of annual generation in Ireland, the head of the National Grid stated that: “This amount of wind generation does, however, pose an increased risk to the security and stability of the power system which the transmission system operator feels exceeds the level normally likely to be accepted by a prudent system operator.” Wind now makes up over 20% of annual generation in Ireland and during this time security of supply has increased.
High-level analysis shows balancing renewables can be mitigated at low cost. The International Energy Agency (IEA) found integrating 0-15% renewables penetration only requires operational changes, such as better supply and demand forecasting. Moreover, scenario analysis by McKinsey & Company found renewables could make up 50% of Vietnam’s power generation mix by 2030 with an addition $83/kW of transmission and 10 GW of local battery storage – an outcome 10% cheaper than what is currently planned in PDP7.
Despite excellent analysis from the IEA and others about the realities of getting wind and solar on the system, without greater data transparency, it is difficult to substantiate claims about grid balancing from the increased penetration of variable renewables.
Pro-coal policymaker decision tree: could EVN become a proxy for Vietnam’s fiscal health?
Carbon Tracker’s view is that building coal power today equals high-cost power and fiscal liabilities tomorrow. If Vietnamese policymakers remain committed to coal power the nation will be forced to make a difficult decision: increase debt and taxes or undermine economic competitiveness through higher energy prices. The figure below shows a basic decision tree for a policymaker who remains committed to coal power over the long-term.
Source: Carbon Tracker analysis
Notes: based on a discussion with Indonesian colleagues Adhityani Putri (CERASIA) and Elrika Hamdi (IEEFA) in 2018.
This situation is particularly challenging for policymakers in Vietnam as debt as a percentage of GDP is reaching the ceiling of 65% and end consumers already receive subsidised electricity (which is why EVN’s operating cashflow has historically been negative). In our below 2-degree scenario, where coal capacity is forced to shut-down in a manner consistent with the temperature goal in the Paris Agreement, the operating cashflow of Vietnam’s coal generation could decline by $6.5 bn relative to a ‘business as usual’ scenario. This figure only includes operating capacity and capacity under construction. Vietnam also has 32 GW of planned coal capacity which, assuming a capital cost of $1,400/kW, could have an overnight investment cost of over $40 bn. For this reason, if the Vietnamese government continues to incentivise new coal, EVN’s finances could become a proxy for understanding the nation’s fiscal health. A similar situation has already emerged in South Africa. Eskom, the nation’s state-owned utility, was forced to subsidise power prices for the end consumer and resisted renewables in favour of coal. In doing so, Eskom has now potentially undermined the financial outlook of the South African economy.1
What’s next for Carbon Tracker?
The intention of Here Comes the Sun (and Wind) was threefold: start a conversation about the economic potential of renewable energy, showcase our data and build a rapport with local experts. Due to the nature of power supply and demand, our levelised and marginal cost analysis is indicative of a wider megatrend eclipsing power markets globally. As such, we now need to prove unequivocally that coal will become a net-liability to the end consumer, and therefore the financial and economic interests of Vietnam. This is a challenge due to data transparency which results in decisionmakers (most notably EVN) having a monopoly on information. Through data transparency, Carbon Tracker, in close collaboration with Green ID, aims to showcase the economic opportunities of renewables and the financial risks of coal. In doing so, we hope to help the government minimise the fiscal liabilities associated with stranded coal assets and ensure the Vietnamese people get access to the cheapest energy possible.
1. For instance, the South African Reserve Bank said in May this year: “The high level of the South African government’s contingent liabilities and the high probability of significant amounts of these contingent liabilities materializing, as well as Eskom’s current large debt levels, pose a threat to South Africa’s sovereign credit rating.”
Written by Matt Gray, Head of Power and Utilities