Vietnam’s Crisis of Success in Electricity · Vietnam’s Crisis of Success in Electricity...

Vietnam’s Crisis of Success in ElectricityOptions for a Successful Clean Energy Mix

David DapiceSenior Economist, Vietnam and Myanmar ProgramAsh Center for Democratic Governance and Innovation John F. Kennedy School of Government, Harvard University

December 2018

Vietnam’s Crisis of Success in ElectricityOptions for a Successful Clean Energy Mix

This policy note was written by David Dapice (David_Dapice@harvard.edu) and benefited from input and feedback from Professors Le Viet Phu, Nguyen Quy Tam, and Thach Phuoc Hung at the Fulbright School of Public Policy and Management.

The views expressed herein are the author’s alone and do not necessarily reflect those of Harvard University or the Fulbright School of Public Policy and Management.

This piece, along with other Ash reports on Vietnam, is posted at ash.harvard.edu/policy-briefs and ash.harvard.edu/vietnam-program. John F. Kennedy School of Government, Harvard University

December 2018

Vietnam’sCrisisofSuccessinElectricity December2018

CONTENTS

ABOUTTHEAUTHOR.........................................................................................................3

ABOUTTHEASHCENTER...................................................................................................3

EXECUTIVESUMMARY.......................................................................................................4

VIETNAM’SCRISISOFSUCCESSINELECTRICITY................................................................8

Background....................................................................................................................8

Vietnam’sElectricitySituation.......................................................................................9

CurrentPlansforCapacityExpansion..........................................................................13

ReasonsforHighRenewableCostsinVietnam-PPA..................................................14

MeasurestoReducetheCostofRenewableEnergyinVietnam.................................16

GasComparedtoCoalforBaseloadGeneration..........................................................18

SUMMARY-OPTIONSFORTHEFUTURE.........................................................................19

Demand........................................................................................................................19

Supply...........................................................................................................................20

BIBLIOGRAPHY.................................................................................................................23

ABOUTTHEAUTHOR

DavidDapiceisaleadingexpertontheeconomicdevelopmentofSoutheastAsiaandhasworkedextensivelyinIndonesia,Thailand,Cambodia,Myanmar,andVietnam.HewasanadvisortotheIndonesianMinistryofFinancewhenthecountryenjoyeditsperiodofrapidgrowthandhasstudiedtheVietnameseeconomysince1990.Dapice’sexpertiseonmattersofeconomicpolicyisregularlysoughtbytheVietnamesegovernment.HeisProfessorEmeritusofEconomicsatTuftsUniversity,whereheservedasChairoftheEconomicsDepartment.HehastakenleaveattheWorldBank(asaBrookingsPolicyFellow),theRockefellerFoundation,andtheHarvardInstituteforInternationalDevelopment.Hehasauthoredorco-authoredanumberofpolicystudiesincludingChoosingSuccess:TheLessonsofEastandSoutheastAsiaandVietnam’sFuture.Hehascontributedtoanalysisofmacroeconomics,urbanization,regionaldevelopment,agricultureandenergyinVietnamandMyanmar,oftencollaboratingwithlocalprofessorsandexperts.

ABOUTTHEASHCENTER

TheRoyandLilaAshCenterforDemocraticGovernanceandInnovationadvancesexcellenceandinnovationingovernanceandpublicpolicythroughresearch,education,andpublicdiscussion.TheFordFoundationisafoundingdonoroftheCenter.ThreemajorprogramssupporttheCenter’smission:TheProgramonDemocraticGovernance,theInnovationsinGovernmentProgram,andtheRajawaliFoundationInstituteforAsia.Thispaperiscopyrightedbytheauthor(s).Itcannotbereproducedorreusedwithoutpermission.

EXECUTIVESUMMARY

AsVietnamlookstothefutureplanningforenergyproductionanduse,keyisacarefulanalysisofthecostofthevarietyofpowergenerationsystemsthatcancontributetoasuccessfulenergymix.ThispaperisdesignedtoassistinthateffortandinprovidinginformationfortheresearchforPowerDevelopmentPlan8.

EfficiencyandUse

1.Vietnamhashugelyincreaseditsoutputofelectricitysince2000andhasreachedvirtuallyeveryvillageandimprovedthequalityofservice.Consumptionnowexceeds2000kWhpercapita,higherthanIndiaandIndonesiaandapproachingthatofThailand–allarericher.

2.Theannualgrowthrateofelectricitydemandhasbeen12%,fasterthananyothercomparableAsianeconomyandisprojectedtobe8-9%annuallyoutto2030–againmuchfasterthanlikelyGDPgrowth.OthereconomieshaveelectricitydemandgrowthatorbelowGDPgrowth.VietnamrequirestwiceasmuchelectricitytoproducethesameamountofrealGDPasThailand.ItusesmoreelectricityperunitofoutputthanChinadoes,yetChinaisbothmoreindustrialandmoreurbanandbothtendtoincreaseenergydemand.Inshort,Vietnamuseselectricitytooinefficiently.

3.Thereasonforsuchpoorenergyefficiencyisalowpriceofelectricitywhichhasfalleninrealtermsfrom2010to2016inspiteofbeingpricedbelowthecostofnewproductionanditsdelivery.Thereisalsoineffectiveenforcementofconservationpolicies,includinginnewbuildings.China’seffortsofferagoodmodelformoreaggressiveandeffectivepolicies.

CoalvsGas

4.CurrentPowerDevelopmentplans(PDP-7-revised)areforcoaltoprovidemostincrementalelectricity.Vietnam’scoaluseinthelastfiveyearsgrew75%,fasterthananyothercountryintheworld.Itisprojectedoutto2030tocontinuegrowingveryrapidly,withanincreasingshareoftotaloutput.Thisisinspiteofcoalbeingimportedandintensepoliticalresistancetocoalduetolocalpollutionconcerns.Thereisscantuseofnaturalgas(keptatasixthoftotalpower)inspiteofampleoffshoredomesticreservesandopportunitiestoimportLNG.PDP-8,duein2019,shouldreassesstheseplans.

5.Domesticgasproductionistaxedheavilyeventhoughitisacleanerfuel.Importedcoalisscarcelytaxedatall.Ifcoalweretaxedonthesamethermalbasisasgas,thetariffwouldbe$100aton.Iflocalpollutioncostsareconsidered,gaselectricity’stotalcostswouldbecheaperthancoal.Forcoalandgas,equaltaxationonathermalbasisandconsiderationoflocalpollutioncostswoulddecisivelyfavorgasovercoal,andwouldassistthegovernmenttoaccuratelyassesstotalcosts.

6.EVNclaimsthatitisdangerouslyunreliableortooexpensivetomoveawayfromitscoal-centricstrategy.ItcouldcertainlyimportLNGandnegotiatethesupplyoflocaloffshoregasinstead.1Gas-firedelectricityisactuallymoreflexibleforrampingupandrampingdownthancoalandmuchcleaner.Ifexcessdiseaseanddeathsarecounted,gasisalsocheaperthancoal,andwelearnmoreaboutthesocietalcostsofairpollutioneveryyear.Ifchangesweremadetosolarandwindpolicy,itcouldgreatlyincreasetheamountandreliabilityofthesesourcesatalowercostthancoalbythetimenewcoalplantscomeonline.EVNcouldfindlocalresistancetocoalmakesitnecessarytorespond,probablyatfirstwithincreasedimportsofpowerandlargeruseofhigh-priceddiesel.

7.InbothIndiaandChina,thecapacityutilizationofcoalgeneratingplantshasfallensharplyduetoacombinationoflowerdemandgrowth(ashifttoservices),improvedefficiency,lowerrenewablepricesandrapidlyincreasingrenewableproduction.InChina,thecapacityutilizationforcoalwasbelow50%in2016andasaresult40%ofcoalplantswerelosingmoney.Thisrepresentsafinancialrisk,especiallysinceittakes3-5yearstocompleteacoalplant,theyarea30-40yearinvestment,anditishardtostopconstructiononcestarted.Gasandespeciallyrenewableenergytakelesstimeandcapacitycanbetailoredtodemand.

Renewables

8.Renewableenergy(meaningsolarandwind–excludinglargehydro)wasinsignificantin2017butisexpectedtogrowtoaprojected10%ofcapacityin2030.Indiaisaimingformorethan20%in2022andChinafor20%in2030.Inothercountries,wind/solarbidsinauctionsarecominginbelowthecostofcoalnow.Vietnam’srenewablecostsareaboutdoublethoseofIndiaorChina.

1Thecostsofgas-firedelectricityaresaidtobe10-12centsperkWhinVietnambutare4-7centsinothercountries,includingthosewhichimportLNG.ShipswhichhaveonboardgeneratorsandLNGstorageandgasificationfacilitiesareavailableandshouldproduceelectricityforlessthan10centsperkWh.

8.ThereareseveralreasonsforhighrenewablecostsinVietnam,mostlytiedtothePowerPurchaseAgreement(PPA)constraints.First,landhasbeenallocatedorlicensedbyprovincestotoomanywithoutthetrackrecordorfinancestodevelopit.Insomecasestheyintendtosellorcooperatewiththerealdeveloperswhoputupthemoneyandhavetheexpertise–butseekingtocharge20%astheir“equity”forhavingthebestland.Inmore-crowdedIndia,landisauctionedandcostsonly5%ofsolarprojects.(Foracceptedprojects,thelandcostis10%ormore.)Second,duetothehighfeed-intariffsandlimitedgridcapacity,underthePPA,EVNisreluctanttoguarantee“takeorpay”contractsthatwouldattractmuchinternationalfunding.Instead,thereisamuchweakerpromisetobuy,whichisacceptablesofarmostlyonlytolocalbanks.(Someforeignenvironmentalfundswillinvestfor“green”reasonsinlimitedamounts.)AtypicalVietnameseloanwillbeabout10%interestfortenyearsinlocalcurrencywhileforeignloanscanbelowercostandmorefavorableterms.Thisraisesthecostofrenewableenergyduetothefasterpaybackperiodandhigherinterestratebyasmuchas3-5centsperkWh.Third,thedeveloperinVietnamhastobuildatransmissionlinetothegridfromtheprojectwhileinIndia,thegridcomestotheproject.Takentogether,thesePPApoliciesatleastdoublethecostofsolarandwindelectricity.

10.Thehighfeed-intariffisslatedtoexpireinmid-2019fornewprojectsstartingafterthatdateanditshouldnotbecontinued.Theonlywayforrenewableenergytoplayaslargearoleasinothercountriesisbyloweringitscostsandimprovingthegridandthusthecertaintyofpowersupplycontractssothatsolarandwindelectricitycanprofitablybesoldforlessthancoal.Workingonwaystointegraterenewableenergywithexistingsources,andsupplementingstoragewithbatteries,wouldhelpVietnamreachhighereconomiclevelsofrenewableenergy.

11.Bystrictlyapplyingexistinglaws,ifadeveloperfailstogetasignedpowerprojectwithinoneortwoyears,theprovinceshouldrecallthelandforauction.Byloweringfeed-intariffsbutstrengtheningthePPAcommitmenttobuyelectricity,lower-costinternationalfundingcouldbeattracted.ByhavingEVNorthegovernmentarrangeforlandrightsforconnectinglinesfromtheprojecttothegrid,thecostsanddelaysassociatedwithgridconnectionswouldbereduced.ThesestepswouldhelpEVNgetlower-pricedenergyandincreasetheirincentivetoimprovethegridmorerapidly.Iffinancewereshort,minorityFDIortop-tierVietnameseprivatecompanyinvestmentintransmissioncouldbenegotiated,includingstorage.DirectPowerPurchaseAgreements(DPPA)ofgreenenergytoFDIfirmsthatwanttobuyitwouldaddanothermechanismtohelpspeedatransitiontoamorerobustenergymix.

12.Byloweringthecostofandboostingtheinvestmentinsolarandwind;rapidlyimprovingthegridandstorage;andloweringthegrowthofdemandthroughsteadybutmodestannualpriceincreasesandtieredpricingtoencourageefficiencyprograms,it

shouldbepossibletosubstantiallyreducetheamountofthermalcapacityneededinthenextdecadewhilekeepingfinancialcostsreasonable.Coordinationofgridcapacityandrenewableproductionshouldbepartofthelicensingprocess.

VIETNAM’SCRISISOFSUCCESSINELECTRICITY

BackgroundVietnamhasincreasedthesupplyofelectricitytoitseconomysince2000byeighttimesandextendedsupplytovirtuallyeveryvillage.EVN,thestatemonopolyutility,hasreducedblackoutsandincreasedthequalityofelectricitysince2010.In2018itwillhaveproducedmorethan2200kWhpercapita,whichwhilejustlessthanhalfofthatofChina,surpassesthatofIndiaandIndonesiaandisapproachingthatofThailand–allofwhicharericherthanVietnam.Vietnam’sgrowthrateofelectricityin2018is10%,whichwoulddoubleuseinsevenyears.LongerrangeprojectionsinthePowerDevelopmentPlanrevised(PDP7),from2020to2030,projectan8%annualgrowth.ThisgrowthrateisfasterthanthatofotherAsianeconomies,manyofwhichhaveelectricitygrowthratesbelowthatofGDPgrowthduetorealisticpricing,conservationandefficiencyprograms.

Vietnamcomparedtoitsneighborsisdifferentwithrespecttoelectricityinseveralotherways.Ithasmuchlessrenewableenergypercapita(excludinglargescalehydro)thananyotherneighbor.Ithashadarapidgrowthofcoalforgeneratingelectricitywith75%growthincoalusefrom2012to2017,whileChinadeclinedandotherswereslower.(SeeAppendix4.)Thecurrent(PDP-7,revised)energyplanprojectsfurtherrapidgrowthincoalatatimewhenneighborsandindeedmostoftheworldarereducingorslowingcoaluse,dueasmuchtoeconomics,governmentassessmentofproperpricingstructuresandlocalpollutionconcernsasclimateissues.2(SeeAppendix4.)

AnotherkeyissueisthatVietnamhaschosentopriceenergylowerthanitsneighborsandclosetoaveragecost,usinglowcostlegacyhydropowertosoftenthehighercostsofnewthermalplants.Butthismeansthatexpansioniscostlyandrequirescontinuingandunpopularpriceincreases.Italsohelpstoexplaintheextremelyinefficientenergyconsumption–VietnamusestwiceasmuchelectricityasThailandtoproducethesameamountofrealoutput.3

WhileVietnam’ssolarandwindpowerproductionarehistoricallylow,theyaresettoincreaseduetohighfeed-intariffsannouncedinrecentyears.Whilenewcoalplantsarepricedat7-8centsperkWhandLNGperhapsahalf-centmorethancoal,onshorewindpowerisnowpricedat8.5centsperkWhandsolarat9.4cents.ThesehighpricesforsolarandwindaredoubleormorethanthoseofauctionpricesinIndiaorChileandhaveinducedahugenumberofproposals–morethan25,000MW–atatimewhen

2Anexcellent2016studyoncoalpollutionis“SynthesisReportonSocio-environmentalImpactsofCoalandCoal-firedPowerPlantsinVietnam”(https://hal-enpc.archives-ouvertes.fr/hal-01441680)MinhHa-Duongistheleadauthor.Itdescribesthenegativeresultsofburninglargeamountsofcoaloneconomicactivityandhealth.3SomearguethattheunmeasuredeconomicactivityofVietnamissolargethatcomparisonsarenotfair.However,studiesoftheinformalsectorsuggestIndonesiaandIndiahaveevenlargerunrecordedoutputandtheyalsohavemuchloweruseofelectricityperunitofoutputinspiteofhighermeasuredGDPpercapita.

totalcapacityisonly48,000MW(48GW).EVNobjects,truthfully,thatitcannottransmitsomuchonitsexistinggridandisreluctanttosign“takeorpay”contractsthatwouldcommitittobuyelectricityitcannotmovetowhereitcouldbesold.However,itisunclearhowmuchofaprioritytheyplaceonimprovingthegridsothatmoresolarorwindenergy–primarilyproducedinthesouthernthirdofthecountry–couldbebought,movedandsoldtocustomers.Thereisnodoubtthatitisnoteasytomovefromamodelwherecentralpowerplantsproducepowerasneededtoonewheretheyadjusttoaccommodatefluctuatingrenewableenergyoutput.Inanycase,suchachangedoesnotcomenaturallytoacash-strappedutility.

Change,however,maybeforceduponEVN.AirpollutionlevelsinmanyVietnamesecitiesexceedWHOguidelinesandarealreadyunhealthy.Burningtensofmillionsoftonsmorecoalwillmakeairqualityworse,evenwithsomewhatimprovedboilersandpollutioncontrolequipment.Localgovernmentsinthesouth–includingtheMekongDelta,HCMCandnearbyprovinces,andevenNinhThuanallhaveaskedforeitherLNGgenerationand/orrenewableenergyratherthannewcoalplants.Simplysayingnotosuchrequestsandfailingtoupgradetransmissionlineswillresultinenergyshortages,possiblyassoonas2019.Whilesomereliefcancomefromusinghigh-costdieselgenerationandimportingenergyfromCambodiaandLaos,itisnotlikelytobeanadequateresponse.

TheGovernmentshouldfindadifferentpaththanthecoal-centriconewhichisnowplannedandhasbeenusedinrecentyears.AcleanerpathwouldhavelowertotalcostsforVietnam.

ThispaperwillfirstdocumentthefactswithrespecttoVietnam’slavishelectricityconsumptionpattern,itslimitedrenewabledeploymentandPMP7’srelianceoncoalfornewpower.Itwillexaminethelogicoffeed-intariffscomparedtoauctionsasawaytobuyelectricitynotproducedbyEVN.ItwillsuggestreasonswhyrenewableenergyinVietnamissoexpensiveandwaystoreduceitscost.Ifthecostsofwindandsolarfalltoalevelwellbelowthatofcoal,thecostsofintegratingthem,eveninconsiderableamounts,intoareliable,year-roundelectricitysystemwouldbemoreattractive.However,thisdoesnotmeanthatallfutureelectricitycancomefromrenewablesources.Somecombinationofgasandcurrentcoalwillbeneededunlessconservationandefficiencyprogramsmorerealisticallyreduceprojectedenergydemand.Suchconservationisentirelypossiblebutnotwithinthescopeofthispaper.

Vietnam’sElectricitySituationVietnamhasincreaseditsproductionofelectricityfrom26.7millionin2000to208millionkWhin2018,agrowthrateofmorethan12%ayear.Percapitaproductionrosefrom347to2213kWhpercapita,asix-foldgain.VirtuallyeveryvillageisconnectedandthequalityofelectricityisimprovingaccordingtotheEVN2017AnnualReport.4Retail

4AccordingtotheEVN2017AnnualReport,p.22,thedurationofoutagesdeclined80%from2012to2016andthenumberoftimespowerwascutfell73%inthesameperiod.Totaltransmissionanddistributionlossesalsofellfrom9.2%to7.6%overthoseyears.

pricesofabout7.5centsperkWharesetbythegovernmentandhavebeenslowlygrowinginlocalcurrencyterms-45%from2010to2016–adeclineinrealtermsafteradjustingforinflation-butcurrencydepreciationhascuttherateofdollarpriceincreasetojust22%inthosesixyears.Mostcostsofnewelectricityinvolveforeigncurrencycostsforthegeneratingequipmentandfuel.EGAT,theprofitableThaiutility,charges12centsperkWhforgenerationandtransmissionanddistribution.IfEVNwereaprivatecompanyitislikelyaregulatoryboardwouldallow11-12centsakWhforitsaverageretailprice.EVNreportsanominalprofitbyaveraginginlowcosthistoricalhydropowerwithnewerandmorecostlythermalpower.However,thismeansthatfastgrowthcausesasmallerportionoftotalpowercomesfromlowcosthydrosourcesandagrowingportionfromhighercostthermalsources,largelycoal.Thisrequiresconstantlyraisingprices.Pricingpowerclosetoitsmarginalcost–thecostofnewcapacityanddelivery–isabetterstrategy.Subsidizedpricingforthosewithlittleconsumptionwouldsoftentheimpactontheneedy.

Thefinancialcostofnewcoalisnegotiatedat7-8centsperkWh–abouthalffromChinesesuppliedandfinancedgenerationstations,withthebalancemainlyfromJapanandSouthKorea.WhileChinaisslowlyreducingitsowncoaluse,itisaggressivelyfinancingtheexportofcoalgeneratingunitsabroad.Themarginalcostofpowerfromnewcoalisabout4centsperkWh–thecostoffuelandmaintenancecostsassociatedwithoperations.Coalburningisassociatedwiththeproductionofashandair,waterandsoilpollution.Thesearealllocalornationalcosts,separatefromanyconsiderationofcarbondioxideandseparatefromthepricepaidbyEVN.EstimatesintheUSputthepollutioncostofcoalburningforpowergenerationatmorethan3centsperkWh–thisisinadditiontofinancialcostsoffuelandcapital.IfasimilarcostappliestoVietnam,thenthetotalfinancialandpollutioncostofcoal-firedelectricityis10-12centsperkWh.SinceUScoalplantshavesignificantcoalpollutioncontrolequipmentnotalwaysfoundorusedinVietnam,itwouldnotbesurprisingifpollutioncostsinVietnamwerehigher.5

Thispaperdoesnotconsideracarbonpollutiontaxincomparingcoalwithothersourcesofelectricity,eventhoughVietnamhascommittedtoreducingcarbonemissionsby8%to25%(withinternationalaid)by2030comparedtoa“BusinessasUsual”scenario.TheOctober8,2018reportoftheUNIGPCC(http://ipcc.ch/news_and_events/pr_181008_P48_spm.shtml)predictedearlierandmuchmoreseveredamagefromclimatechange,includingtolow-lyingareassuchasmuchoftheMekongDelta.Itsuggestedthatdrasticeffortstoreducethepotentialdamagefromrisingglobaltemperaturesassociatedwithincreasingcarbondioxidelevelswereneededandstilljustbarelypossible.Ifconcertedinternationalactionwerecalledforinthenextdecade,carbon-heavyinvestmentscouldbeexposedtopossiblecarbontaxesorothermeasures.Thisisapotentialfinancialriskwhichisonereason

5Beyondelectrostaticprecipitatorsandscrubbersforsulfuroxides,mercurycontroldevicesarerequiredintheUSwhichcancost$400millionpergeneratingplant.Ashdisposalalsoremainsaconcernforlocalcommunities.InTraVinh,the30hectaressetasideforashstoragefromarecentlyopenedcoalplantarealready2/3fullandheavymetalsareaconcernforlocalagricultureandfishandshrimpgrowing.

whymanywesternbanksandinvestmentfundshavestoppedfinancingcoalplants.Thereisarealriskthatacoal-centricstrategycouldendupwithVietnamhavingstrandedassetsthatarenolongereconomic.6

TheincreaseinelectricitydemandinVietnamismuchhigherthanincomparableAsianeconomies,evenwhencorrectingfortheGDPgrowth.Thegraphbelowshowsthegrowthofelectricityfrom2006to2016dividedbytheGDPgrowthrateoverthesameperiod.(DatafromBPandWorldBank.)

ThegraphshowsthatVietnamusesabouttwiceasmuchelectricityperunitofgrowthasitsneighbors.Sincemanyofthemaremoreurbanandhavemoreindustry,bothofwhichusemoreelectricity,thisdifferenceisevenmoresurprising.NorisitbecauseVietnam’selectricityuseissolowpercapita–IndiaandIndonesiahavehigherGDPpercapitabuthavemuchlowerelectricityusepercapita.Indeed,atprojectedratesVietnamwillovertakeThailand’spercapitaelectricityuseinafewyearseventhoughThailandhas2.5timesVietnam’sincomelevelpercapita.WhentheuseofelectricityisdividedbyGDPatcomparableinternationalprices,Vietnamismoreenergy-intensivethananyofitsneighborsaswell:

Sources:BPStatisticalReviewofWorldEnergy2018andWorldBankPPPGDPdata.

6ItistruethatChina,IndiaandtheUSarenotagreeingtocurtailcoaluse,buttheUScutcoaluseby20%infiveyearsinfavorofgasandrenewables,whileChina’susedeclinedfrom2012-17andIndia’sslowed.TheyarepreparingforaclimatetaxwhileVietnamisnot.

Vietnam Indonesia Malaysia India Thailand China

ElectricityGrowthOverGDPGrowth,2006-16

Vietnam China Malaysia India Thailand Indonesia

ElectrictyinGWhOverGDP(PPP)in2017

Vietnamismoreenergyintensiveperunitofoutputnowandisusingabouttwiceasmuchelectricitytogetequalamountsofextraoutput.ItsprojectedenergyuseiswellabovelikelyGDPgrowth,makingitoneoftheleastenergyefficienteconomiesintheregion–andbecomingmoresoovertime.ThiscreatestremendouspressureonEVNtoinvestheavilyinproductionwhenmoreefficientuseofelectricitywouldalmostcertainlybelessexpensiveandcertainlybelesspolluting.LoweringthegrowthofelectricitytotheGDPgrowthrateshouldbeentirelypossible–itisinfactnormalforvirtuallyalllargeAsianeconomies.7AneffectiveefficiencyeffortwouldcreatemuchmoretimeforEVNtoupdateitsgridanddevelopatechnicalabilitytouseothersourcesofgeneratingcapacity.Raisingelectricitypricesinapredictablewayinatieredstructurepairedwithapubliceducationcampaigncouldhelp.

TheotherwayinwhichVietnamstandsoutistheirhistoricallyextremelylimiteduseofrenewableenergy,excludinglargehydro.Thefollowinggraph,usingenergydatatakenfromthe2018BPStatisticalReviewofWorldEnergyReport,showsthepercapitaproductionofrenewableenergybycountryin2017.8Clearly,Vietnamhasnotdevelopedrenewablesourcestoanysignificantextent,atleastthrough2017.In2018,EVNsignedrenewablecontractsfor2271MWofcapacity,or4%ofexpected2020capacity.

7OnlyBangladeshisatallclosetoVietnam,witha9%electricitydemandgrowthoverthelastdecade,butwithlessthan500kWhpercapita(Vietnamhasmorethan2000kWhpc),itisnormaltohaveelectricitydemandgrowfromsuchlowlevels.8Thisincludessolar,wind,biomass,geothermalandsmallscalehydro.In2017,globalwindcapacitywas514thousandMWandsolarcapacitywas391thousandMW.Annualadditionsare50-100thousandMWeach.Theindustrynolongerneedshighfeed-intariffsasscaleeconomieshavebeenachieved.

CurrentPlansforCapacityExpansionThecurrentPowerDevelopmentPlan7-revisedwasreleasedin2016.ItisexpectedtobereplacedbyPDP-8inlate2019.Thecurrentplanforecastscoaltorisefrom34%ofallelectricitygeneratedin2015to53%by2030,Gasandhydrofallfrom30%eachin2015to17%and12%respectivelyby2030.Renewableenergyrisesfrom3.7%to10.7%ofallelectricitygenerated.Importsremainat1-2%oftotalpowerandnuclearwassupposedtorisefromzeroto5.7%,butthoseplanshavebeensuspended.Normally,nuclearandcoalaresubstitutesasbothareusedforbaseloadgeneration,socoal’ssharecouldapproach60%by2030ifitreplacednuclear.Totalcapacityin2030isplannedtobe130GW,upfrom38.6GWin2015,acompoundgrowthrateofabout8.5%ayear.9

Therelativedecreaseinlarge-scalehydroiseasilyexplained.Therearenotmanylargesitesleftfordevelopment.Forgas,itismorecomplicated.Vietnamhassignificantoffshoredepositsofgaswhichithasnotdevelopedandexplorationhassuffered.Thoughitwouldtake5-7yearstodevelopthemoncealltherequiredcontractsaresigned,theycouldprovideagreatershareofelectricitythanscheduled.Onereasonprogresshasbeenslowinsigningdevelopmentdealsisfirst,itisoftensaiditistooexpensivetodevelopoffshorefields–$10billionormore–withgaspricesof$5-6perthousandcubicfeetofgas.(PVNissayingthesameforBlockB)However,theslowdowninexplorationisbecausetheGovernmenthasdecidedthatoffshoregasmustbeheavilytaxed,apparentlyby$3-4perthousandcubicfeetinadditiontothe$5-6price.Atthatpriceof$9-10,gashasbeenviewedastooexpensiveandisnotdeveloped.Incontrast,importedcoalisbarelytaxedatallandasimilartaxoncoal’sthermalcontentasgaswouldamountto$100aton!Thatwouldalsomakecoaluneconomic.Soadecisiontotaxoffshoregasbutnottotaximportedcoaliswhatmakescoalcompetitive.Gas–adomesticasset-hasfarfewerenvironmentaldrawbacksandislesscarbon-intensivethancoal,andwithexploration,greaterpotential.Thegovernmentcouldreexaminethesepolicydecisions.

AnotherpossibilityistoimportLNG–liquefiednaturalgas.10Thisisaninternationallytradedcommodity,likecoal,andimportsaretypicallyarrangedunderlong-termcontractssincethespecializedshipscarryingLNGanddegasificationterminalsareexpensive.LNGfromtheUSwouldprobablycosttheexporterabout$6-$7perthousandcubicfeet(thepriceintheUSisonly$3-$4butliquefyingandtransportadd$3tothecost),butLNG’spriceinAsiaisbidupordowndependingondemandfromChina,SouthKoreaandJapan.ItappearsthatLNGelectricityismoreexpensivethanwhatEVNispayingforcoal-firedelectricity.11However,itcanbeusedmoreeasilywithrenewable

9The2016GIZReport,“VietnamPowerDevelopmentPlanforthePeriod2011-2020:HighlightsofthePDPrevised”providethedatainthisparagraph.ThereportisbasedonthePDP-7-revised.10IfVietnamneedstobargainwiththeUStoreduceitstradesurplusandmaintainaccesstotheUSmarket,importingLNGfromtheUSwouldbeonewaytoshow“goodfaith”inhighlytransactionalnegotiations.11WeweretoldbyMOITthatreplacing6000MWofcoalwith6000MWofLNGwouldraisesystem-wideelectricitycostsby0.6%.Since6000MWisaboutatenthoftotal2020capacity,this

sourcessincegasgeneratorscycleupanddownmorequicklythancoalboilers,adjustingtovaryingsupplyfromsolarandwindsources.Thisisalsotrueforhydroelectricity.

Theplantohaveabout10%solarandwindby2030isnotaggressive–Indiaplanstohavemorethan20%solarandwindgeneratedelectricityby2022–andadetailedstudysuggeststhatevenIndia’scoal-centricgridwillbeabletotakewindandsolarof175GWoftotalcapacitywithoutmajorchangestothegrid,thoughpredictivemodelingandbettercontrolsofcoalplantswillbeincorporated.12Ofcourse,asamoredevelopedmarket,Indiahasanauctionsystemandisgettingsolarbidsatlessthan4centsperkWh,whichischeaperthancoal.Itwillactuallylowertotalsystemcostsbyusingcheapsolarandwind.Chinaplanstohave20%renewablesby2030andisnowgettingsolarbidsforlessthan5centsperkWh.13DevelopersinVietnamclaimthatthecostsofrenewableinVietnamareatleasttwiceashighasIndia,andhavesuccessfullyarguedforhighfeed-intariffsof8.5centsperkWhforonshorewindand9.4centsforsolar.WhyshouldVietnamesecostsbesomuchhigherthancostsinIndia?

ReasonsforHighRenewableCostsinVietnam-PPAWhenhighfeed-intariffswereannounced,therewasasurprisingresponsefromfirmswishingtosupplyrenewableelectricity–morethan20,000MWofsolarprojectproposalsweresubmitted.Thisisathirdof2020generatingcapacityandfarmorethanthegridcancurrentlyabsorb–mostsolarandwindsitesaresomedistancefrommajorcitiesthatneedthatmuchpower.But,inaddition,therewasarushattheprovincialleveltohandoutlandlicensestolocaldevelopers.Mostofthe“developers”weresaidtolackcapitalorexpertiseinbuildinglargesolarorwindprojects.Theyhopedtoselltheirrightsorco-investintheprojectsbytakingasharebasedontheirlicenserights.Theactualdeveloperwouldhavetoprovideallcapitalandexpertisebutgiveup10-20%oftheownershipshare,orsoweweretoldininterviews.InIndia,landcostsareonlyabout5%ofprojectcosts,eventhoughIndiaismoredenselypopulated.

SinceEVNwasnotinapositiontotransportsomuchrenewableenergy,itisreluctanttosignfirm“takeorpay”contractsforit.Instead,thecontractsallowedthemtotakeonlysomuchastheyneededorwereabletoabsorb.Thesecontractsarenotacceptabletomostinternationalbanksorinvestors.Therefore,itwaslocalbanksandfirmsthathadtoprovidethecapitalformostprojectsthatwerelicensed.Localbankshavehigherinterestratesandshortertermsthaninternationalbanks.Atypicallocalloanisabout10%ayearfortenyearsratherthan6-8%for15-20yearsfromcommercialinternationalsources–withExport/ImportBankfinancingisevencheaper.(USExport/ImportBank

impliesa6%highercostthancoal.Thatisroughly0.5centsperkWhmorethancoal.Othernews-basedestimatesare10centsperkWhforLNG.12“GreeningtheGrid:PathwaystoIntegrate175GWofRenewableEnergyintoIndia’sElectricityGrid”–VolumeI,NationalStudy,June2017,IndiaMinistryofPowerandUSAID.AsimilarstudyforVietnamisneeded,13ChinaIsSlashingItsSubsidiesonSolarPower,Forbes,6/18/2018,JillBaker

financinghadinterestratesof4.2%for18yearsinOctober,2018.14)Ifa100MWprojectcosts$1000akilowatt,thetotalcostofthematerialandconstructionis$100million.(Thesearetypicalcosts.)Toshowtheimpactofdifferentcostsofcapital,considera100%debtfinancedproject.(Inpractice,debtisabout70-85%andtherestisequity,whichhasahighercapitalcharge.)Thetablebelowshowsannualinterestcostsandthetermoftheloanavailable.

AnnualPaymentsona100MW/$100MillionProject CostperKilowatt-hour

10%/10years(Local) $16.3million 9.6cents7%/15years(Foreign/commercial) $11.0million 6.5cents4.2%/18years(Foreign/Ex-ImportBank)$8.0million 4.7centsIftheprojectproduced1700kWhayearperkilowattofcapacity,itwouldproduce170millionkWhayear.Thedifferentrepaymentcostsperkilowatt-hourareshowninthetable.Clearly,ifcontractswerewrittensothatinternationalloanscouldbeused,therepaymentcostswouldbemuchlower.Notethatthistableisonlyillustrative–actualworld-wideinterestratesarerisingandequityfinancetypicallyhasacapitalchargeof12-15%,sotheactualcostwouldhavetobecalculatedforanactualproject.15Thereisalsotheimportantcomplicationofforeignexchangerisk.Sincethedonghasbeenslowlydepreciatingagainstthedollar16,dollar-basedloanshavetobeadjustediftherevenueisinlocalcurrency.Therecouldbehedging(akindofinsurance)orsimplyadding3%ayeartothedollarinterestratetooffsettheexpecteddepreciation.Withadepreciationadjustment,themainadvantageofinternationalcommerciallendingisitslongertermandthespreadingofriskawayfromVietnamesebankswhomightotherwiseput“toomanyeggsinonebasket”andfacehighlossesifproblemsdevelopedwithrenewableenergyloans.

ThereisathirdfactorwhichexplainswhyVietnamhashighrenewableenergycosts.Thetransmissionlinefromtheprojecttothenationalgridhastobebuiltbytheprojectdeveloper.He(orshe)hastonegotiatewitheachlandholderalongtheroutethattheproject-to-gridlinewilltakeandpaythemforthelandorrentitfor10-20years.Inaddition,thedevelopermustpaythecostofbuildingthehighvoltagelinefromtheprojecttothegrid.A110kilovolttransmissionlineis$400,000perkilometersoa25kmlinewouldadd$10millioninconstructioncostspluslandacquisitioncosts.Thiswouldaddatleast10%tothecostofthe100MWproject.

PuttingthethreefactorstogetherunderthePPA–landspeculationtakingupthebestsites;higherinterestratesduetocontractswhichdonotsatisfyinternationalstandards,

14TherecentlyimposedtariffsonsolarpanelsmaketheUSabadchoiceforexportingsolarequipment,butothercountrieshaveExport-Importfinancingatroughlysimilarrates.15Whiletheblendedcostofloanandequitycapitalwouldbehigher,theactualcostofpanelsandreasonablypricedlandcouldwellbelower.Solarpanelcostsarefalling20-30%in2018.16Thedongexchangerateattheendof2008was17,000=$1anditwas$23,300=$1inOctober2018,anannualdepreciationrateof3.2%.

insufficienttakeorpayguarantees,andtransmissionlinerequirements–itisclearthatrenewableenergycostsarehigherthanneedbe.Roughlyspeaking,thesecostsatleastdoublethecostperkilowatthourthatwouldotherwisebepossible.

MeasurestoReducetheCostofRenewableEnergyinVietnamTherearestepsthatcouldbetakensothatthecostofrenewableenergyfallstolevelsclosertothoseofothercountries.

1. Forland,thecurrentnational“useitorloseit”regulationshouldbestrictlyappliedoncetheinvestorsfailtoimplementtheirproposedprojectwithinayear,orsometimestwoyears,sincethegrantingofinvestmentlicense.Theprovincecouldthenauctionthelandtodeveloperswhowantedtobuildtheprojects.Evidencemightberequiredthatthebidderhassomecapacitytodeveloptheprojectandisnotaspeculator.EVNandtheGeneratingCompanies[orGencos-SOEownersofgeneratingcapacityspunofffromEVN]shouldbeallowedtobidforprovinciallandonanequalbasisiftheyplantoinvestinrenewableenergythemselves.

2. Forcontracts,thereisnofinancialincentiveforEVNtobuylargeamountsofpoweratpriceshigherthancoal,orindeedhigherthanitsretailpriceofelectricity.Thehighfeed-intariffsarelossmakingforthem,andwhiletheyareaSOEtheyneedtobecreditworthyandthusarenotbeeagertobuyhigh-costpowerwhichrequiresbillionsofdollarsofgridinvestments.Byemphasizingrealbutmanageablegridconnectionproblems,theycanandlikelywillresistsigningcontractsthatworsentheirsituationandputpressureonretailelectricityprices.Thesolutionistolowerthecostofrenewableenergybyreducingthefixedpriceandeventuallyallowingauctions,butthisrequiressolvingtheproblemsinthePPA.TheprivatesectorthinksauctionshavebeenshowntonotworkuntilthereisamarketdevelopedandthinksitistooearlyforEVNtogotoauction.EventheWorldBankiscomingtotheconclusionthatEVNcan’tbereadysoonforauctions.Alternativesaretohaveauctionsbutwithaminimumsharesetasideforwindandsolar;lowerrenewablefeed-intariffswithstrongercontractualcertaintythatoutputwillbebought;ortohaveatrulyneutralpartymanagetheauctions.Ofthethree,perhapsalowerfeed-intariffwithafirmcontractwouldbepreferredbydevelopersinthenextfewyears.

IfVietnamdecidesitwantstomovetowardsahighproportionofrenewableenergy,asothercountriesaredoing,itshouldfindawaytosigncontractsthatattractinternationalfundingandreapthebenefitsoflongertermloansandlowerinterestrates,atleastfromExport-ImportBanks.Ifitiscontentwithasmallfractionofrenewableenergy,itwillmaintainthecurrentpracticeofsigningcontractsthatputmoreuncertaintyonthedeveloperandlenderatthecostofexcludingmostinternationalfinancialparticipation.Butthenrenewableenergywillbemoreexpensivethanitmightbeandalsomoreexpensivethancoal,atleastatcurrentsolarpanelcosts.

3. Fortransmissionlinesconnectingthesolarorwindprojecttothenationalgrid,variousremediesexist.Thegovernmentmighttakeoverlandacquisition

responsibilityand/orpayforthefirstseveralkilometersoftransmissionlinesorcost-sharewiththedeveloper.Havingsmallerprojectsclosetoeachothersharingasingletransmissionlineisalreadybeingexploredandisanotherstepthatwouldlowertheeffectivecostofrenewableenergy.Ifthecostcomeinat4-6centsperkWh,thatwouldbecheaperthanthecurrentfixedcoalprice–thoughthevariablenatureofrenewablepowerimposesextracostsonEVNrelativetothermalorhydro,whichcanbecalleduponasneeded.ItislikelythatifEVNfollowedIndiainpredictingtheamountsofrenewableenergyandsettingtheircoal,gasandhydrotocombinewithrenewableenergyasitbecameavailable,itwouldbepossibletoutilizemuchmorerenewableenergyatareasonablecostthaniscurrentlyplannedfor,especiallyinthesouth.

AnimportantaspectofrenewableenergyinVietnamisthatmanyofthebestsolarandwindlocationsareinthesouthernthirdofthecountry.Thislieswithinaregionthathasarelativelyhighshareofoffshoregasandhydrosourcedenergyrelativetocoal.Sincegasandhydrocanbecycledupordownmorequicklythancoalcan,theyworkbetterwithrenewableenergy.Whilethisbynomeanseliminatesthechallengesassociatedwithintegratingrenewableenergy–therewouldstillhavetobeanupgradedgridtocarrymorepower–itshouldmakeiteasiertomanagetheintegrationatareasonablecost.

IfEVNfoundithardtoinvestenoughorrapidlyenoughinthegrid,itcould(ifallowed)welcomeforeigninvestmentasaminorityinterestinupgradedtransmissionlines.Thecontractwouldallowatransmissionfeeforaspecifieddistanceandamount,payabletotheforeigninvestor.ControlcouldremainwithEVN.TheFDIordomesticprivateinvestmentcouldincludebatteriesorotherenergystoragewhichwouldhelpstabilizesupplyandextendtheavailabilityofsolarandwindbeyondtheperiodswhentheyaregenerating.Suchstoredrenewablepeakperiodsupplywillsoon,ifnotalready,becheaperthankeepingseldom-usedexcessthermalcapacity.Dieselpower,forexample,costsmorethan25centsperkWh.

AnotherissuerelevanttotheSouth,butalsotootherregions,istoallowDPPAordirectsalesofgreenenergytofirmsthatprefertobuyit.Manyforeigncompanieswanttoreducetheircarbonfootprintandarewillingtopayextraforthat.Ifasolarorwinddeveloperorgroupcouldsendtheirenergytoawillingbuyeratanegotiatedpriceandwheelingfee,thatwouldhelpspeedthedevelopmentofcleanenergyandinvestmentinthegrid,sinceEVN(andanyforeignpartnersinthegrid)couldbepaidforsuchtransport.Suchdirectsalesrequirenogovernmentmoneyandcouldbeasimpleregulatorychange.

Similarcommentsapplytoallowingsalesfromrooftopcollectorsinapartments,industrialorofficebuildingstonearbyconsumersinacompactarea,suchasanindustrialzone.Currentregulationsdiscourageorevenprohibitrooftopcollectorsalesexcepttothegrid.Allowingdirectsalescouldgenerateseveralthousandmegawattsofelectricitywithnopublicspending–estimatesarefor6GWinHCMCalone.Sincemany

othercountrieshavebeenabletoissuesupportiveregulations,itwouldbesurprisingifVietnamcouldnotdothesame.

GasComparedtoCoalforBaseloadGenerationInglobalgenericanalysis,thecostsofcoalandgas-firedelectricityaresimilar.17CoalisattractingfavorableinvestmentstermsfromChina,JapanandSouthKoreaastheyscaledowninvestmentathomebutlookforinternationalmarketssuchasVietnamandthePhilippines.InVietnam,itappearsthatgas-firedelectricityusingLNGissomewhatmoreexpensivethancoalifonlyEVN’sfinancialcostsareconsidered,thoughitisnotclearwhycostsarehigherthaninotherLNGimportingcountries.

TheWHOin2018releasedastudy18finding60,000excessearlydeathsinVietnamin2016duetoairpollution.Whilecoalburningsignificantlycontributestothattotal,sodovehicles,industrialproductionandevenagriculturefromburningwastes.However,increasingcoalburningwouldcertainlyaddtothetotalairpollutionandthusdeathanddisease.AnotherstudyexaminedplanstoincreasecoalburninginSoutheastAsiaandpredictedalmost20,000deathsayearinVietnamfromcoalby2030.19

Thereisnodoubtthatcoalburninghasahigherhealthandenvironmentalcostthangas.Therearelittleornoparticulateemissionsfromnaturalgasandnitrogenandsulfuroxideemissionsarealsolower.20(Ofcourse,carbonpollutionisalsoless,butthatismoreofaglobalproblem.)Pendingfutureresearch,itwouldbereasonabletoconcludethatthelocalpollutioncostsofcoalarehigherthangasandwouldmakethetotalcost(financial+pollution)higherforcoalrelativetogas.SincegascanbeimportedascoalisnoworproducedinVietnamifoffshoredepositsaredeveloped,itisoroughttobeconsideredasapreferablecompetitortocoal,especiallygiventheconcernofthepublictowardsnewcoalplants.Sincegasisbothusedforbaseloadandquicklyresponsivetochangesindemandorrenewablesupply,itisastrongcontendertobealargerpartoftheenergymix.ThisisthedirectionChinaistakingalready.However,ultimatelyitisthe

17https://www.lazard.com/media/450337/lazard-levelized-cost-of-energy-version-110.pdfEvenif$3perthousandcubicfeetisaddedtotheUSgascost,thatbringstotalgas-firedelectricitycostsupto6centsperkWh,stilllessthancoal.Thecostofgasrelativetocoaliscriticalindeterminingwhichischeaperinfinancialterms.18http://www.wpro.who.int/vietnam/mediacentre/releases/2018/air_pollution_vietnam/en/19https://pubs.acs.org/doi/pdf/10.1021/acs.est.6b0373120TheUnionofConcernedScientistswrote:“Cleanerburningthanotherfossilfuels,thecombustionofnaturalgasproducesnegligibleamountsofsulfur,mercury,andparticulates.Burningnaturalgasdoesproducenitrogenoxides(NOx),whichareprecursorstosmog,butatlowerlevelsthangasolineanddieselusedformotorvehicles.DOEanalysesindicatethatevery10,000U.S.homespoweredwithnaturalgasinsteadofcoalavoidstheannualemissionsof1,900tonsofNOx,3,900tonsofSO2,and5,200tonsofparticulates[7].Reductionsintheseemissionstranslateintopublichealthbenefits,asthesepollutantshavebeenlinkedwithproblemssuchasasthma,bronchitis,lungcancer,andheartdiseaseforhundredsofthousandsofAmericans.”Foundat:https://www.ucsusa.org/clean-energy/coal-and-other-fossil-fuels/environmental-impacts-of-natural-gas#.W8TwG_lReUk

governmentthatsetstherelativepriceofuntaxedcoalandheavilytaxedgas,whilethepublicabsorbspollutioncosts.21

Theotheraspectofgasisthatasingle-cycleunitcanbeinstalledinlessthanayearandacombinedcycle(moreefficient)unitintwoorthreeyears.Thisallowssupplytobematchedmorecloselytoactualdemandandreducestheriskofoverbuildingduetoaglobalslowdown,shifttoservicesthatuselesselectricity,greaterefficiencyorgreaterroleofcheaprenewableenergy.SeeAppendix1forexamplesofwhygasand/orrenewablesourceshavelessriskthancoalinafinancialsense.

SUMMARY-OPTIONSFORTHEFUTUREDemandVietnam’sPDP8shouldreexaminerevisedPDP-7thatprojectselectricitydemandtogrowat8.8%from2018to2030.Electricitydemandwouldjumpinthatplanfrom208GWHin2018to569GWHin2030.Vietnam’spercapitauseofelectricitywouldrisefromabout2200in2018to5400kWhpercapitain2030.HongKonghadelectricityconsumptionoflessthan6000kWhpercapitain2017–whenitspercapitaincomewas$60,000.Vietnam’sPPPGDPpercapitaislessthan$7000andmaydoubleinthenexttwelveyears.Isitreasonabletoapproachpercapitaelectricityconsumptionlevelsofaneconomyseveraltimesricher?

Again,itwouldbereasonableforVietnamtoaimforelectricitydemandgrowthaboutequaltoGDPgrowth.At7%ayeargrowth,totalelectricityproductionwouldgrowtoonly468GWH,saving101GWHcomparedtobusiness-as-usual.Percapitademandwouldstillrisesharplyto4400kWh,whileVietnam’sPPPGDPpercapitawouldbeinthe$14-$16thousandpercapitarangeby2030.Amajordecisionpointisifelectricitydemandshouldgrow“asusual”orslowdowntoreflectthenearlyuniversalexperienceofotherAsianeconomies.

Inordertoencourageenergyefficiency,EVNshouldideallyraisethepriceofretailelectricitytoreflectthecostofnewproductionanditsdelivery.Thisislikelytobe10-12centsperkWh,thesameasThailand’sutility.Gettingthereeventuallyismoreimportantthantryingtogettherefast.Veryrapidelectricitypriceincreasesgeneratedissatisfactionandaredifficulttoimplement.Singledigitannualpriceincreasesinpercentageterms,somewhathigherthanintherecentpast,arelikelytobeacceptableifcombinedwithanexplanationthatEVNischoosingcleanersourcesofenergyandthepriceforinitialkWhuseremainslowerforthedisadvantaged.Simplyannouncingthatelectricitypriceswillriseslowlybutsteadilywillsignaltobothhouseholdandindustrialconsumersthatitwillpaytoinvestinmoreefficientequipment.Helpingwithinformation,labeling,andevenloansforsuchequipmentwillhastenitsadoption.ThereareampleexamplesofsuccessfulconservationprogramsinChinaandothercountries.

21Coalhashistoricallybeenuntaxedorlightlytaxedwhilegashashistoricallybeenmoreheavilytaxedduetoitsprofitability.Thishabitcouldbere-evaluatedsoequaltaxationofthermalvaluesallowedefficientdecisions.

CombininggentlebutpredictablepriceincreaseswithnudgesandinformationwouldhelpVietnam’selectricitydemandslowdownanditsefficiencyrise.

SupplyEvenwithslowergrowth,alotofnewcapacitywillbeneeded.EachnewPowerDevelopmentPlanwillconsidercoal,gasandrenewableenergy.Ifrenewablecosts,particularlyforsolar,continuetodeclinerapidly,therenewablepriceadvantage(withsupportivepolicies)willgrowovertime.22Ifapoliticaldecisionweremadetooptforhighersharesofrenewableandgas-firedelectricityrelativetocoal,itisunlikelythatsystem-widecostsafter2020wouldbeverydifferentinfinancialterms.Withpollutioncostsandfinancialuncertaintyconsidered,achoicethatreducescoal’srolewouldcertainlybelesscostlyandlessrisky.

Attheveryleast,Vietnammayaskitselfwhyitisalmostaloneamongitsneighborsinchoosingapaththatheavilyusesafuelmoreassociatedwithpreviouscenturiesandwidespreadpublichealthproblemsthanwithfutureenergyuseinmiddle-incomeeconomies.

Apointnotalwaysincorporatedincomparingrenewableenergywithcoalisthetimetocompletion.Oncelandaccessissuesaresettled,itisquitepossibletoimplementasolarorwindprojectwithinoneyearorevenless.Agreen-field(newsite)coalplantwilltakeatleastfouryearsandoftenfiveormore.Thus,anuncontesteddecisiontobuildanewcoalplantnowwillresultinavailableenergyin2022or2023.Itcouldtakeevenlongeriftheprovinceobjectstothecoalplant.Adecisiontobuildevencheaperrenewableenergyearlyin2021willresultinpoweravailableinlate2021.Thefuture(andlower)priceofrenewableenergyshouldbecomparedtothecurrentpriceofcoalplants.

ItislikelythattheworldwillfaceaneconomicslowdownthatwoulddepressVietnam’sexportsandoverallgrowthrate.Beingabletoadjustelectricitysupplytodemandbydelayingshort-cyclecapacityadditionslikerenewables(andtoalesserextentgas)ratherthanbeingcaughtinalong-termcoalinvestmentcyclewouldsaveEVNandthenationasignificantamountinavoidedcosts.ThisfactorisalreadyevidentinbothChina–wherecoalgeneratorsrunlessthanhalfofthetime–andalsoinIndia.23Notethatwhencoal,withitshighfixedcosts,runsatalowcapacityutilization,thecostper

22Batteryandotherkindsofenergystoragecostswillalsofall–thesehelpmakerenewableenergymorereliable,evenafterdarkorwhenthewindisstill.Inthenextdecade,renewableenergywillbemuchmoresmoothlyandreliablysuppliedthanitisnowoveralongertimeperiodwithbatteriesorotherstorage.See,forexamplehttps://about.bnef.com/blog/tumbling-costs-wind-solar-batteries-squeezing-fossil-fuels/23https://www.reuters.com/article/us-china-power-capacity/china-suspends-new-coal-fired-power-plants-in-29-provinces-report-idUSKBN1880P4statesthatin2016,averagethermalgeneratingplantsinChina,mostlycoal,operated4165hoursayearorat47.5%ofpotential..Accordingtohttps://eneken/ieej.or.jp/data/7498.pdfInIndia,thecoalcapacityutilizationin2016was56.7%,downfrom77.5%in2010accordingto“ATaleofThreeCoalMarkets”byJ.NakanoandS.Ladislaw,CSIS,March2018,p.21

kilowatt-hourgeneratedrises.Thiscouldmakecoalevenmoreexpensive.(See“Box”oncoalinappendix1.)

Ifrenewableenergydoesgrowrapidly,therewillhavetobesignificantupgradestothephysicalcapacityofthegridandalsotoitsabilitytocarryandincorporateinformationaboutvaryingsupplyanddemandlevels.Budgetingforseriousgridinvestments,predictivemodelingandenergystorageispartofatransitiontoacleanerenergymix.ItwouldalsohelppoorprovinceslikeLaiChau.Thereare18hydroprojectswaitingfortransmissionlinessotheycanstartconstruction.Thepoorprovincewouldgetconstructionjobsandincomefromtheimprovedgrid–andprivateinvestorswouldfundthedams.

Ifinvestmentsaremadeinthegridandstorage,EVNwouldhaveincentivestobuyrenewableenergyandhydroelectricityfirst.Themarginalcostsofsolar,windandhydroareclosetozeroandevenapricebelowfourcents,themarginalcostofcoal(fuelandvariablemaintenance)isstillagainfortherenewabledeveloper,whileapricebelowfourcentsisalossforthecoalplant.Thereisalsonopollutionfromrenewableenergyandhydro,whiletherearesignificantcoststodisposingproperlyofash,controllinglocalairpollution,andtheimpactonlocalwatersupplies.Takingbothfinancialandexternalpollutioncostsintoaccount,EVNandVietnamwouldbebetteroffcallingonrenewableandhydropowerfirstandlimitingtheamountofpowerthatisnotdispatched(used)whenitisavailablefromcleansources.ThechoicebetweencoalandgasismorecomplicatedandshouldbeapproachedasaLevelizedPriceofElectricitymodelingtobedeterminedbyavarietyoffactors,includinglocalpollutionlevels,costs,taxrevenues,availablesupplyandlocaldemand,andbaseloadadjustabilityofthevariousplants.AnimportantcomplicationisthatEVNmayhaveenteredintolong-termcoalpurchasecontractsandthesewillincreasethecostofnotusingcoal.However,curtailingnewcoalinvestmentswillhelpallowexistingplantstoproducewiththeircontractswhilelimitingfutureliability.

Theexpansionofgridcapacityandimprovingtheagilityofthegridtorespondtodemandandsupplyfluctuationswillnotbecheap.Foreignandtoptierdomesticcompanies,couldpartnerwithEVNtoinvestingridupgradingandstorageiffirmcontractswerewrittentorewardhigherelectricitytransmissionvolumesandstorageforpeakperiods.ThiscouldspeedtheabilityofEVNtosignfirmsupplycontractswithsolarandwinddevelopers.24Iffirmcontractsweresigned,thefeed-intariffshouldbelowertoreflectreducedrisks.Therewillbeachancetoreassessfeed-intariffsafterJune2019.

24Anotheroptionwouldbeforaprivatefirmtobuildtransmissionlinesfromprojectstousersandnegotiatewiththesolar/windproducer(whichcouldbeitself)andtheconsumer.Thisoptionwouldrequireachangeinlaw.

Ifsensiblestepsaretakentoreducerenewablecoststothoseofothercountries,alargeamountofincrementalpowercouldcomefromsolarandwindbythe2020’s.Ifthisiscombinedwithseriousefficiencypolicies,itislikelythatamuchmoremodestroleforcoalandgaswouldbeneededevenwhilecontrollingcostsandimprovingpollutionemissions.Theargumentthatrenewableenergyistoouncertainandexperimentalisnolongervalid,thoughchangesingridinfrastructureandmanagementwouldbeneededtomakethetransitiontoreliable,cleanerandultimatelycheaperenergy.ThequestionisifVietnamwishestomakethetransitionasfastasotherAsianeconomiesormoreslowly.

TheCostsofaHighFeed-InTariff

Highfeed-intariffsarejustifiedifatechnologyisjustgettingstartedorifinstitutionalcostsarehighandscareoffpotentialinvestors.InVietnam,thedecisiontooffersolarelectricitypricesmorethandoubleIndianauctionpriceshasfalselypersuadedmanyinEVNthatsolaristoocostlyandexperimentalforlargescaleuse.Italsogivestheopportunityandincentiveforgovernmentofficialstorequiredeveloperstopaytogetonapprovedprojectlists.Ingeneral,honestgovernmentcomesnotonlyfromenforcinglegalproceduresbutalsocreatingconditionsthatdonotcreate“rents”orexcesspotentialprofitsthatareselectedbyadministrativedecisions.Ifalowerfeed-intariffiscombinedwithseriousstepstoreducecostsforlandandcapital,therewouldbelessexcessprofitandlessopportunitytodemandsidepayments.Ultimately,fairauctionsareasolution,afterastablemarketmechanismisdeveloped.Endingthehighfeed-intariffafterJune2019iswiseandshouldbefollowedbyjointeffortstolowercostsandimprovecertaintyofcontracts.

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Appendix1:RisksAssociatedWithCoal

OneofthemajorrisksassociatedwithcoalinIndiaandChinanowisthatthecoalgeneratingplantsarebuiltinanticipationofdemandthatdoesnotdevelop.Ittakes4-6yearstobuilda“greenfield”plantandthatrequiresprojectingelectricitydemand.Asefficiencyimproves;aseconomiesshiftmoretoservices(whichuselessenergy);asChina’sgrowthslowsdown;andasrenewablesourcesprovidelow-costcompetition,theutilizationratioofcoalgeneratingplantsfalls.InIndia,theutilizationofcoalplantsfellfrom77.5%in2010to56.7%in2016/17.OnaverageChina’scoalstationsoperatedatlessthanhalfofcapacityin2016.Thisraisestheaveragecostofcoal-firedelectricitysincefixedcapitalandmaintenancecostsmustbespreadoverfewerkilowatt-hoursofproduction.Ifaplausiblecapitalandfixedmaintenancechargeof$200perkWofcapacityperyearistaken,fallingfrom80%to50%utilizationraisesfixedcostsby1.8centsperkWh.Themarginalcostofhydro,windandsolariseffectivelyzero,sooncetheircapacityisbuiltitisonlyrationaltousethosesourcesfirstifthegridisabletotakethepowertowhereitisneeded.(ForeignBOToperatorsofcoalplantsmaylobbyforpriorityinsupplyingEVNiftheyhaveinvestedincoalplants.Thisintroducesapoliticalcomplicationbeyondthescopeofthispaper.)

Asacountrybecomesmiddle-income,thepublicbecomesmoreconcernedwithpollution.IntenseresistancetonewcoalplantsisalreadyevidentinthesouthernpartofVietnamand,attheveryleast,thisincreasesdelaysandcostsofanewcoalplant.Asfurtherevidenceofpublichealth,ashdisposal,andairandwaterpollutionissuescometolight,thisresistancewillincrease.EvenEVNmaybegintoworrythatitwillhavetofixtheashstoragesitesthatwillcoverthousandsofhectares.TherecordofJapan,SouthKorea,TaiwanandChinaareclearevidencethatthisisarisk.Allofthemarereducingorstabilizingcoaluse.ThelocalpollutioncostsofcoalinVietnamarelikelytobeseveralcentsperkWh,thoughmoreresearchisneededtoconfirmifVietnamissimilartoothercountriesinthisregard.India,withasimilarpercapitaincome,putcoal’sexternalcostsat2-3centsperkWh.

TheOctober2018releaseofaUNclimatestudyfoundthatthecostandthreatsofrisingglobaltemperatureswillgrowtoalarminglevelsby2030unlessstrongactionistakenraisesthelikelihoodofsomecollectiveinternationalactiontoreducecarbonemissions.ItistruethatVietnamhasverylowpercapitacarbonemissionsandshouldnotpayforthemistakesofothercountries.Ontheotherhand,aninternationalagreementthatrequiresallcountriestoimposeacarbontaxoritsregulatoryequivalentisbecomingmorelikely.Evenifthetaxiscollectedandspentlocally,thecostofcoal-firedelectricitywouldrisebyseveralcentsperkWhinmostplausiblescenarios.Thisiswhymanywesternbanksandinvestorsarenotwillingtofinancenewcoalplants–thereistoomuchfinancialrisk.(Each$10pertonofCO2taxaddsonecentperkWhoftaxtocoal-firedelectricity.Carbontaxesof$20to$50atonarelikelyiftheyareimposed,thoughtheUNReportarguesforevenhighercarbontaxes.)

Finally,thereisariskfromimportingcoal.Willaninternationalcarbontaxbeappliedatthepointofexport?Willnationaldecisionstoreducecoalproductiondriveupprices?Whatifthecurrencydepreciatesandcoalpricesjumpintermsofdong?Theserisksarenotonesthathavetobetakenifefficiencygrowsorlocalgasdepositsaredevelopedorifsolarpanelsareused–oncepaidfor,thereisnofurtherdrainofforeigncurrency.

Appendix2:EvenGeneralElectric(GE)GetsItWrong

GEisamajorUScompanythathelpedcreatetheelectricageandisamajorproducerofgeneratingequipmentforcoalandgas.Itsstockpricehassufferedinspiteof7500gasturbinesworld-wide,whichshouldbeabaseforprofitableservicecontracts.Butitsstockpricehasplummetedfrom$30to$7ashare.Why?

AccordingtoastoryintheOctober31,2018NewYorkTimes:

“Energyefficiencyprogramsandrenewablesourceslikesolarandwindhavebothexpandedanddroppedinpricefasterthananticipated.Andfurtheradvancesinbatterytechnologycouldmakerenewablesconsistentlyreliableratherthandependentontheweather.Theseforceshavepromptedutilityexecutivestoholdoffnewordersforgasturbines,afteryearsofgrowth.Thedemandforgas-turbinepowergenerationthisyear[2018]willbemorethan40%lessthanin2016,analystsestimate.”(Emphasisadded]

GE’sexperiencesuggeststhatenergyefficiencyandrenewableenergycancauselargedeclinesintheneedforthermalenergy–evengas-firedelectricitywhichisdisplacingcoalintheUSduetofracking(awayofdrilling)andtheresultingcheapnaturalgasthatmakesevennewercoalplantslesscompetitive.ButthisisnotjustaUSphenomenon–itishappeningacrosstheglobe.Whencompaniesfacemarketforces,theyhavetoadjusttonewtechnologicalandeconomicrealities.IfEVNrespondedtothesamepressures,itwouldnotplanforexpansionofelectricpowerinthewayitdoes.ApoliticaldecisionisneededtopersuadeEVNtorespondmoretomarketforces,thoughbetterpolicytowardsrenewableenergyandelectricitypricingwouldbeneededaswell.Lessgrowthinelectricity,usedmoreefficientlyandproducedinacleanerway,wouldendupbeingcheaperforVietnamthanthealternative.

Appendix4:AnnualGrowthRateinCoalUseofMajorAsianConsumers,2012-17

(“Major”consumersusemorethan10milliontonsin2017;Globalconsumptionofcoaldeclined.)

Declining: Australia,China

SlowIncreases: Indonesia–1.6%ayear Japan–0.8% SouthKorea–1.4% Taiwan–0.8% Thailand–2.0%Moderateincreases: India–5.1% Malaysia–4.7%FastIncreases: Philippines–10.2% Vietnam–11.9%

Appendix3:TheRealPriceofElectricityinVietnamFellfrom2010to2016

Vietnamhasdecidedtochargelessthanthemarginalcostofgeneratinganddistributingtheelectricityitsells.Instead,itchargessomethingclosetotheaveragecost,usingcheaphydroelectricprojectstooffsetthehighercostofnewthermalunits.Mostcompetitivecompanieschargethecostofincreasedproductionplusdistribution,becauseotherwisetheywouldlosemoneyastheyaddedmorehigh-pricedcapacity.

However,VietnamdoesnotjustunderchargecomparedtootherASEANutilitieslikeEGAT,theprofitableThaiutilitythatcharges12cents(plustaxes)perkWhtoEVN’s7.5cents.Itoftenactuallylowerstherealpriceofelectricity!In2010,EVNreported96.4trilliondonginnon-financialrevenueandsold91.7billionkWhforapriceof1051dongperkWh.In2016,revenueroseto268.4trillionwhilesalesjumpedto178.6billionkWh.ThepriceperkWhin2016was1503dongperkWh.However,inthattimeperiod,theGDPdeflatorrose47%.Inrealterms,theelectricitypricein2016(aftercorrectingforinflation)was1020dongperkWh.Oversixyears,realpricefell.(TheGDPpriceindexrosefrom100in2010to147.4in2016.)

Wedonothaveauditedreportsfor2017and2018,buttheestimated2017pricewas7.5centsperkWh,orabout1670dongperkWh.Inrealterms,thatis1090dongperkWh.So,insevenyearstherealpriceofelectricityroseby½of1%ayear,whilethecostofelectricitylikelyincreasedmoreasVietnamhadtoswitchtoimportedcoalonnewplantsandtheshareoflowcosthydrofell.IfVietnamhadmanagedtoincreasethepriceofelectricityby3%ayearinrealterms,EVNwouldbeinastrongerpositionandfinancinggridandcapacityexpansionwouldbemucheasier.Conservationwouldhavegrownandpollutionwouldbeless.

A publication of the Ash Center for Democratic Governance and InnovationHarvard Kennedy School79 John F. Kennedy StreetCambridge, MA 02138617-495-0557www.ash.harvard.edu

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