Clean Energy Finance and Investment Policy Review of Viet Nam

Executive summary

The Clean Energy Finance and Investment Policy Review of Viet Nam supports Viet Nam’s efforts to realise a clean energy transition. It provides a comprehensive overview of the current policy environment, highlighting progress and identifying opportunities for strengthening policy interventions that can help to scale up clean energy finance and investment. The following is a summary of the assessment and key recommendations from six policy areas that form the framework for the Review and that are elaborated in chapters 2 through 7.

Assessment

The Government of Viet Nam is to be commended for its prioritisation of clean energy development and for the recent progress in becoming one of the largest regional renewable energy markets in just a few short years. Strong incentives have created a boom in solar development and drawn attention to the country’s abundant renewable resource potential. To maintain market growth sustainably Viet Nam must resolve critical new challenges over the coming years including the successful integration of higher shares of variable generation; the mobilisation of diversified sources of capital; ensuring continued cost reductions; and maintaining a stable investment environment while managing the transition of its support schemes. Although it has been anticipated that the explosive rate of deployment witnessed over the last two years would slow down, the level and length of reduction in deployment rates signalled in the Power Development Plan (PDP) VIII (still at draft at the time of publication), which sees no significant new, large-scale renewable capacity additions until after 2030, is dramatic and could prove detrimental to local supply chains, green jobs, investor confidence and longer-term cost reductions. Risks associated with the availability and costs of finance for new coal power plants as well as the capacity to achieve timelines for the implementation of complex integrated liquefied natural gas (LNG) to power projects are emerging sources of energy insecurity under the PDP VIII draft. The ability of new thermal plants utilising imported fuels to mitigate fuel price risks will also be critically important as import reliance increases. Fifty percent of electricity supply will rely on imported fuels by 2035 compared to 15% in 2021. Enabling project sponsors to lock in longer-term fuel supply contracts will likely depend on contracting terms such as guaranteed offtake and more generous tariffs that have not been readily provided by EVN to date. Despite tremendous economic potential, the energy efficiency market remains largely untapped and stronger incentives, regulation and new business models are needed to drive the market. As an increasing number of countries and corporates pledge stringent commitments to climate action and sustainable development, Viet Nam will need to continue its clean energy transition if it is to maintain its current position as a leading destination for foreign direct investment.

Planning and public governance

Viet Nam is continuing to strengthen its long-term ambitions for renewable energy and energy efficiency as outlined in the draft PDP VIII, Viet Nam Energy Efficiency Programme (VNEEP) III, and the updated Nationally Determined Contributions. However, the lack of a flexible planning process may hinder the ability to react to the quickly changing context for clean energy and emerging implementation risks. Effective oversight and governance are critical to ensuring that Viet Nam’s future power system develops in a manner consistent with the country’s overarching policy goals.

Regulatory framework

Viet Nam’s energy policy landscape has undergone significant transformation pivoting the sector towards greater levels of private participation, market-based principles, and, more recently, prioritisation of non‑hydro renewable and energy efficiency development. The regulatory environment will need to evolve quickly to ensure incentive structures and enabling regulation can drive suitable business models for both renewable energy and energy efficiency development, including the procurement of balancing services and flexible demand and supply side resources.

Investment and competition policy

As the renewable energy market matures, Viet Nam will need to continue to support fair competition and equal access to the market between private developers and state owned enterprises. The upcoming framework for competitive procurement of renewable projects, the full launch of the wholesale market, the continued equitisation of Electricity Viet Nam (EVN) generation companies and the independence of the National Load Dispatch Centre (NLDC) will be important milestones for creating a level playing field. Viet Nam benefits from a particularly open environment for foreign direct investment, and the country’s clean energy transition can help attract further investor interest and support the government’s ambitions to become a leading manufacturing hub.

Investment promotion and facilitation

The strong action taken to reduce direct fossil fuel subsidies coupled with plans to develop a local carbon market will do much to ensure capital is directed towards projects supporting the country’s green growth ambitions. A favourable tax structure providing generous corporate income tax holidays to renewable energy projects and energy efficient equipment manufacturers also provides important incentives. However, the complex regulatory environment and administrative procedures can be challenging to navigate, particularly for foreign investors.

Financial market policy

A major scale up in financing is needed to meet Viet Nam’s clean energy transition goals requiring both domestic and international public and private sources of finance. The green banking policies led by the State Bank of Viet Nam are commendable and have played an important role in facilitating domestic finance. The rapid solar expansion over the last two years was financed to a large degree through domestic banks. While there is good appetite to finance clean energy projects, a lack of access to long-term debt capital will limit future growth potential and the absence of non-recourse project finance restricts the funding capacity of developers.

Cross-cutting issues

Without careful, long-term planning, mismanagement of end of life solar photovoltaic waste will have negative environmental effects and deteriorate public confidence in the energy transition. Regional initiatives for grid integration can enable cost effective variable renewable energy integration. Initiatives have progressed slowly to date but renewed focus on overcoming the challenges to establish multilateral trading should be prioritised. Targeted support for innovation in the clean energy sector will be an important cost reduction driver where local conditions necessitate localised technical solutions. In order to enable an inclusive clean energy transition, communities must be supported to benefit from local clean energy investment by improving access to green jobs and increasing opportunities for female entrepreneurship.

Table 1. Actions for Viet Nam to improve its clean energy finance and investment framework

KEY ACTIONS

Near-term

Strengthen and expand minimum energy performance standards and labelling in Viet Nam to remove inefficient products from the market and improve the availability and certainty of demand for more efficient ones. Fill regulatory gaps in the energy services market holding back development of those opportunities, ensuring there are transparent conditions for energy service contracting. Streamline project approval and permitting processes to reduce administrative costs and timelines for renewable energy project development. This could be achieved by establishing a nodal agency (or one-stop shop) that provides a single point of contact for clean energy project developers. Prioritise implementing an effective framework for corporate sourcing in order to keep-up with global trends on decarbonising supply chains and to provide new routes to market for renewable electricity. Establish regulations that set a clearly defined green bond framework including definitions for eligibility, reporting and verification protocols. Support the development of green bond issuances for sovereign, sub-sovereign and corporate issuers. Begin planning for and implementing the enabling framework for the development of a domestic solar photovoltaic recycling industry drawing from the experience of mature solar markets.

Medium-to-long term

Develop a clear roadmap to move to full cost recovery levels in the tariff structure to provide consumers sufficient long-term visibility to adapt to tariff uplifts and to provide a market signal for the promotion of energy efficiency investment. Establish a centralised agency (a variant of the Super ESCO model) mandated to support provincial authorities to develop, procure, finance, and monitor public energy efficiency programmes and support private sector ESCO development Increase frequency of the regular PDP revisions and updates to ensure that the most cost-effective and optimal development of the power system of Viet Nam is continuously ensured. Mechanisms for ensuring optimised course-correction (annual or biennial) should be clear and transparent. Enhance the independence of the NLDC and strengthen ERAV’s independence, so that all market participants view the decisions it makes as fair, objective, and free of political interference. Clarify renewable energy procurement mechanisms over the course of the PDP VIII period to provide medium‑long‑term confidence on pipelines. This is particularly important for offshore wind capacity procurement where supply chain development is at a formative stage.

Table 2. Opportunities to enhance development assistance

KEY ACTIONS

Development co-operation should enhance efforts to support policy makers in designing and implementing policies to facilitate variable renewable integration, design renewable energy auctions, strengthen energy efficiency regulation and support the development of local capital markets to deliver green financial products. Support skills development in the banking sector for the development and integration of environmental and social management skills and non-recourse project financing. Programmes should also include developing solutions that can be easily replicated or standardised to facilitate project preparation and due diligence by investors. Develop on-lending schemes or other financing mechanisms that can facilitate access to long-term capital by domestic finance institutions and take advantage of low cost capital from multilateral and bilateral development banks. This could require a re-evaluation of development finance mandates to shift from sovereign lending to be able to facilitate more direct lending to financial institutions without a sovereign mandate. Improve the availability of clean energy finance and investment data. This will help identify funding gaps, track climate finance flows and help build investor confidence and reduce perceived risks that could potentially lower the cost of finance.