Vietnam: Power and Energy– Outlook on the European Union Vietnam Free Trade Agreement (EVFTA)

Vietnam has expressed its commitment to turn to clean and green energy while prioritizing domestic energy in respect with social, economic and energy security goals. The increasing demand of energy is pressuring Vietnam into developing local resources which requires attracting private investment.

Up to now, Vietnam is not self-sufficient to provide the energy corresponding to local demand.  Therefore, in order to reach energy efficiency, Vietnam must put in place a double action: developing the local sector thanks to private investment, and set up management tools to reduce electricity waste by users.

A report issued by the "Made in Vietnam Energy Plan" commission, concludes that Vietnam can continue using indigenous energy resources (gas, coal, hydro, oil, wind, solar) until a future green energy is developed.  As the fire-coaled sector is expected to be revived, renewal of coal power plants would slow down the air quality deterioration caused by older mega-power coal plants. Yet, other measures could be initiated by the Government.

Encouraging natural gas energy

Vietnam is endowed with natural gas whose use should be preferred to coal use. Indeed, natural gas is a more flexible, cheaper and cleaner fuel than coal. Pursuant to many international agreements encouraging green energy development, Vietnam will be more likely to find financing for renewable energy sector than for coal-fired one.

Investment in exploitation of natural gas should be greatly encouraged as it follows international treaties and is a good economic and environmental opportunity. The Government should then prepare policy and regulatory framework to further enhance foreign and local investment, technology and experience sharing, and to develop successful markets.

Furthermore, development of offshore gas-to-power appears to be another beneficial and economical alternative to imported coal. Not only the cost of natural gas exploitation is less expensive than the cost of clean coal import or production considering taxes and royalties related to gas pricing, but it would also attract more investors. In addition, it would release the State from heavy expenses since the International Monetary Fund estimated that health and environmental costs, with the current energy development plan relying on coal, would reach US$15 billion annually by 2030.

Developing Power Purchase Agreements (PPAs)

The German Agency for International Co-operation issued recommendations regarding wind and solar power purchase agreements (PPAs) for renewable energy. They include specific evaluation of costs and tariffs for PPAs to be more bankable. Ensuring their implementation is greatly encouraged to favor a lasting and sustainable development.

Companies which made public commitment to use renewable energy and any other large power consumer should be entitled to sign Direct Power Purchase Agreements (DPPAs) with power suppliers. We find for instance in the cases of Nike, Coca-Cola, Apple, Google etc., Vietnamese legislation does not allow DPPA. By changing this policy, there will be more foreign investment in the value supply chain of green energy.

Controlling electricity use and reducing energy waste

Through a more efficient use of electricity and reduction of energy waste, Vietnam would be considered a competitive and viable alternative for foreign direct investment. Granting tax incentives for individual households and businesses that reduce their energy use, encouraging solar or wind or any other renewable energy, would depressurize the distribution system and educate users.

Development of waste to energy system in local communities would allow a dual benefit: improve health and hygiene as well as increase power supply and facilitate its distribution. The carbon emissions would be automatically diminished.

Establishment of a Power Price Roadmap using market based pricing with variable pricing considering residential, commercial or industrial use, should prevail. A belief that energy price will remain subsidized by the Government supplants any efforts to promote energy efficiency investment and innovation.  Then, knowledge of energy cost may induce consumers and investors to get more efficient equipment and processes.

Recommendations for Government's regulations

In order to help the Vietnamese Government reach environmental goals, credit enhancement of the state-owned enterprise Electricity of Vietnam (EVN) should be developed. Guaranteeing that EVN will pay for renewable power supplies by increasing international donors will help ensure the projects' feasibility and encourage investment.

A more sustainable plan can be implemented if enacted with proper policy and regulatory framework. The main recommendation to secure a greener future environment is to lower the part of coal power plants in the power development plan to 2030.

A flexible plan could be established to adjust the future demand and to stop the risk of a higher or lower demand than estimated. This plan should attract more foreign and local sources of investment and reduce reliability on foreign governments. However, establishing mandatory energy efficiencies and construction requirements for housing, office or retail development would also educate and have a positive impact on the renewable energy sector.

Outlook on the EVFTA

The EVFTA signed on December 2nd 2015 is expected to enter into force by January 2018. Relations between Vietnam and the EU will be greatly intensified, especially since Vietnam is the 2nd to sign such an agreement with the EU after Singapore, which does not compete in the same fields. Many investors will flow from the EU to Vietnam and bring new technologies and techniques.

A chapter in the EVFTA is dedicated to sustainable development and we can expect that the EU, a firm defender of green and clean energy, will influence Vietnam to review its power development plan in a foreseeable future.

Most important issues

– The coal-fired sector is to be revived according to the power development plan whereas cleaner and more economical alternatives are open to Vietnam.

– The International Monetary Fund has estimated that US$15 billion would be dedicated annually to health and hygiene costs. Air purification or stopping air quality deterioration is an issue to be solved urgently and threatened by the revival of coal energy.

– Allowing DPPAs would boost investment and innovation in green energy sector and depressurize the distribution system.

– Educating suppliers, users and investors through Power Price Roadmap, waste-to-energy system and tax incentives is the most effective way to ensure high observance of the Government's measures regarding environment.

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.

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