Foreign investors’ position on energy pricing and supply in Viet Nam

Source: http://www.eurochamvn.org

 

Supported through the European Chamber of Commerce in Vietnam (EuroCham) via its Green Growth Sector Committee (EuroCham GGSC), the International Institute for Sustainable Development (IISD) has recently completed a study to determine the position of foreign direct investors toward energy pricing and supply policy in Viet Nam.  


The study assesses also the impact of the current energy policy on Viet Nam`s competitiveness. The results provide policymakers with data and information so as to allow the Vietnamese Government to develop an energy policy that reflects the needs and concerns of this important constituency. The study results from an in-depth consultation with the foreign business community in 3 January workshops, along with a survey of 150 firms and has been performed in partnership with the United Kingdom’s Foreign and Commonwealth Office – Vietnam, the Vietnam Business Forum (VBF) and the Central Institute for Economic Management.

 

The primary research presented above provides significant new information which has a number of clear, important implications for Vietnamese energy policy. Based on the findings, EuroCham Green Growth Sector Committee is strengthened in its approach towards a sustainable energy supply in Vietnam. A Green Growth Investment Conference will be held on 18th June 2015 at the Intercontinental Asiana Saigon to further deepen the stakeholder dialogue, showcase successful projects and the way to their practical implementation, respectively address existing obstacles.

 

The key policy implications of the foregoing study are outlined in five key points:


  1. Viet Nam’s ability to attract FDI is NOT based on low energy prices.Stakeholder analysis and survey results indicate that firms do not typically invest in Viet Nam as a result of the fact that energy prices have been historically low. In fact, firms ranked the state of power prices to be the least important factor of ten factors in their decision to invest in Vietnam. Much more important in their investment decisions were other drivers such as the cost and availability of skilled labour, domestic market conditions and government development policy. When asked to rank the importance of energy prices as a driver for investment decisions (on an increasing scale of 1-10), 72 per cent of firms indicated a score of 5 or less.
  2. On the whole, foreign investors are not seriously concerned about the prospect of gradually higher power prices. This is likely partly to do with the fact that firms spend relatively little on electricity. The study found that 90 per cent of foreign firms across all sectors spend less than 10 per cent of total operating costs on electricity, with 60 per cent of firms spending less than 5 per cent. The majority of firms indicated that they would be willing to bear sustained nominal annual power prices increases of 15 per cent or more before reconsidering future investment, and more than 65 per cent of firms were willing to bear sustained price rises of more than 10 per cent per annum. 
  3. Based on these findings, the Vietnamese government should be more ambitious in raising the price that large industrial consumers pay for power. Firstly, firms have clearly indicated that energy prices are not a key driver of foreign investment in Viet Nam. Secondly, as presented throughout this report, firms have also shown a willingness to accept higher power prices over time as a key means of enhancing the functioning of Vietnam’s electricity sector. This provides space for the Vietnamese Government to be more determined in moving towards charging large industrial users the full cost of power, without being concerned that by doing so they will cause a significant adverse investment response from multinationals.
  4. Firms are very concerned by the inadequacy of power supply and the prospects for diminishing supply reliability, considerably more so than by the prospect of higher power prices.Sixty-five per cent of firms indicated that they were either rather unsatisfied or not satisfied at all with power infrastructure and supply. Two-thirds of firms who disclosed information said that they used back-up generation either ‘sometimes’ or ‘often’. Further, a large majority (73 per cent) of firms said that the unreliability of power supply was more damaging to Vietnamese investment competitiveness than the prospect of higher power prices over time. Ensuring adequate power supply should therefore be the key priority of Vietnamese energy policy, along with a long-term movement towards greener modes of electricity generation. This, however, will only take place with higher tariffs for grid electricity (to increasingly provide investment capital to EVN), higher PPAs to encourage new private sector BOTs, and a legal framework for investment thatmakes the latter – especially for renewables – possible.
  5. There is significant space (and necessity) for the private-sector solutions to Viet Nam’s power supply needs. Given both the current inefficiency of the energy market and the difficulty of EVN in allocating investment capital, private sector investment will likely need to play an increasingly important role in securing adequate electricity supply in Viet Nam over time. Renewable generation, in particular, is well-placed to meet growing energy needs due to its scalability over short time frames, with wind power being particularly promising given the extensive pipeline (4.4 GW) of registered projects and existing (although currently inadequate) government support policy. Again, however, this will require higher grid tariffs, higher PPAs to encourage new private sector investments, and a new enabling legal framework for investment. Working towards these three outcomes should be a priority for government.

 

EuroCham Green Growth Sector Committee is engaged in a dialogue with the relevant Ministries and ODA organizations, jointly with the Vietnam Business Forum (VBF) and other partners to tackle the above mentioned issues, implement a power pricing roadmap and achieve progress towards private sector investment in the clean and sustainable energy sector.

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