Alongside solar power, Vietnam has significant potential in wind energy and it's hoped that wind will play a large role in turning the country away from coal and gas.
To encourage the development of wind power projects the government introduced a feed-in tariff (FiT) scheme way back in 2011. The FiT rate of VND1,614/kWh (excluding VAT, equivalent to US$0.078) was seen at the time as an important step towards realising the country's renewable ambitions.
The low rate, however, has proved unappealing to investors. Despite a range of tax benefits offered to developers, including exemptions from customs duties, a preferential corporate tax rate of 10% and income tax and land use fee exemptions, Vietnam has just four operational wind farms. The original plan to have 1 GW of wind power capacity by 2020 was fanciful, with current projects generating just 138 MW. In fact, three of the four farms are only in existence because they were able to negotiate power purchase agreements (PPA) at better rates than the FiT.
The poor take up led to an inevitable rethink, with the revised Power Development Plan 7 (PDP 7) targeting a 6.5% share of electricity generated from renewables by 2020 and 10.7% by 2030. On wind specifically, installed wind power capacity was forecast downwards to 800 MW by 2020, 2000 MW by 2025 and 6000 MW by 2030. These figures would account for 0.8% of total electricity production in 2020, 1% in 2025 and 2.1% in 2030.
Winds of change
There is little doubt about Vietnam's potential when it comes to harnessing wind energy. The country boasts over 3,000km of coastline and is subject to regular monsoonal winds. According to The World Bank, 8.6 percent of Vietnam's territory is suitable for the construction of wind farms, in comparison with 2.9 percent in Laos, and just 0.2 percent in Cambodia and Thailand.
A large part of this potential is thanks to the South China Sea, which presents a golden opportunity for the development of offshore wind farms. The waters bordering the southern tip of the country have an average wind speed at sea of 10-11km per hour, according to research conducted by the Vietnam Institute of Seas and Islands, under the Ministry of Natural Resources and Environment (MONRE). At a height of 80m above sea level, turbines could generate 400-800W per square metre per year.
However, even the modest targets included in the PDP 7 will be difficult to achieve if changes are not made. As with the solar situation, the economic feasibility of the renewable energy sector largely depends on the policies put forward by the government, including the FiT.
As with other forms of renewable energy, Vietnam is in a strong position for wind power production. There is strong interest in the country's energy sector from both domestic and foreign investors, but the low power purchasing price remains a significant sticking point for wind energy projects, making it difficult for Vietnam to become an international competitor in wind energy.
According to the United Nations Development Programme (UNDP), the FiT proposed is not sufficient for investors to recover their investments. This tariff is also much lower than in Indonesia (US$0.11), Malaysia (US$0.1476) and Thailand (US$0.19).
By the latest estimates, even the lower target of 800 MW by 2020 looks unachievable. Installing wind turbines is still a challenge in Vietnam and the country relies heavily on imported equipment. Investors have been clamouring for more government support and a guarantee that it will buy electricity at higher prices so that they can recoup costs from their wind energy projects.
Blown off course
A number of regulatory and market barriers are preventing the industry from meeting its full potential.
Besides the low feed-in tariff that needs to be adjusted, the issue of transparency presents additional challenges. The insufficient reliability of data, and the lack of a systematic and consistent database for investors and producers to tap into, makes for unnecessary risk.
A dearth of qualified human resources and technical infrastructure, as well as an inadequate supply of auxiliary equipment and services, forces additional costs on power producers.
Complex procedures make it difficult for foreign investors to tap into the market in the first place. Local stakeholders are also unclear about the rules, leading to subjective interpretation and application of national regulations at the provincial level.
The Vietnamese government has indicated it will review and update the buying price, but investors are still waiting. Local groups have proposed an FiT of US$0.095/kWh, while the German Agency of International Cooperation (GIZ) states that US$0.098/kWh for mainland farms and US$0.112/kWh for offshore projects is about as low as is commercially viable. Such an increase will help offset the risks detailed above and get more turbines spinning around the country.
Too good to miss
Even as foreign investors wait for news on pricing some have already taken the plunge. Seven months after it was first proposed, the massive 800 MW Vietnamese Phu Cuong Wind Farm has been officially formalised under a $2 billion Joint Development Agreement between GE Renewable Energy, Mainstream Renewable Power, and local Vietnamese partner, the Phu Cuong Group. Mainstream is also planning two other projects with a combined capacity of 138 MW in the southern province of Binh Thuan.
Deals like these represent progress, albeit slight, on the road to harnessing Vietnam's wind power potential. Clearly, the country's significant potential is enough for some firms to look past the bottlenecks. However, low subsidies are stunting the sector, threatening to turn rich resources and investor interest into hot air. The outlook remains conservative, but even a small upwards adjustment in the power pricing could change that, ensuring that Vietnam's wind power advantages don't go to waste.
Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.
