This chapter examines clean energy policies and regulations in Viet Nam. It analyses Viet Nam’s evolving clean energy policy environment and how regulatory developments have been shaping the market landscape for clean energy investment. The chapter reviews the role of expanding energy performance standards and labelling schemes, energy management obligations, and regulatory conditions for energy service companies. It also considers the impact of regulations on renewable electricity generation and identifies opportunities to align with international best practice.
Clean Energy Finance and Investment Policy Review of Viet Nam
Green Finance and Investment
3. Regulatory framework
Abstract
Viet Nam’s energy policy landscape has undergone significant transformation over the past two decades 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 government of Viet Nam has made laudable progress implementing the regulatory framework to achieve these overriding policy objectives. The Government must continue to strengthen these reforms in a transparent, consultative process to ensure the regulatory framework evolves to address emerging challenges and remaining market barriers. Particular focus should be paid to building the enabling framework to attract diversified sources of capital to deliver the deployment targets set in the Power Development Plan (PDP) VIII and Viet Nam Energy Efficiency Programme (VNEEP) III.
Assessment & Recommendations
Recent success attracting renewable energy investment brings urgent new regulatory priorities
Viet Nam’s feed-in tariff (FIT) support mechanism, particularly for grid-scale and rooftop solar photovoltaic (PV), incentivised rapid capacity deployment over the course of 2019-2020. By end of 2020, variable renewable energy (vRE) capacity reached 17.6 GW (for wind and both grid-scale and grid‑connected rooftop installations) accounting for 23.6% of total generation capacity. Such rapid deployment was prioritised due to a tightening electricity supply margin caused by strong demand growth coupled with delays in planned thermal power plant procurement. However, the economic impacts of COVID-19 supressed electricity demand causing an oversupply situation, particularly in the southern regions where deployment of solar PV is concentrated. Oversupply led to congestion of the transmission system, magnified during low-demand periods. Under such operational conditions strategic curtailment of generation sources, including renewable independent power producers, was unavoidable. Such large shares of vRE has made operation of the power system more complex and provided a preview for Viet Nam’s higher renewables future. Integrating high levels of vRE is not only an operational challenge but also a regulatory one. Viet Nam’s regulatory environment will need to evolve quickly to ensure incentive structures and enabling regulation are in place for the procurement of balancing services and flexible demand and supply side resources that will be required to facilitate the continued clean energy transition.
A shift in approach to renewable energy procurement creates market uncertainty
The Prime Minister’s Notification No. 402/TB-VPCP issued in November 2019 set the course for a transition from FIT based procurement to competitive auctions for solar. Motivations for this decision include the need for more carefully managed deployment in line with available grid capacity and the desire to harness the cost reduction potential of competitive bidding. The solar FIT programme (Decision No. 13/2020/QD-TTg) expired on 31 December 2020 and there are no plans to introduce a transitional support scheme for grid-scale solar PV projects. This creates a significant regulatory vacuum and uncertainty given the auction system is still at a relatively early design phase and few details are available yet to market participants. Onshore and offshore wind FITs (Decision No. 39/2018/QD-TTg) expire on 1 November 2021 and likewise there are no details available confirming procurement arrangements after this date. Abrupt changes to renewable energy (RE) support mechanisms can have detrimental stop-and-go effects on industry, local supply chain development, investor confidence and risk perception, and local employment effects. All of which could ultimately set back the cost of development of RE projects in Viet Nam as higher levels of deployment are planned after 2030.
Risk allocation in standard power purchase agreements restricted international capital
FIT regulations introduced mandatory standardised power purchase agreements (PPAs) with fixed terms for electricity sale between independent power producers and the national power transmission corporation, Viet Nam Electricity (EVN) as sole off-taker. Aspects of the PPA were highly attractive to investors including the indexing of payments in Vietnamese Dong to the USD exchange rate. However, other aspects fell short of requirements for bankability, particularly for lenders in OECD markets. This includes the provisions for termination compensation, step-in rights, lack of curtailment protection, and lack of international arbitration. Flows of international capital from OECD countries into Viet Nam’s clean energy sector have therefore been restricted to date while domestic and regional sources more comfortable with the PPA risks have been predominant. The large investment requirements for PDP VIII implementation, increased sector exposure of domestic banks, and shift to competitive auctions point to the growing need to review the risk allocations in the PPA. Continued barriers to international capital flow may restrict auction price competition and cost reduction while the financing needs for PDP VIII implementation goes beyond the capacity of domestic banks. This is particularly relevant for highly capital-intensive offshore wind projects requiring large economies of scale for price competitiveness and careful risk allocations in the PPA to enable non-recourse project finance led by international loan syndications in partnership with local lenders.
Regulation for energy efficiency promotion has advanced quickly but processes for monitoring, enforcement, and impact evaluation can be improved
Viet Nam has taken important steps to implement the legal and regulatory framework to promote energy efficiency investment during the VNEEP I & II periods. This includes passing the energy efficiency law, introduction of appliance minimum energy performance standards (MEPS) and energy labelling, mandatory sub-sectoral specific energy consumption targets, energy auditing and reporting obligations, and energy performance building codes. The VNEEP III period offers an opportunity to take stock and build from these achievements. There should be a focus on enhancing the monitoring and enforcement capacity at provincial levels, evaluating effectiveness, and strengthening regulation where required to keep pace with market conditions. It is noted, for example, that a 2019 assessment by CLASP found 76% of air conditioning models available in the market met the two highest star ratings indicating the market was ready for a rebalancing of the energy rating scale.
Dedicated regulations that guide energy performance contracting will build market confidence
The uptake of energy performance contracting (EPC) business models has been limited in Viet Nam to date. Development of the EPC market has been a key driver of energy efficiency improvement in mature energy efficiency markets globally. Although there are no regulatory barriers restricting EPC modalities between two private enterprises, the lack of awareness and the novelty of EPC creates significant hurdles leading to long business development cycles. A dedicated framework providing clear guidance on accounting and taxation treatment, third-party monitoring & verification, and specialised arbitration procedures would be an important step to foster confidence. Regulatory barriers related to public budgeting and procurement restrict the possibility for EPC-based procurement across state agencies and state owned enterprises. These regulations should be reviewed to allow multi-year EPC contracting under guaranteed or shared savings modalities. The public sector can take an important ‘first adopter’ role to demonstrate the EPC model and to allow energy services companies (ESCOs) to build stronger balance sheets and technical competencies.
Box 3.1. Main policy recommendations on clean energy regulatory framework
A range of technical and market-based solutions will be required to deliver the power system flexibility to integrate higher levels of variable renewable energy generation. A regulatory framework should be developed to enable the procurement of ancillary services through technology neutral, market-based mechanisms. Forward looking and inclusive ancillary services procurement can ensure changing system needs meet at least cost by allowing all possible solutions among generation, grids, and demand, to compete on a level playing field. Vietnam may also consider including incentives for flexibility in long-term PPAs, and even, at some point, the development of dedicated markets for flexibility services.
Regulatory uncertainty related to RE procurement mechanisms over the course of the PDP VIII period should be resolved to provide medium-long-term confidence on pipelines for investors and new market entrants. This is particularly important for offshore wind capacity procurement where significant regulatory uncertainty exists and supply chain development is at a formative stage.
A review of PPA terms for renewable energy independent power producers (RE-IPPs) should be carried out once the auctioning mechanism has been developed to ensure appropriate risk mitigation and optimum allocation of remaining risks between bidders and other sector stakeholders. The review process should be consultative and transparent to build investor confidence. Cost-benefit analysis of contractual de-risking options should be undertaken to inform the auction design and maximise cost-effective tariff reduction potential.
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.
Minimum energy performance standards and labelling in Viet Nam should be strengthened and expanded to remove inefficient products from the market and improve the availability and certainty of demand for more efficient ones. Viet Nam can build upon its past experience with product MEPS and work with partners such as the United for Efficiency and ASEAN Shine initiatives to increase the stringency and coverage of existing standards.
The Government should address the regulatory gap in the energy services market holding back development of those opportunities, ensuring there are transparent conditions for energy performance contracting (EPC). Regulations and guidelines should cover accounting procedures, incentives, public procurement and public budgeting barriers, EPC loan terms, and arbitration procedures.
Energy Efficiency Policies and Regulations
Significant progress has been made developing the regulatory framework for industrial energy efficiency promotion but monitoring and enforcement needs to be strengthened
During the course of VNEEP I & II several legal and regulatory milestones were achieved to promote energy efficiency in the industrial sector. Most importantly, this includes the passing of the Energy Efficiency Law which obligated Designated-Energy Users (DEUs) to appoint a qualified energy manager to undertake energy audits every 3 years and to implement energy managements systems that include annual and five yearly energy reduction plans. Implementing Decree No. 21/2011/ND-CP later defined DEUs as industry and agricultural facilities with total energy consumption over 1 000 TOE per year and any non-industrial (including residential, commercial, hospital and education) buildings with over 500 TOE or higher. The first list of obligated DEUs was released in 2018 with MOIT Decision No. 1221 and set the requirement of MOIT to release updated lists yearly. The latest list is based on 2019 consumption (Decision No. 1577/2020/QĐ-TTg) and contains 3 006 DEUs (2 441 industrial facilities, 15 agricultural facilities, 84 transportation units, and 466 buildings). Implementing and enforcing energy audit and energy management obligations can be complicated due to treatment of shared ownership, leased equipment, multi-occupancy, and tenant-landlord split incentives. Defining DEUs at the building or facility level rather than at the enterprise level may exacerbate this issue. Circular No. 9/2012/TT-BCT elaborates on the method for the establishing and reporting of energy management plans but does not provide detailed guidance on these issues.
Enforcement provisions were also introduced with Decree No. 134/2013/ND-CP giving a number of state actors authority to impose warnings and financial sanctions for breach of these obligations. Currently, no enforcement notices or sanctions have been issued and the monitoring and enforcement regime for these obligations have yet to be fully implemented. It was noted in a VNEEP II evaluation carried out by the Danish International Development Agency in partnership with MOIT that DEUs generally do not follow the requirements of developing energy management plans or with yearly reporting to the provincial Department of Industry and Trade (DOIT). VNEEP III has prioritised greater focus on compliance enforcement with a specific target of 100% of DEUs applying energy management systems by 2025. Integrating energy management processes into the core business operation and investment processes of large energy users is a key demand-side driver for energy efficiency market development. The government must be commended in the significant progress made to date establishing the legal framework to drive such uptake, and the platform this provides going into VNEEP III with which to consolidate these achievements through renewed focus on strengthening the compliance environment. The reporting obligations that come with the Energy Efficiency Law also provide valuable information flows from enterprises to government on efficiency opportunities, technology diffusion, progress against sub-sectoral targets, etc. This data should be utilised for impact assessment, evaluation, and to support further refinement of the regulatory environment.
Since the passing of the Energy Efficiency Law, mandatory specific energy consumption (SEC) targets for several energy-intensive industries have also been introduced. Mandatory targets were introduced from 2014 following pilot voluntary agreements developed under the Global Environment Fund (GEF) funded Vietnam Clean Production and Energy Efficiency Project (CPEE) implemented by the World Bank (2011-2016). Mandatory targets have now been set for chemicals, plastics, steel, paper, sugar, and seafood processing industries1. These industries must develop and invest in energy reduction plans to meet the SEC targets by 2025 or face potential enforcement action. Industry inputs were gathered during the benchmarking and target setting process, but despite careful industry consultations, the setting of mandatory targets can risk unintended effects if inefficient investment decisions are promoted or where access to investment capital is restricted. These risks can be pronounced if the investment case for deep energy efficiency retrofits is weakened due to low or subsidised energy tariffs; Viet Nam has some of the lowest industrial tariffs in the region (Figure 3.1).
Access to finance was highlighted as a key barrier during the CPEE program with companies keen to implement low-cost measures (small maintenance, improvement of production processes, and innovation), but struggled to prioritize capital intensive actions (e.g. equipment replacement) over other operational and investment needs (e.g. capacity expansion). This was more prevalent for the companies with the lowest profitability margins and/or in the most competitive market segments (World Bank, 2018[1]). This is likely to be exacerbated due to COVID-19 impacts; a survey of firms across a number of sectors, including manufacturing, reported an average 36% revenue reduction in 2020 compared to the previous year due to payment delays, cancellation of existing orders, and falling demand (Tan and Tran, 2020[2]).
Figure 3.1. Comparison of industrial electricity tariffs in selected regional countries 2018
Note: Industry size defined with monthly consumption and maximum load thresholds: Small 5 000 kWh, Medium 65 000 kWh & 180 kW load, Large 270 000 kWh & 600 kW load, Very Large 1 050 000 kWh & 2,250 kW load
Source: (ADB, 2018[3])
It will be important for MOIT to closely monitor progress against these targets, to continue dialogue channels with industry actors, and to provide supplementary support in the form of technical assistance, tax or other fiscal incentives and facilitating access to finance throughout the target period. Regular tariff uplifts that keep pace with inflation and increasing costs of electricity production will also be crucial. To date these have only happened sporadically and have not kept up with rising costs (Lee and Gerner, 2020[4]). The wider support and facilitation environment available to industries participating in China’s top‑1000 Programme was a key driver of diffusion of best available technology and energy intensity improvements over the implementation period when energy intensity of GDP fell by nearly 4% per year. The government of China implemented tax exemptions for approved energy saving projects and equipment and direct fiscal incentives to enterprises between USD 26 to USD 33 per ton of coal equivalent saved (Rock et al., 2013[5]). The Scaling Up Energy Efficiency for Industrial Enterprises Programme co-financed by the Green Climate Fund and World Bank is targeted to begin full operation in Viet Nam in Q2 2021 setting up a risk sharing facility to support access to commercial energy efficiency (EE) loans for industry coupled with expanded technical assistance resources.
Energy management system certification to international standards is increasing
Promoting the uptake of internationally recognised standards such as ISO50001 Energy Management, ISO9001 Quality Management and ISO14001 Environmental Management is a key area to ensure energy and environmental management practices are properly integrated into companies’ operational processes. This is not just relevant for improving Viet Nam’s energy intensity and industrial competitiveness but will have growing importance for attracting foreign direct investment and trade as multinational corporations increasingly scrutinise the environmental impacts of their global supply chains (discussed in chapter 4). Viet Nam is making progress in this area with holders of ISO50001 certification increasing from five in 2012 to 84 in 2019 (ISO, 2019[6]). This uptake has been supported through VNEEP I & II periods with awareness raising, training, and conducive regulations such as the Designated Energy User obligations described above. Around 150 enterprises received direct support during VNEEP 1 & 2 for the implementation of an energy management system, among which 20 enterprises went on to successfully achieve ISO50001 certification. This was coupled with training and certification to 2 200 energy management staff and the development of standardized training materials on energy management. The government may consider providing further incentives for ISO50001 uptake, for example, through exemptions or relaxation of energy auditing requirements under the energy efficiency law. This is a similar approach taken across EU countries under the Energy Efficiency Directive.
Figure 3.2. ISO50001 energy management system certifications for selected countries
Note: ISO50001 is an internationally recognised certification standard for energy management system quality
Source: (ISO, 2019[6])
Minimum Energy Performance Standards & Labelling can be tightened in line with market conditions
Energy labelling regulations were introduced by Circular No. 08/2006/TT-BCN mandating a voluntary introductory phase to develop labelling procedures, label design and the technical standards underpinning performance tiers. Technical standards were introduced for five equipment classes, Group 1: lighting, residential appliances and air conditioners; Group 2: commercial and office appliances; Group 3: industrial three phase motors, transformers and chillers; Group 4: cars with less than seven seats; and Group 5: solar water heaters and public lighting. A mix of endorsement labels and comparative labels were introduced depending on technology type. During this time testing facilities were set up (QUATEST 1, 2 & 3), and marketing campaigns undertaken to increase consumer awareness. Decision No. 51/2011/QĐ-TTg later introduced the shift to mandatory labelling for some appliances, as well as the introduction of MEPS and a roadmap for their implementation. Decision No. 04/2017/QĐ-TTg later supplemented this with five additional products subject to mandatory energy labelling: LED lights, laptops, water heaters with storage, cars with 8-9 seats and motorcycles.
Table 3.1. Timelines for mandatory labelling and minimum energy performance standards
Source: Decision No. 51/2011/QĐ-TTg & Decision 04/2017/QĐ-TTg
In 2015, shortly after mandatory labelling was introduced, MOIT had approved energy labels for over 8 000 different products and by 2019 this number has grown to 15 000 with labelled products accounting for 90% of all household appliance purchases (Tap Chi Tai Chinh Online, 2019[7]). A market survey in 2014 found impressive uptake and compliance rates for the labelling regulations only six months following the introduction of mandatory labeling requirements; 68% of air conditioners (AC) and washing machines were found to be correctly labelled whereas endorsement labels for compact fluorescent lamps were all found to conform to the regulations. The survey did however highlight that the distribution of washing machines and fans available in the market were highly skewed towards the highest 5 star rating and therefore provided little differentiation in the market and limited incentives for manufacturers and retailers to supply better performing products (Australian Government, 2014[8]). A 2019 survey of the air conditioners market found 76% of all ACs in the market achieved a 4 or 5 star rating, a remarkable improvement compared to the earlier 2014 survey result of 33% (CLASP, 2019[9]). This suggests that Viet Nam has an opportunity to rescale the star rating system and revise the MEPS introduced in 2015 to drive continued market transformation over VNEEP III. It is also recommended that Viet Nam timetable regular market reviews and regrading of MEPS/labelling benchmarks to provide consumers with updated guidance on latest energy efficient technologies.
Figure 3.3. Market share of new appliances for sale by energy performance rating 2014
Note: Star ratings corresponding with Viet Nam’s appliance energy labelling regulations with 5 star the most energy efficient
Source: (Australian Government, 2014[8])
Energy services companies are active in Viet Nam but a regulatory framework guiding energy performance contracting modalities would build market confidence
Energy services companies (ESCOs) provide technical expertise, project implementation services and, depending on the market conditions, upfront financing or guarantees for energy efficiency projects. ESCO business models have played an important role in facilitating the scale-up of energy efficiency investments in various OECD markets. Their business model mitigates technical and financial barriers faced by project hosts through various forms of energy performance contracts (EPCs) that allow upfront project costs to be paid over time with a share of the savings achieved or by guaranteeing a minimum savings performance. There are thought to be more than 200 ESCOs active in Viet Nam, but the use of EPCs is rare with the vast majority providing consultancy or conventional supply and install services (Viet Nam News, 2020[10]).
Although there are no regulatory barriers restricting EPC modalities between two private enterprises, the lack of awareness and novelty of EPC creates significant hurdles and long business development cycles. A dedicated regulatory framework providing clear guidance on accounting and taxation treatment, third‑party monitoring and verification, and specialised arbitration procedures would be an important step to foster confidence. Regulatory barriers related to public budgeting and procurement restrict the possibility for EPC-based procurement across state agencies and state owned enterprises. These regulations should be reviewed to allow multi-year EPC contracting under guaranteed or shared savings modalities. The public sector can take an important “first adopter” role to demonstrate the EPC model and to allow ESCO businesses to build stronger balance sheets and technical competencies. Vietnamese ESCOs are typically small enterprises that lack the balance sheet to provide the collateral required by corporate lenders and therefore have restricted access to financing. It is also relevant for project hosts such as industrial clients who may have weak profitability and high existing debt leverage and who therefore prioritise their remaining investment capacity for what is considered core operational investments. Viet Nam can incorporate learnings from China’s successes in ESCO market development as outlined in the case study below (Box 3.2).
Box 3.2. Case Study: People’s Republic of China regulatory drivers for ESCO development
The Energy Services Company (ESCO) market in China has seen remarkable growth over the last two decades to become the leading market globally, accounting for 59% of global ESCO revenues in 2017. Over 80 ESCOs were operating in the country in 2005, rising exponentially to over 6 500 in 2019 with ESCOs now providing over 750 000 jobs (Zhu, 2020[11]). China’s market development has taken a private sector focused development pathway with 90% of ESCO revenues in the private sector particularly centred in industry. This is a similar market trend to Korea, and to a lesser extent Japan, compared to the United States, the EU, and Canada, where public programmes make up the majority of market activity. It should be noted however that given the level of state support for industry, the line between private and public enterprises in China could be difficult to draw.
Figure 3.4. ESCO market revenue private vs. public sector 2016-2017
Source: (IEA, 2018[12])
China’s ambitious and long-running industry targets set under the Top 1 000 and Top 10 000 programmes implemented since 2005 effectively kick started the market for energy services. This market-making policy was later supported with a range of regulations that fostered the growth of ESCOs and energy performance contracting (EPC). These can be categorised under the following themes in Figure 3.5:
Figure 3.5. Components of a conducive regulatory environment for ESCO development
The range of regulatory actions and guidelines in China targeting EPC development are listed in Table 3.2. Supportive ESCO regulations in China. A critical aspect for ESCO development is access to finance; in China, this was achieved by providing dedicated capital to banks for on-lending but also by focusing on adapting underwriting procedures to overcome barriers specific to ESCOs. The ability for ESCOs to pledge fixed assets and future revenues under EPC projects as security was important and not commonly found in other markets. Supporting ESCOs to develop a credit history in this way has enabled ESCOs to grow their balance sheets and businesses. In 2010, 78% of ESCOs in China were micro or small enterprises, changing to 40% in 2019 (Zhu, 2020[11]).
A private sector led approach to ESCO market development has been achieved successfully in China thanks to the development of a clear regulatory framework that created clarity for contract parties while incentivising market activity. The Government of Viet Nam has made important first steps to create the market through industry targets and energy auditing obligations, however, the supportive regulatory environment to foster market development for ESCOs remains relatively weak. There is no ESCO-specific regulation establishing financial or tax incentives, clarifying EPC accounting treatment, EPC loans, or certification. Viet Nam has prioritised further development of the regulatory environment over the VNEEP III and can incorporate learnings from China to continue to make progress in this area.
Energy Efficiency Regulation in the Building Sector
Vietnam is undergoing rapid urbanisation and a rising middle class. The number of people living in cities is projected to increase from 34.7 million in 2018 to 65.7 million by 2050. This represents more than half of the population relocating to an urban area, spurring demand of 12 million square meters of additional floor space every year (IFC, 2019[13]). In September 2013, the Ministry of Construction adopted the Viet Nam Energy Efficiency Building Code (VEEBC) QCVN 09:2013/ BXD, which set mandatory technical standards for the design, construction or retrofitting of civil buildings (office buildings, hotels, hospitals, schools, commercial buildings, services buildings, apartments buildings, among others), with a gross floor area of 2 500 m2 or larger. VEEBC was updated in 2017 (QCVN 09:2017/BXD) however, the level of compliance is believed to be low. VNEEP III sets a specific goal to verify that 100% of newly built or refurbished buildings comply with the 2017 standard. Decree No. 15/2021/ND-CP has set out important new procedures for the design, appraisal, and inspection of construction projects, which will provide a valuable updated framework to improve the compliance environment.
Figure 3.6. Yearly green building certification 2010-2020
Note: LOTUS is Viet Nam’s national green building certification system developed by the Viet Nam Green Building Council. LEED is a green building certification system developed by the U.S. Green Building Council, EDGE is a green building certification system developed by IFC
Source: Viet Nam Green Building Council & IFC
There is positive momentum in Viet Nam with the uptake of green buildings but numbers still remain low. In 2020, there were 23 newly certified LEED buildings (U.S Green Building Council’s green building certification standard) and nine LOTUS certified buildings (Viet Nam’s domestic green building certification developed by the Viet Nam Green Building Council). To provide further momentum for the green building market the government should consider establishing appropriate incentive programmes, for example, through tax exemptions or support for preferential green mortgage rates. The Ministry of Construction is expected to introduce a new green building legal framework in 2021 that will give authority to provincial level governments to establish localised incentive policies.
Electricity market design and renewable energy policies and regulations
Recent success attracting renewable energy investment brings urgent new priorities to adapt regulatory frameworks for facilitating grid integration
Viet Nam’s FIT support mechanism, particularly for grid-scale and rooftop solar photovoltaic (Solar PV), incentivised rapid capacity deployment over the course of 2019-2020. By the end of 2020, variable renewable energy (vRE) capacity reached 17.6 GW (for wind and both grid-scale and grid-connected rooftop installations) accounting for 23.6% of total generation capacity (EVN, 2021[14]). Such rapid deployment was prioritised due to a tightening electricity supply margin driven by strong demand growth coupled with delays in planned thermal power plant procurement. However, the economic impacts of COVID-19 quickly supressed electricity demand causing an oversupply situation, particularly in the southern regions where most of the deployment of solar PV is concentrated. Oversupply led in turn to congestion of the transmission system, magnified during low-demand periods. Under such operational conditions strategic curtailment of generation sources, including RE-IPPs, was unavoidable. During the 2021 Tet holiday (Vietnamese lunar New Year) 5.5 GW of renewable capacity was curtailed whereas ongoing curtailment of RE IPPs to levels up to 30-40% in the most affected localities is also reported. NLDC reports that vRE sources can account for up to 40% of total generation sources during periods of regular grid operation. Over the entire year the average share of vRE on the system accounted for 4.85% of the total which will likely rise to over 10% by the end of 2021 (EVN, 2021[15]). This would put Viet Nam’s vRE integration rate above the rate in 2018 of leading renewables markets such as Japan, Australia, the United States and China (Figure 3.7).
Figure 3.7. Variable renewable energy share and phase of integration selected countries 2018
Source: (IEA, 2020[16])
Such large shares of vRE has made operation of the power system more complex and provided a preview for Viet Nam’s higher renewables future. Integrating high levels of vRE is not only an operational challenge but also a regulatory one. Viet Nam’s energy regulatory environment will need to evolve quickly to ensure incentive structures and enabling regulation are in place for the procurement of balancing services and flexible demand and supply side resources that will be required to facilitate the continued clean energy transition. Such measures will also require embedding into the overall market reform process, development of competitive electricity markets and investment plans for grid upgrades.
Viet Nam’s competitive power market is developing but a single buyer model remains for renewable energy independent power producers
Viet Nam’s Electricity Law, passed in November 2004, set out the legal basis for power sector reforms including the establishment of a competitive power market, the restructuring of Viet Nam Electricity (EVN) and a reformed governance structure (see chapter 2). The Prime Minister’s Decision No. 63/2017/QD-TTg (revising earlier decisions passed in 2006 and 2013) approved the reform roadmap (Conditions and Power Sector Organisation Structure for Vietnam Power Market Stages Formation and Development) that plotted the path from a competitive generation market, to a competitive wholesale market, and finally to fully competitive wholesale and retail markets beyond 2023.
Figure 3.8. Planned phases of Viet Nam’s electricity market development
Source: Decision No. 63-2013- QD-TTd
The electricity wholesale market (VWEM) has been in operation since 2019 with the overall design set out by MOIT Decision No. 8266/2015/QD-BCT and rules of participation further developed since. The VWEM implemented the transition from a single buyer model allowing power corporations (and some larger consumers) to participate in the spot market and to also hedge market risks with bilateral contracts directly with generators. This is in contrast to the single buyer model during the competitive generation market period where EVN Electric Power Trading Company (EPTC) purchased all power and supplied it to power corporations at regulated bulk supply tariffs. Hydro and non-renewable generators above 30 MW are now required to participate in the wholesale market whereas renewable energy generators receiving FITs remain under a single buyer arrangement selling power to EPTC without exposure to market prices.
The wholesale market, when fully developed, can play a key role in unlocking and incentivizing system flexibility. Prices that reflect actual system conditions can incentivise generation to ramp-up or ramp-down as necessary, so long as those generators are fully exposed to price signals. This is true not only for traditional dispatchable generation, but also for renewable generation, which can also respond flexibly (for example, by choosing to self-curtail) when incentivised to do so. Price signals should have a high-resolution, both in terms of time (e.g. in 30- or 15-minute increments aligned with dispatch windows) and space (i.e. reflecting local conditions in regions or grid nodes). This means not only carefully considering the design of the wholesale electricity market, but also ensuring that long-term power purchase agreements (PPAs) are market-friendly – that is, exposing generators under long-term contracts to short-term price signals. Contracts for difference (CfDs) or other modern remuneration mechanisms can ensure long-term profitability while also incentivising system friendly operations. As RE-IPPs make up an increasing proportion of installed capacity, their integration into the power market will be of increasing importance to ensure adequate liquidity for efficient market operation. The development of the wholesale market should also be designed to create an environment that enables the technical integration and commercialisation of storage assets by creating price signals that reflect system needs.
Improved ancillary services will be required to maintain power quality and reliability
Power systems with significant vRE penetration require additional ancillary services to maintain power quality and reliability. Ancillary services can be split into different service types: synchronised regulation that corrects short-term electrical imbalances, contingency reserves that are held ready in case of unexpected failures and black start reserves that support system restoration in the event of a power loss. Ancillary services are provided by power plants procured through PPA terms with the pricing governed by Circular 25/2018/VBHT/BCT. To date, the country’s hydro assets have largely provided ancillary services and there are currently no storage assets operating on the transmission grid. RE-IPPs are able to participate in ancillary service provision through the terms of the standard PPA, however, it is noted from discussions with NLDC that awareness of the available incentives is low and the incentives have not attracted significant participation. The deployment of energy storage for ancillary service provision is entirely contingent on schemes that compensate project owners for these services (unlike generation assets, which can also sell power). Expanding ancillary service delivery in line with vRE capacity will require modifications to current procurement mechanisms and the potential for separate ancillary services markets as the electricity market further develops. A review of evidence to understand the full cost/benefits of expanding ancillary services across the full range of services types, technologies (generation and dedicated storage assets both distributed and centralised), and ownership models will be required to design a clear strategy for procurement aligned with electricity market development and vRE deployment. Forward looking and inclusive ancillary services procurement can ensure that these changing system needs meet at least cost by allowing all possible solutions among generation, grids and demand to compete on a level playing field.
Some important initial steps have been achieved in enhancing system flexibility; the national grid code which sets out connection rules for the distribution system (Circular No. 25/2016/TT-BCT) and for the transmission system (Circular No. 39/2015/TT-BCT) was revised in 2019 with Circular No. 30/2019/TT‑BCT to provide provisions for improved frequency control. A more significant revision of the grid code is also underway to adopt a unified code aligned with international best practice. ERAV is working with the Danish Energy Agency under the Energy Partnership Programme on this work, which commenced at the end of 2020 with a five-year implementation period.
In 2012, the Smart Grid Road Map was introduced in Decision No.1670/QD-TTg to implement measures to automate grid operation and increase reliability. Now, almost all substations and generators over 30 MW have been connected with Supervisory Control and Data Acquisition software system, which enables remote control of equipment. Viet Nam has also taken steps to develop demand response resources with the Demand Response Roadmap and Implementation plan approved in 2019 under Decision No. 175/QD-BCT. This follows from an earlier pilot implemented by Ho Chi Minh City Power Corporation in 2015, which achieved an average of 600 kW of demand side resource availability across 12 participating end users. The demand response programme is being initially implemented on a voluntary, non-profit basis by engaging enterprises with power consumption over 1 million kWh per year and able to reduce load by 10-20% within 30 minutes of receiving a demand response notice. Without suitable incentives through payments or tariff benefits, though, participation is likely to remain low. ERAV is tasked to develop an appropriate incentive mechanism in co-ordination with the Ministry of Finance but it is understood this work is still at an early stage.
Renewable energy procurement is regulated through a series of ministerial decisions
The support mechanisms and legal framework for procurement of renewable independent power producers (RE-IPPs) have been established by a number of technology-specific decisions and circulars introduced and revised by MOIT since 2008 (Table 3.3). These regulations have introduced tariff support in the form of feed-in tariffs (FITs) or avoided cost tariffs for certain technologies (applicable to biomass power plants and small-scale hydro). They have also introduced standardised power purchase agreements (PPAs) that set mandatory terms between the RE-IPP and EVN as sole power off taker. This has effectively introduced an alternative procurement framework set apart from the country’s Public Private Partnership Law, which governed the procurement of large thermal power plants under Build-Operate-Transfer (BOT) arrangements. These renewable support mechanisms have had varying levels of success over the years. Relatively low levels of deployment witnessed, until Decision No. 11/2017/QD-TTg introduced the solar feed-in tariff, beginning of a rapid deployment of solar PV capacity that took off between 2019 to the end of 2020 (see Chapter 5 for a detailed discussion on the design of the feed-in tariffs).
Table 3.3. Timelines and key regulations for renewable energy support
Standardised power purchase agreements fall below international bankability standards
To begin construction a developer must execute a PPA with Electricity Vietnam (EVN) according to standardised terms set out in the corresponding circulars issued by MOIT. The PPA is a critical contractual agreement which all other agreements with lenders and equity investors depend as it sets much of the risk profile for the project depending on the certainty or otherwise of revenues from the offtaker. Standard PPA terms simplify the project development process by negating the need for extended negotiation between potential RE-IPPs and EVN as the offtaker. However, to make the investment attractive and to ensure projects are able to raise debt financing, the risk allocations under the PPA must be finely balanced.
Figure 3.9. Simplified structure of agreements for a renewable energy project
Notes: PPA = Power purchase agreement
Source: (IRENA, 2018[17])
The standardised PPAs in Viet Nam have typically not met international minimum lender requirements for bankability in a few regards and have thus restricted the level of international financing flows from OECD countries into the sector.
Curtailment: the PPA does not impose a clear “take or pay” obligation on EVN and so does not give a guaranteed revenue stream in the event of curtailment events. EVN is obligated to purchase power output only when delivered to the grid. The PPA exempts EVN from the obligation when the grid is under repair, inspection or testing, or breaks down. This effectively leaves projects at risk in the event of curtailment due to grid congestion.
Force Majeure: The PPA does not distinguish between political and natural force majeure events
Arbitration: The governing law of the PPA is Vietnamese law and there is no provision for international arbitration unless agreed by both PPA signatories.
Change of Law: There is no protection for the financial impacts caused by changes in law and/or tax policies after the PPA has been signed.
Termination compensation: Termination compensation is fixed at 1 year’s revenue. This has been retained for the latest solar PPA but the latest wind PPA has strengthened this to include all direct losses faced on the remaining contract term.
Low interest rates in OECD markets have driven low costs of debt compared to domestic local currency debt interest rates (4-7% vs. 9-12% nominal2), facilitating greater flows of international capital, which has the potential to drive down the prevailing cost of capital in the renewable energy sector. Cost of capital has a large influence on the levelised cost of energy (LCOE) from renewable sources due to higher capital intensity compared to thermal plants. It is estimated that for every 10% reduction in cost of capital there is an LCOE reduction potential of around 6% and that the cost of capital therefore has a greater influence over LCOE than resource quality (Ondraczek, Komendantova and Patt, 2015[18]). OECD consultations with developers and international banks have indicated that to facilitate these flows would require a revision to the PPA terms to give more investor protections particularly over termination and curtailment risks.
The use of non-recourse or limited-recourse financing structures will become increasingly important in Viet Nam’s clean energy sector as individual project sizes and total investment requirements increase over the PDP VIII period. Project financing structures allow project sponsors to raise debt financing off balance sheets. This reduces the impact of the project on the developer’s debt capacity and cost of debt (World Bank, 2020[19]). The current PPA terms do not provide enough revenue certainty to enable these financing structures and external mitigation options are either unavailable or cost-prohibitive (see chapter 6).
A shift in approach to renewable energy procurement creates market uncertainty
The Prime Minister’s Notification No. 402 issued in November 2019 set the course for a transition from FIT-based procurement to competitive auctions. Motivations for this decision include the need for more carefully managed deployment in line with available grid capacity and the desire to harness the cost reduction potential of competitive bidding. The solar FIT (Decision No. 13/2020/QD-TTg) expired on 31 December 2020 and there are no plans to introduce a transitional support scheme for grid-scale solar PV projects. This creates significant regulatory vacuum and uncertainty given the auction system is still at a relatively early design phase and few details are available yet to market participants despite tentative timelines of early 2022. Onshore and offshore wind FITs (Decision No. 39/2018/QD-TTg) are set to expire on 1 November 2021 and no structured transition mechanism is currently being planned with already approved projects in the pipeline expected to be negotiated on a case-by-case basis. The transition to an auction based mechanism will provide opportunities for tariff reduction, but only if sufficient competition is secured for price discovery and conditions are in place to effectively de-risk projects and reduce cost of capital. Abrupt changes or uncertainty to RE policy and support mechanisms can have detrimental stop‑and-go effects on industry, local supply chain development, investor confidence and local employment effects. All of which could ultimately disrupt the cost of development of RE projects in the run up to the auctioning programme. These issues are especially critical for (non-nearshore) offshore wind industry, characterised by long lead times for complex supply chain development. A clear roadmap for the envisioned procurement strategy for offshore wind would greatly contribute to creating more certainty for investors and enable realisation of the planned offshore wind capacity on time and in the most cost-effective way.
Current regulations do not provide a specific framework for competitive selection of RE-IPPs and decisions will need to be taken under which law auction-based procurement will be hosted and whether current provisions are conducive to implement an effective auction design (World Bank, 2019[20]). It is understood from consultations that a substation-based bidding framework is favoured by MOIT as it can more effectively synchronise capacity deployment with available grid capacity thereby reducing the risk of curtailment or additional integration costs. Such a system would mean substations across provinces with available interconnection capacity would be identified by MOIT in co-operation with local provincial authorities and EVN NPTC. It is understood that local authorities and local Departments of Industry & Trade (DOITs) will take a lead role in managing the auction process. These details are tentative and no draft documents have yet been released for consultation. A Prime Minister’s decision will be required to confirm exact modalities including planning processes, roles and responsibilities, evaluation criteria and the bidding framework itself. It is understood that MOIT is not currently considering a revision to the standardised PPA terms for the launch of the auctioning programme. It will be important to conduct a thorough consultation with industry stakeholders to evaluate the impacts this may have on participation, cost of capital and ultimately the tariff reduction potential. The PPA terms will continue to be problematic for many international developers and lenders including export credit agencies that could play an important role in providing affordable financing and/or de-risking instruments.
Distributed solar has boomed despite issues with administration of net metering
Viet Nam’s Rooftop Solar Promotion Program 2019-2025 was launched by MOIT with Decision No. 2023/QD-BCT targeting 1 GW of rooftop solar capacity in the form of 100 000 rooftop systems by the end of 2025. Rooftop solar FITs, along with net metering regulation and standardised PPAs were introduced in 2017 and revised in 2020 to support the achievement of this goal (see chapter 5 for discussion on the feed-in tariff design). The net-metering mechanism was anticipated to regulate payments from EVN to the project owners relying on two-way electricity meters. In a trading cycle, if the amount of electricity generated from a rooftop installation was greater than the consumed amount, the surplus would be carried forward to the next trading cycle. At the end of the year or when the contract was terminated, the surplus amount of energy would then be sold to EVN at the FIT rate. This net metering payment mechanism created administrative difficulties regarding EVN’s treatment of taxes and accounting procedures and therefore payments for the majority of installations were delayed pending issuance of further guidelines from MOIT and MOF. To resolve payment delays, on 11 March 2019, MOIT issued Circular No. 05, providing guidelines scrapping the net metering mechanism in favour of a simpler mechanism consisting of two distinct payments between EVN and the installation owner for exported power and consumed power. The promotion of investment in distributed solar was remarkably successful and by end of 2020, 101 996 projects with total capacity of 8.274 GW had been connected before the expiry of the FIT eligibility on 31 December 2020. MOIT is now in the process of designing a follow on support scheme for rooftop solar with initial indications that a tiered FIT design based on capacity is being considered (see chapter 5).
Renewable portfolio standards have been prioritised but are yet to be implemented
Vietnam’s Renewable Energy Development Strategy prioritised a number of policy mechanisms for the promotion of renewable energy. This includes the development of a Renewable Energy Portfolio Standard (RPS) that would mandate large power generation companies (with capacity greater than 1000 MW and excluding Build-Own-Transfer plants) and power corporations (Viet Nam’s distribution and retail companies) to generate or source an increasing share of renewable energy; not less than 3%, 10% and 20% in 2020, 2030 and 2050 respectively. To date, these provisions have not been implemented. However, as the electricity market reform progresses, RPS could be a valuable mechanism to promote RE sourcing by retail companies. The government of Viet Nam will also be designing a renewable energy certification scheme to support the implementation of a corporate sourcing pilot programme (direct PPAs) set to launch in 2022. Such a certification scheme can also facilitate the implementation of RPS mandates.
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Notes
← 1. (i) Document 26/2020/VBHN-BCT (Circular 38/2016/TT-BCT) for plastic; (ii) Document no. 28/2020/VBHN-BCT (Circular 24/2017/TT-BCT) for paper; (iii) Document no. 27/2020/VBHN-BCT (Circular 20/2016/TT-BCT) for steel; (iv) Circular No. 39/2019/TT-BCT for sugar; (v) Document No. 25/2020/VBHN-BCT (Circular 52/2018/TT-BCT) for seafood processing industry; (iv) Circular 19/2016/TT-BCT for beer and beverages; (vii) Circular 02/2014/TT-BCT for chemicals.
← 2. Figures based on OECD interviews with foreign and domestic banks and developers.