This chapter analyses the use of targeted incentives for energy efficiency and renewable energy development, and provides insights into good practices in other countries. It highlights key measures implemented by the government to improve the business environment for clean energy projects, as well as areas of untapped opportunity to attract further investment. It also examines the role that public procurement of energy efficiency services and corporate sourcing of renewables can further support clean energy market development.
Clean Energy Finance and Investment Policy Review of Viet Nam
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Green Finance and Investment
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5. Investment promotion and facilitation
Abstract
Strong support has been provided by government to facilitate clean energy investment in Viet Nam. The strong action taken to reduce direct fossil fuel subsidies coupled with innovative plans to develop a local carbon market will do much to ensure capital is directed towards projects that support green growth. A favourable tax structure providing corporate income tax holidays to renewable projects and energy efficient equipment manufacturers also provides important incentives to investors. The doing business environment could be improved to further facilitate investment, particularly foreign investors with less familiarity with Viet Nam’s legal environment. Due to the decentralised governance structure, project developers must interact with multiple contacts across different agencies whereas implementation of laws and regulations is not always uniform across provinces. Administrative procedures can also be relatively complex as evidenced by tax procedures which take on average twice as long to compared to the regional average (World Bank, 2021[1]).
Assessment and recommendations
Viet Nam has taken strong action to reduce fossil fuel subsidies
The Government of Viet Nam has taken strong actions to reduce fossil fuel subsidies in the energy sector and prioritise market mechanisms for the pricing of energy products. The subsidisation rate for fossil fuel consumption directly by end-users or for electricity generation was estimated at 1% in 2019, down from 4.3% in 2015. This represents only 0.1% of GDP compared to regional peers such as Indonesia at 1.7% and Malaysia at 0.5% (IEA, 2020[2]). In addition to direct subsidies, electricity retail tariff controls have historically accounted for a large source of indirect subsidies. Retail tariff subsidies incentivise over consumption and undermine energy efficiency investment. Since the Electricity Law in 2006, the government has gradually strengthened transparency in the retail tariff setting and moved to market-based pricing. The average retail tariff (ART) was revised upwards 13 times since 2006 to around USD 8 cents/kWh today. Despite this, the ART is estimated to remain below long-term marginal cost to cover operation and maintenance and debt servicing expenses, while providing a return on capital for future investment (estimated at US 12 US cents/kWh). Further sources of indirect subsidy include corporate concessions and tax breaks, improved access to land and access to preferential loan terms from state owned banks; such benefits have been available to state-owned enterprises (SOE) operating or developing fossil fuel assets (Lee and Gerner, 2020[3]).
Planning for a carbon market is underway to strengthen Viet Nam’s climate policy
Viet Nam is one of a few countries in the region that has implemented an environmental protection tax (EPT) to promote green growth. Introduced in 2012, it places a levy on the production or importation of products with negative environmental impacts, namely: petroleum, coal, hydro chlorofluorocarbons, plastic bags and chemical pesticides. A proportion of EPT revenues capitalise the Viet Nam Environmental Protection Fund and provides concessional financing for projects with positive environmental benefits. Resolution No. 579 in 2018 increased the tax rate on coal by 50%. An ex-ante assessment concluded that this increase would lead to a reduction in coal-related CO2 emissions of 10.25% (Nong, 2018[4]).
In November 2020, Vietnam’s National Assembly adopted a revised Law on Environmental Protection that prioritises the launch of a domestic emissions trading market. The Ministry of Natural Resources and Environment (MONRE) has worked with the World Bank under the Partnership for Market Readiness Programme since 2016 to develop much of the analytical work required to underpin this. This includes the development of a monitoring, reporting and verification system, and greenhouse gas registry. A roadmap is also under development to set key implementation activities and milestones. It is understood that a voluntary market will be targeted for launch by 2027 and mandatory participation by 2029 (Viet Nam Water Portal, 2020[5]). The introduction of a carbon market in Viet Nam can promote investment decisions that deliver environmental protection at the lowest overall economic cost. However, its effectiveness in the energy sector will depend on the interaction with the underlying power market structure and operation. The plan for a carbon market will therefore need to be designed and integrated into the overall roadmap for power market reform to ensure price signals can be effectively passed through to power market participants and drive investment decision making. Its effectiveness will also be dependent on the management of policy alignment across different policy domains, for example, in the case of energy efficiency where tariff cross subsidisation may work against price signals from a carbon market.
Fiscal incentives are in place to promote clean energy investment
Viet Nam investment law defines clean energy as a preferential investment sector and therefore grants eligibility for fiscal incentives. This includes a preferential corporate income tax (CIT) rate, exemption from import tax for eligible components and exemption from land lease charges in certain localities. Manufacturing businesses producing energy efficient equipment are eligible for incentives, however, no demand-side incentives are yet available through the tax structure for companies or individuals investing in energy efficiency or green buildings. Such incentives can be an important policy tool to drive market transformation. Viet Nam’s incentive framework for clean energy investment provides significant benefit to clean energy investors but the procedures for granting and administrating these benefits are complex. The OECD’s Investment Policy Review 2019 notes that there is a lack of clear guidance to investors and that the application of rules can be inconsistent. Drawn out exchanges with tax authorities is often required for the granting of tax incentives and tax procedures are generally time consuming. The World Bank’s Doing Business rankings concludes that 384 hours are required on average each year by businesses on tax administration compared to the average for East Asia and the Pacific of 178.
Renewable energy project approval and permitting processes can be streamlined
The process for approval and permitting for renewable energy projects requires sponsors to liaise with a number of different public agencies whereas it has been noted that applicable laws and regulations are not always uniformly applied across different provincial authorities. This creates the perception of complexity for clean energy investors that may discourage new market entrants and increase development costs. The experience of operational wind power projects suggests that development times lay between three to five years which is roughly comparable to the EU average for onshore projects of 3.5 years (MOIT/GIZ, 2016[6]). With the plan to transition to an auction system it will be important to ensure that the processes for permitting and site preparation are streamlined for potential bidders. Hidden costs related to administrative processes and approvals can make it difficult for bidders to estimate costs accurately. If there is uncertainty or a high-risk perception it may lead to bids with higher contingencies priced in. Alternatively, where unexpected additional costs are incurred it may risk approved projects not being realised or winning bidders requesting renegotiation of terms.
Public retrofitting schemes can accelerate the energy efficiency market development
Public energy retrofitting programs can be an effective driver of energy efficiency market development due to the large quantity of project pipelines that can be unlocked. Public sector programs can also facilitate wider adoption in the commercial and industrial sectors by demonstrating scalable financing models such as energy performance contracting. Energy services company (ESCO) markets in the United States, Canada, and the European Union developed largely as a result of government initiatives to promote public sector programs (World Bank, 2016[7]). There has been isolated examples of public programs in Viet Nam but they have not been widely replicated beyond their implementation periods. Provinces and municipalities, rather than central government, play a central role in facilitating public energy efficiency programs due to the high degree of fiscal decentralisation in Viet Nam. This creates challenges for project aggregation – an important requirement for energy efficiency investment due to the low capital costs of individual projects. Viet Nam has no agency that can coordinate aggregation and support provincial procurement at a central level to achieve economies of scale, ensure high quality project design, standardisation, and monitoring and verification.
Box 5.1.Main policy recommendations on clean energy investment promotion and facilitation
A clear roadmap to move to full cost recovery levels in the tariff structure should be developed 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.
The plan for a carbon market should be designed and integrated into the overall roadmap for power market reform to ensure price signals can be effectively passed through to power market participants and drive investment decision-making.
The government of Viet Nam should prioritise the development of demand-side tax incentives for companies and individuals that invest in the highest energy efficient equipment. Such incentives can be structured by the energy performance thresholds enshrined in Viet Nam’s energy labelling regulations and tax reductions provided at point of purchase or through rebates.
Project approval and permitting processes should be streamlined 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.
The government of Viet Nam should consider establishing a centralised agency (for example a variant on the Super ESCO model) that is mandated to support provincial authorities to develop, procure, finance, and monitor and verify the savings for public energy efficiency programmes. The agency would provide a key facilitation role to aggregate high-quality projects for contracting to private sector ESCOs. The agency could also provide intermediary services to promote greater market confidence in energy performance contracting in the private sector.
Fossil fuel subsidy reform and carbon pricing
Viet Nam has taken strong action to reduce fossil fuel subsidies
The Government of Viet Nam has taken strong action to reduce direct subsidies in the energy sector and prioritising market mechanisms for the pricing of energy products. There are currently almost no direct subsidies for energy products apart from small subsidies targeting poverty reduction in certain subsectors, including modest electricity subsidies for impoverished households and smallholder farmers, and diesel subsidies for households involved in artisanal fishing. Decision No. 69/2013/QD-TTg sets the regulatory priority for electricity pricing to follow market mechanisms, while Circular No. 83/2014/NĐ-CP dated on 3 September 2014 sets the priority for oil, gas and petroleum products to follow market mechanisms. The Green Growth Strategy and Climate Change Strategy both set targets of phasing out subsidies by 2020. The subsidisation rate in the electricity sector now sits at 1% down from 4.3% in 2015. This represents only 0.1% of GDP compared to Indonesia at 1.7% and Malaysia at 0.5% (IEA, 2020[2]). Although direct fossil fuel subsidies have been restricted, tariff price controls account for a large source of indirect subsidies and have historically placed pressure on state budgets. Corporate concessions and tax breaks, discounted resources and land, and access to preferential loans from state owned banking institutions have also historically been widely available for SOEs including those operating or developing fossil fuel assets.
Figure 5.1. Fossil fuel subsidies in selected countries 2020
The Government of Viet Nam has made modest progress reforming retail electricity tariffs, which have historically been administratively set below cost recovery levels. Tariff subsidies incentivise overconsumption, undermine the investment case for energy efficiency and negatively affect the profitability of utilities. Since the Electricity Law in 2006, the average retail tariff (ART) has been revised upwards 13 times to around USD 8 cents/kWh today. These tariff uplifts have been important but have largely remained in line with inflation rates, as an example, ARTs increased by 53% from January 2010 to January 2015 compared to cumulative inflation for the same period of around 56%. The ART today remains below estimated long-term marginal cost to cover operation, maintenance and debt servicing expenses, while providing a return on capital for future investment (estimated at USD 12-14 cents/kWh) (Lee and Gerner, 2020[3]). Viet Nam Electricity (EVN), the state-owned utility, has the delegated authority under Decision No. 24/2017/QD-TTg to adjust retail tariffs by a maximum of 5% every six months subject to macroeconomic conditions, whereas adjustments between 5-10% fall to the Ministry of Industry and Trade (MOIT), and above 10% requires prime ministerial approval. Decision 24 provides greater transparency and clarity on the process and methodology for tariff uplifts however there is little clarity on timelines and targets. Having a strong position in this regard will help to signal to energy users to adapt their behaviours and plan investments to optimise their energy usage while supporting EVN’s profitability.
As single buyer for renewable energy independent power producers, the financial strength and outlook of EVN is of increasingly critical importance for facilitating investment since the availability of sovereign-backed payment guarantees to cover off-taker risk has been restricted due to public debt management laws implemented by Resolution No. 25/2016/QH14. Supported in part by tariff uplifts, EVN has remained a marginally profitable enterprise over recent years with net profit margins increasing from 1.5% in 2015 to 2.5% in 2019 (compared to a global average of 9.5% for the utility sector) (CSI Market, 2020[8]). EVN received its first credit rating in 2018 with an Issuer Default Rating (IDR) of BB with a Stable Outlook in line with Viet Nam’s sovereign rating. The capacity to raise tariffs is a critical metric in a rating agency’s evaluation of a power company’s creditworthiness. Two successive increases of effective tariffs totalling 12.6% in 2018 and 2019 boosted total revenues by VND 59.4 trillion (USD 2.5 billion) (Brown and Vu, 2020[9]). To maintain EVN’s financial performance, uplifts of the tariff will likely be required due to emerging risks including increasing hydrology variability that could affect hydro power plant output and increase fuel expenses, exposure to currency risks (dollar denominated debt accounts for 73% of EVN’s borrowings), and reduced access to concessional sources of financing (Fitch Ratings, 2020[10]).
Planning for a carbon market is underway to strengthen Viet Nam’s climate policy
Viet Nam is one of a few countries in the region that has implemented an environmental protection tax (EPT) to promote green growth. Introduced in 2012 with the Environmental Protection Law it places a levy on the production or importation of products with negative environmental impacts, namely: petroleum, coal, hydro chlorofluorocarbons, plastic bags and chemical pesticides. A proportion of EPT revenues capitalise the Viet Nam Environmental Protection Fund (VEPF) and provides concessional financing for projects with positive environmental benefits. The EPT also offsets a proportion of additional costs incurred due to Viet Nam’s FIT policies. Resolution No. 579 in 2018 increased the tax rate on coal by 50% with an ex‑ante assessment concluding that this increase would lead to a reduction in coal-related CO2 emissions of 10.25% (Nong, 2018[4]).
In November 2020, Vietnam’s National Assembly adopted a revised Law on Environmental Protection that established the mandate for the Ministry of Natural Resources and Environment (MONRE) to design a domestic emissions trading market. MONRE has worked with the World Bank under the Partnership for Market Readiness Programme since 2016 to develop much of the analytical work required to underpin the programme. This includes the development of a monitoring, reporting and verification system, and greenhouse gas registry. A roadmap is also under development to define activities and implementation milestones. It is understood that a voluntary market will be targeted for launch by 2027 and mandatory participation regulated by 2029 (Viet Nam Water Portal, 2020[5]). The introduction of a carbon market in Viet Nam can promote investment decisions that deliver environmental protection at the lowest overall economic cost. However, its effectiveness in the energy sector will depend on the interaction with the underlying power market structure and operation. The plan for a carbon market will therefore need to be designed and integrated into the overall roadmap for power market reform to ensure price signals can be effectively passed through to power market participants and drive investment decision making. Its effectiveness will also be dependent on the management of policy alignment across different policy domains for example in the case of energy efficiency where tariff structures may work against price signals from a carbon market.
Targeted incentives and funds for energy efficiency investment
Improved demand-side incentives can play an important role in market transformation
Viet Nam’s investment law defines clean energy as a preferential investment sector and therefore grants eligibility for fiscal incentives. The incentive takes the form of a tax holiday providing complete exemption from corporate income tax (CIT) for two years after the enterprise first makes profits, followed by a further four years in which CIT is charged at 50% of the applicable rate. Such businesses also benefit from a preferential CIT rate of 17% for the first 10 years. Exemption from import taxes for eligible components, and exemption from land lease charges are also applied in certain localities. These incentives are likely to have been a key investment facilitator and supported the development of the clean energy sector; however, their cost-effectiveness and exact contribution to meeting clean energy policy goals, and wider economic benefits are unclear. It is the OECD’s understanding that no comprehensive cost-benefit analysis has been undertaken to date (OECD, 2018[11]).
Manufacturing businesses producing energy efficient equipment are eligible for incentives, however, no demand-side incentives are yet available through the tax structure for companies or individuals investing in energy efficiency or green buildings. International experience shows that such incentives play an important part in driving market transformation.
Structuring and implementation of such an incentive scheme is simplified by the established energy labelling regulations and appliance-testing infrastructure. Such incentives can come in the form of tax credits, enhanced capital allowances, or VAT reductions that reduce CIT, personal income tax, or VAT. For example, the Italian government created an incentive programme in 2010 offering a 50% tax deduction for the replacement of household appliances such as refrigerators, washers, dryers, ovens and freezers with more efficient new units. Mexico similarly provided government-funded subsidies to consumers to cover a portion of the purchase of new, energy-efficient refrigerators and air conditioners. Other examples, such as the Carbon Cashbag programme in Korea, which created credits for energy‑efficient and low-carbon products that could then be used for things like discounts on public transportation, have been used to incentivise energy efficiency uptake (de la Rue du Can et al., 2014[12]), while more innovative approaches include examples such as the on-wage financing scheme launched by Ghana to improve the accessibility and affordability of energy-efficient appliances in line with the countries new energy efficiency standards and labelling regulations (U4E, 2020[13]).
Viet Nam’s incentive framework for clean energy investment provides significant benefit to clean energy investors but the procedures for granting and administrating these benefits are complex. The OECD’s Investment Policy Review 2018 notes that there is a lack of clear guidance to investors and that the application of rules can be inconsistent. Drawn out exchanges with tax authorities is often required for the granting of tax incentives and tax procedures are generally time consuming. The World Bank’s Doing Business ranking concludes that 384 hours are required on average each year by businesses on tax administration compared to the average for East Asia and Pacific of 178.
Financing conditions for energy efficiency remain challenging
Energy efficiency investment in the industrial sector has increased over the course of Viet Nam Energy Efficiency Programme (VNEEP) I & II with overall investment in key energy intensive industries estimated at about USD 800 million between 2010-2015. Despite this progress the sum falls short of the estimated overall investment needs of about USD 1.7 billion when considering economic potential (UNDP & MPI, 2017[14]). The government must be commended for its achievements in establishing a regulatory framework to promote energy efficiency, including energy audit and energy management obligations, and the introduction of mandatory specific energy consumption targets (chapter 3). To date, the implementation and compliance rate for these regulations are thought to be low but improvements in this area prioritised for the VNEEP III period will do much to promote the mainstreaming of energy efficiency in industry operation and investment planning. Improving access to affordable financing on reasonable terms for industry and energy service companies (ESCOs) will be key to realising the economic benefits of these regulations, an issue highlighted as a significant market barrier.
Banks are the main source of financing in Viet Nam with credit most commonly extended based on a track record of existing corporate relationships with interest rates of 10-12% and collateral requirements covering 80-120% of total credit amount (see chapter 6 for more discussion on the banking sector). Such financing conditions pose a challenge for energy efficiency as they erode project economics (particularly given the low energy tariffs prevalent) and lead businesses to commit their remaining debt capacity to core business investments. It poses particular challenges for the uptake of third party financing and energy performance contracting models offered by ESCOs (a key market facilitator for energy efficiency investment) as they tend to be under-capitalised companies lacking the existing banking relationships and balance sheets to allow them to raise debt. Despite the early actions taken by the government of Viet Nam to minimise the economic impacts of the COVID-19 pandemic, the profitability of many businesses have been impacted. A World Bank business survey found that on average, firm sales are about 36% lower than the same period last year whereas 51% of businesses have seen decreased orders (Tan and Tran, 2020[15]). This will cause additional hurdles to overcome to facilitate energy efficiency investment over the recovery period.
Figure 5.2. Firm experience of reduced demand during COVID-19 period
Note: The survey collected responses from 501 firms through a mix of phone and in-person interviews. The firms are located across 15 provinces, representative at three different firm size categories and four broad sectors - agriculture, manufacturing, wholesale and retail, and other services.
Source: (Tan and Tran, 2020[15])
Improving access to finance for energy efficiency investment is a multifaceted challenge. On the one side, it requires support to facilitate the development of sizable, high quality and bankable project pipelines. On the other, it requires support for the banking sector to access long-term, dedicated capital (ideally on preferential terms) to build the human resources able to undertake project due diligence and to provide options for credit enhancement to reduce collateral requirements. The World Bank’s Vietnam Energy Efficiency for Industrial Enterprises (VEEIE) project which began implementation in 2018 and will run to 2022 has provided a USD 100 million credit line on lent by the Ministry of Finance to participating financial institutions for energy efficiency projects in industry. By May 2020, USD 23.34 million, accounting for 23.34% of the total credit line, had been disbursed across 13 subprojects (compared to the 60 subprojects targeted for 2022) (World Bank, 2020[16]). The World Bank, with co-funding from the Green Climate Fund, is following up with the Scaling Up Energy Efficiency for Industrial Enterprises in Vietnam programme which will set up a risk sharing facility (RSF) to further support access to commercial financing for energy efficiency projects. The RSF will provide partial credit guarantees to participating financial institutions to cover potential defaults on loans to industrial enterprises and energy service companies (ESCOs). The programme is targeting the mobilisation of USD 250 million of commercial financing for energy efficiency projects by 2025.
Investment in public programmes can drive energy efficiency market development
Public energy retrofitting programmes can be an effective driver of energy efficiency market development due to the large quantity of pipeline that can be unlocked if sufficient resources are committed and enabling conditions are in place. Public sector programmes can also promote wider adoption in the commercial and industrial sectors of scalable financing models such as energy performance contracting. ESCO markets in the United States, Canada, and the European Union developed largely as a result of government initiatives to promote public sector programs (World Bank, 2016[7]). There has been limited activity in this area in Viet Nam to date apart from small-scale pilot projects that have not been widely replicated beyond their implementation periods.
Provinces and municipalities rather than central government must play a central role in facilitating public energy efficiency programmes due to the high degree of fiscal decentralisation in Viet Nam. Since the State Budget Law 2002, local governments have borrowing and expenditure authority in their jurisdictions. They also retain all revenues from taxes and fees related to administrative charges while also sharing revenues from value added tax, corporate income tax, personal income tax and excise tax on domestic goods (Morgan and Trinh, 2016[17]). In 2017, provincial expenditure made up 54% of total public expenditure and 60% of total capital investment (Asian Development Bank, 2017[18]).
This decentralised fiscal structure creates challenges for project aggregation across provinces, an important facilitator for energy efficiency investment due to the low capital costs of individual projects. Viet Nam has no agency that can coordinate aggregation and procurement processes at a central level to achieve economies of scale, ensure high quality project design, standardisation, and monitoring and verification. In addition, the decentralised fiscal structure creates challenges for investment planning which is often unaligned with strategic priorities and leads to public capital allocations that are spread too thinly. A Ministry of Planning and Investment (MPI) portfolio review of 2013-15 concluded that public resources could accommodate less than half of total investment needs from both central and local governments for already approved projects and that there were 40 000 public projects ongoing with the majority managed at the local government level (World Bank, 2018[19]).
Local governments have a variety of financing options available to them, including the domestic capital market, commercial loans, and on-lending from the central government of external funds. Borrowing is monitored closely by the Ministry of Finance due to borrowing ceilings imposed under the Law on State Budget Management (chapter 6). Currently the level of commercial bank lending to local governments for public infrastructure is low. Banks are reluctant to extend credit due to past policies of ”directed lending” that led to a misallocation of private capital to poorly performing public projects. The assumption of implicit guarantees from central government meant appropriate project due diligence was rarely carried out causing high rates of non-performing public loans (World Bank, 2018[19]). Issuance of subnational bonds is another option but may be limited to the most prosperous provinces due to the lack of credit enhancement and technical competencies. Unlike the corporate bond market where credit enhancement is available through the Credit Guarantee and Investment Facility, no such facility exists for subnational issuers. Two small green bonds have been issued at the subnational level by Ho Chi Minh City and Ba Ria Vung Tau province in 2016 but have not been replicated by other provinces (see chapter 6).
Despite the options available to raise private financing for local sustainable infrastructure the financing experience of most provincial authorities is limited to the management of overseas development aid and concessional loans, which have typically been fully on-granted to them by the central government (World Bank, 2013[20]). Such resources will become increasingly scarce in future and state resources insufficient for the level of investment required. Increasing access to private financing at the provincial level is therefore becoming more critical and the enabling conditions should be strengthened to reflect this. There is a need for a new legal and regulatory framework to govern the full range of rights and obligations of lenders and borrowers in the event of a default. Without the certainty of a clear recourse mechanism enshrined in law, commercial lenders will remain hesitant to extend credit particularly given the difficulties faced with assessing subnational credit risk. A 2018 study found data provided by provincial governments to be out-dated, unreliable and sometimes conflicting, with annual deviations of up to 50% of actual expenditure commonly found (Campanaro and Duc Dang, 2018[21]). Financial management practices including planning, budgeting, accounting, reporting and auditing will need to be improved to overcome these informational barriers to facilitate investment. State resources should also be used more strategically to focus on leveraging commercial co-financing by covering key project risks rather than full investment capital. Institutional structures such as Colombia’s FINDETER may provide a good model for Viet Nam in this area.
Box 5.2. Case Study: Colombia’s Financiera de Desarrollo Territorial (FINDETER) fund
Following constitutional reforms that introduced fiscal decentralisation in Colombia in the 1980s many municipalities and provincial authorities faced challenges accessing commercial finance for infrastructure projects, having had little or no previous experience borrowing long-term debt on commercial terms. Lenders on the other hand were hesitant to extend credit to local governments as they lacked any precedent to judge credit risk. Financiera de Desarrollo Territorial (FINDETER) was established as a financial intermediary to address these financing constraints. FINDETER functions as a second-tier lender providing discounted loans to commercial banks that finance local infrastructure projects. FINDETER was initially set up with equity provided by the Government of Colombia and loans from the World Bank and the Inter-American Development Bank. Thanks to its good credit rating, it borrows at better rates than commercial banks and provides long-term capital for on-lending, while commercial banks retain 100% of the credit risk of local government borrowers (World Bank, 2016[22]).
Figure 5.3. FINDETER Financing structure
A crucial component of the financial structure is an intercept provision, which allows second tier lenders to intercept revenues from a special account if loan payments are not made, and in turn, to repay these to FINDETER. This structure also allows FINDETER to collect payments directly from the bank’s local borrowers if a bank becomes insolvent. The intercept provision has maintained a low percentage of non-performing loans and reinforced FINDETER’s credit rating. FINDETER offers maturities of up to 15 years, which is notable, as loans to local governments without the involvement of FINDETER would normally not exceed five years (World Bank, 2016[22]).
With a similar decentralised fiscal structure and challenges faced by some provincial governments to access long-term capital for energy efficient technical infrastructure and retrofitting programmes, the government of Viet Nam could consider such a funding structure to overcome financing constraints and leverage private sources of capital.
Targeted incentives and funds for renewable electricity
Feed-in tariffs have facilitated a rush of renewable investment but with mixed results across technologies
Targeted tariff incentives for renewable energy procurement have been in place since 2008 when Decree No. 18/2008/QD-TTg introduced an avoided cost tariff for small generators below 30 MW along with a dedicated procurement framework for renewable IPPs (see chapter 3 for discussion on the standardised power purchase agreements). The tariff is benchmarked to the marginal cost of the most costly generator on the system and updated yearly by the Electricity Regulatory Authority of Viet Nam (ERAV). This avoided cost tariff was initially technology neutral but later revised in 2014 to apply to only those technologies without targeted feed-in tariffs (FITs) following the introduction of the first dedicated wind FIT in 2011. The avoided cost tariff scheme was the precursor for the country’s FIT incentives that were introduced in a series of decisions and implementing circulars from 2011 onwards (Table 5.1). The FIT rates are provided to eligible generators at a fixed rate for a period of 20 years from commercial operation date. The FITs are paid in Vietnamese dong (VND) but the tariff is indexed yearly to the VND/USD exchange rate set by the State Bank of Viet Nam. This provision is designed to reduce currency exchange risk for international investors financing a greater proportion of investment capital with hard currency but with revenues in local currency. In practice, this has benefited domestic investors to a greater degree due to the appreciation of the dollar against the dong providing increasing returns for sponsors with local currency financing costs. The FITs for solar and wind have a time-based expiry and capacity limits are controlled through the planning process rather than through a capacity quota or degression mechanism in the FIT design (see chapter 2).
Table 5.1. Details of renewable energy tariff support mechanisms
|
Technology Class |
Tariff |
Tariff period |
Tariff Indexing |
Time limits / capacity quota |
|---|---|---|---|---|
|
Small Hydropower |
Avoided cost tariff benchmarked yearly to the highest marginal cost generator on the system |
20 years |
none |
none |
|
Municipal solid waste & landfill gas |
Waste – 2 114 VND/kWh (USD 9.1 cents) Landfill gas – 1 532 VND/kWh (USD 6.6 cents) |
|||
|
Biomass Power Plants |
Avoided cost tariff benchmarked yearly to the marginal cost of coal generation using imported fuel later scrapped in 2020 for a simple FIT set at 1 968 VND/kWh (USD 8.5 cents) |
Paid in VND but indexed to USD/VND exchange rate No indexing for inflation |
||
|
Biomass Combined Heat & Power |
1 220 VND/kWh (USD 5.2 cents) later increased to VND 1 634 (USD 7 cents) in 2020 |
|||
|
Solar PV |
Ground mounted – 2 086 VND/kWh (USD 9.1 cents) reduced to 1 644 VND in 2020 (USD 7.1 cents) |
COD of 30 June 2019 extended to 31 Dec 2020 with no further extension for grid-scale projects. Rooftop FIT will be redesigned and extended pending official approval |
||
|
Rooftop – 2 086 VND/kWh (USD 9.1 cents) reduced to 1 943 VND in 2020 (USD 8.4 cents) |
||||
|
Floating – introduced in 2020 at 1 783 VND/kWh (USD 7.7 cents) |
||||
|
Wind |
Onshore – 1 614 VND/kWh (USD 7 cents) increased to 1 928 VND in 2018 (USD 8.4 cents) |
COD of 1 Nov 2021 with no extension planned after this date |
||
|
Offshore (inter-tidal) – 2 223 VND/kWh (USD 9.6 USD) (introduced in 2018) |
Note: COD = Commercial operation date. USD rates calculated based on VND/USD rate of 0,000043
Source: Ministry of Industry and Trade
Viet Nam’s FITs have seen mixed results in terms of facilitating investment across the different technologies covered. The most eye-catching achievements were witnessed in the solar sector where the FIT drove rapid, large-scale investments due in part to the higher tariff (USD 9.1 cents for ground‑mounted installation compared to the 2011 wind FIT of USD 7.1 cents). From 2017 when the solar FIT was introduced to the end of 2020, 5.7 GW of ground mounted solar was connected to the grid which catapulted Viet Nam’s solar market to become the largest in the ASEAN region. A similar investment boom was witnessed in the distributed solar market where, by the end of 2020, rooftop solar installations grew from a few hundred MWs to 9.7 GW spread across 102 000 individual systems (EVN, 2020[23]). More distributed solar capacity came online in a single year in Viet Nam than the total capacity installed in India at the time (3 GW by August 2020) (IEA, 2020[24]). Such rapid development of variable renewable generation has led to challenges with grid integration and management of reverse flows in the distribution network. Some projects have experienced power curtailment particularly in provinces with high levels of solar deployment such as Ninh Thuan province where 10 out of 25 solar project owners reported having to operate at 30-40% capacity resulting in losses of USD 21.7 million (ASEAN ACE, 2020[25]) (see chapter 3 for discussion on actions being taken to increase system flexibility).
Facilitating the rapid build out of solar capacity with an attractive FIT was in part driven by necessity due to delays experienced in the construction of large thermal power plant projects procured under the Public Private Partnership (PPP) laws. During the 2016-2020 period, only 58% of planned coal-fired capacity was actually realised, compared to 118% in hydropower and 205% in non-hydro renewables (IEEFA, 2020[26]). These delays led to a tightening supply margin prior to the COVID-19 period and forecasted power shortages of 400 million kWh in 2021, peaking at 13.3 billion kWh in 20231. EVN has done admirably well to manage connections and adapt system operation in the face of such a fundamental shift in system architecture over such a short period. To avoid barriers to facilitating investment in line with increased PDP VIII targets, it will be important to continue to take actions to mitigate the risk of curtailment for both greenfield and operating assets. Widespread curtailment without protections in the power purchase agreement (PPA) can erode investor and lender confidence leading to higher financing costs and restricted foreign direct investment (FDI).
Large investments in grid infrastructure will be required over the PDP VIII period at levels beyond the financing capacity of EVN. To overcome this investment gap MOIT are increasingly prioritising the facilitation of private participation in the transmission sector. The country’s first privately invested 500/220kV substation and transmission line was constructed in 2020 under a stand-alone pilot agreement. To replicate this model will require the development of a revised legal framework including the amendment of the Investment Law and Electricity Law that were designed to protect EVN’s monopoly in the transmission sector. It will also require the implementation of a bankable concession model that can ensure the required investment protection and returns for investors while ensuring appropriate regulations and operational guidelines are in place to ensure coordination with EVN (See chapter 4 for a discussion on this topic).
FITs have been less successful at facilitating investment flows for non-solar renewable technologies. This is evident in the wind sector where a fraction of the capacity has been deployed despite high resource quality. By the end of 2020, 472 MW of wind capacity was in operation, falling short of the 800 MW targeted in the revised PDP VII. In part this is due to the legacy issue of the first wind FIT introduced in 2011 which was set too low to provide sufficient risk-adjusted returns on investment. MOIT revised the FIT upwards in late 2018 (and introduced an offshore inter-tidal specific FIT) with an eligibility deadline of November 2021, setting challenging development timelines for projects to reach commercial operation before the expiry. The disruption caused by the COVID-19 pandemic caused development delays and it is thought that up to 1.3 GW of the 2.9 GW of wind projects with signed PPAs are now at risk of missing the November 2021 FIT expiry (GWEC, 2020[27]).
In June 2020, the Prime Minister issued Document No. 693/TTg-CN calling for MOIT to streamline the approval of additional wind projects and to consider facilitating this with an extension of the FIT to run until December 2023. A total of 11.6 GW of wind capacity was included in the Power Development Plan by December 2020, in which 8.7 GW were described by MOIT as being very unlikely to reach commercial operation date before the FIT cut off2. In October 2020, MOIT issued official Letter No. 8159/BCT-DL which contained a proposal for a wind FIT extension until 2023 but with step-down reductions to the tariff. It is understood that this proposal is no longer being considered and that wind capacity procurement will be managed through an auction system without a transitional FIT period. It is unclear how projects currently in the pipeline with approved PPAs but missing the FIT expiry will be supported.
An avoided cost tariff for biomass power plants and a FIT for biomass combined heat and power (CHP) was introduced in 2014 with Decision No. 24/QD-TTg. For biomass plants, this set the tariff for eligible generators at the average marginal price of a coal power plant utilising imported fuel. Decision No. 942/QD-BCT in 2017 later introduced a regional uplift to the avoided cost calculation methodology. Since its introduction, no investments in biomass power plants have been realised. Biomass CHPs received a 20 year fixed FIT at 1 220 VND/kWh (USD 5.2 cents) this was less than half the tariff offered to similar technologies in Thailand (USD 13 cents) and the Philippines (USD 12.4 cents) (GGGI, 2018[28]). There are currently 38 sugar mills in Viet Nam that have invested in biomass CHP with a total capacity of around 352 MW but with only eight plants exporting to the grid. Analysis undertaken by Global Green Growth Institute concluded that up to 737 MW of total biomass CHP capacity could be developed in the sugar industry alone given improved investment incentives. In recognition of the slow development of the biomass market the government approved Decision No. 8/QD-TTg in 2020 which saw the scrapping of the avoided cost tariff for biomass power plants in favour of a fixed FIT set at 1 968 VND/kWh (USD 8.5 cents) and an uplifted biomass CHP FIT of 1 634 VND/kWh (USD 7 cents).
The support mechanism for offshore wind procurement is still uncertain
With a stated target of 2-3 GW offshore wind in 2030 going up to 11 GW in 2035 in the high scenario, the draft PDP VIII sets a relatively cautious phase-in of offshore wind in the energy generation mix. Even with these more modest volumes, a number of important policy choices need to be made in the near term to create a stable framework for the development of (non-nearshore) offshore wind industry and cost-effective realisation of projects. International experience indicates that economy of scale for offshore wind projects is quickly approaching 1 GW and larger projects are more conducive to deliver lowest possible levelised cost of energy (LCOE).
The challenges regarding long-term visibility regarding the regulatory framework of RE technologies is especially critical for (non-nearshore) offshore wind industry, characterised by long lead times for complex supply chain development. Lack of clarity regarding the key regulatory and support scheme prospects can cause significant delays and cost increases due to higher risk perception. At the point of developing this report, an analysis with the aim of establishing clear definitions, evaluating and selecting a support scheme and its critical parameters is still under way. A clear roadmap for the envisioned framework development of the offshore wind would greatly contribute to creating more certainty for the investors and enable realisation of the planned offshore wind capacity on time and in the most cost-effective way. An approach that has yielded positive results e.g. in Denmark has been consulting with developers and the supply chain in a proactive way3 to establish a common understanding of the key opportunities and challenges in e.g. the specifics of a particular regulation or the development of offshore wind more generally.
Whilst many critical elements pertaining to the offshore wind regulatory framework are still in development (including the Marine Spatial Plan, offshore vs nearshore wind site definition, support scheme design etc.), international examples of best practice could be considered to ensure timely and cost-effective capacity build-out, for example, ensuring sufficient area reservations in the form of unallocated capacity for offshore wind sites are available to be included in later auctions, incorporating qualification / eligibility criteria to prospective developers as well as progress criteria and timeline to be met in the project development phase. Similarly, the trade-offs between opting for the FIT support scheme to kick-start and mature the market, before transitioning to an auction scheme should be considered. The majority of mature offshore wind markets, as well as regional emerging offshore markets, have resorted to the more stable and less risk‑bearing FIT scheme in the initial phases of industry development.
Infrastructure development should be co-ordinated with the planning for offshore wind capacity build-out. A plan for construction and upgrade of seaports to timely serve the needs of forthcoming offshore wind projects should be included in PDP VIII and integrated with seaport planning in the National Energy Master Plan. Due to unparalleled size and weight of offshore wind equipment, existing seaports in Vietnam with suitable locations should be upgraded to meet requirements for transportation, installation, operation and maintenance. The progress of seaport upgrading should be in line with the development timeline of the offshore wind projects to provide adequate infrastructure and ensure financial feasibility.
Finally, a streamlined and transparent permitting process for offshore wind would be greatly advantageous. The one-stop shop model introduced in Denmark, with the Danish Energy Agency assuming the single focal point for all offshore wind development-related interfaces, has contributed to cost-effective and successful development of offshore wind industry in Denmark.
Feed-in tariff support for distributed solar is set to continue
Viet Nam’s support mechanism for distributed solar expired at the end of 2020. This marked the end of the solar FIT established by Decision No. 13/2020/QD-TTg which extended the first solar FIT (Decision No. 11/2017/QD-TTg) originally set for expiry on June 30 2019. Decision 13 also marked the first time a non-EVN offtaker was permitted under the law. This was an important development as it opened the market to third-party ownership business models for on-site solar installations under 1 MW. Whereas solar asset owners were previously only permitted to self-consume or sell power to EVN, Decision 18 allowed a third party to invest, own and operate generation assets and sell power to a corporate customer for on-site consumption with the flexibility to negotiate the commercial terms and tariff directly. This provision also paves the way for corporate PPAs whereby offsite generation projects can enter into supply contracts with corporate customers and pay to deliver power through EVN’s grid.
The additional regulatory developments required to realise this model is being piloted in 2021 (discussed further below). The Government of Viet Nam is set to continue support for the distributed solar market with an updated FIT mechanism expected to be developed in the coming year. Early indications suggest that MOIT favours a tiered tariff structure dependent on system capacity with larger installations receiving a lower tariff. Another important design element being considered is the requirement for larger installations to install control systems that enable improved monitoring and system control by the National Load Dispatch Centre (NLDC). Given the high levels of variable renewable energy already integrated to the grid this would be an important development that would enable NLDC to better utilise distributed energy resources for system balancing. MOIT is also considering building in greater flexibility to enable quicker tariff adjustments to control deployment rates.
Pilot corporate power purchase agreements will provide new routes to market
The Government of Viet Nam with support from the United States Agency for International Development (USAID) is currently designing a pilot direct PPA programme which is set to launch in 2021 pending the Prime Minister’s approval of proposal No. 544/TTr-BCT. The contract will likely take the form of a “synthetic PPA” which will enable qualifying generators to develop offsite renewable installations while signing PPAs with a corporate “synthetic-offtaker”. The generator will export power to the national grid at wholesale spot prices while also signing a contract for difference with an agreed strike price with the corporate off-taker. Under these terms, if the wholesale price is lower than the strike price the corporate off-taker will make payments to the generator for the difference and vice versa if the wholesale price is higher than the strike price. Renewable generation certificates will also be exchanged from the generator to the off-taker (Figure 5.4) The pilot will target up to 1 GW of renewable capacity with eligibility limited to wind or solar power projects above 30 MW that have already been approved for inclusion in the Power Development Plan. The inclusion of direct PPAs in Vietnam’s regulatory framework will be an important step to continue to facilitate increasing foreign direct investment into the country’s manufacturing sector (see chapter 4). Direct PPAs also provide an opportunity for developers to diversify offtaker risks with an alternative to EVN as a sole contract counterparty.
Figure 5.4. Synthetic direct power purchase agreement structure
Source: USAID Viet Nam Low Emissions Energy Programme
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