Carbon Tracker’s recent trip to Vietnam – what we learnt and what’s next

Key findings:

1. Renewables have the potential to become the least-cost option for Vietnam to meet its energy needs. Amongst all the noise about the implications of the Paris Agreement, Vietnamese policymakers have two core priorities: provide cheap energy and use this energy to build out the nation’s capital stock. Any policy that gets in the way of these priorities will likely be marginalised or rejected. The challenge for policymakers is how to provide least-cost electricity while also keeping debt within the ceiling of 65% of GDP and managing socio-economic priorities, such as strengthening commodity-price security? After the roadshow we are more optimistic on the potential of renewable energy. During a panel discussion at the Global Wind Energy Council conference one panel participant stated they would take a price 35% below the current tariff if the government amended the power purchase agreement. Presuming this statement is true, the cost of onshore wind has the potential to be around $55/MWh or over 10% below the cost of new coal today (based on a levelised cost of energy analysis from Bloomberg NEF).
2. Policymakers could help overcome curtailment concerns and attract low cost capital with improved data transparency. Energy infrastructure is not the only reason why regional and international investors are interested in Vietnam. Vietnam stands to benefit from the so called ‘tariff war’ between the US and China. As capital surges towards Vietnam’s low-cost manufacturing base, policymakers can leverage this interest to get the best possible financing terms for energy. While this is a smart negotiating tactic, policymakers also need to focus on greater data transparency. Transparency is essential for the creation of efficient, liquid and competitive power markets. It is also critical for creating a level playing field between participants and avoiding the scope for market power to be abused. This is a particularly sensitive issue for renewables originators in Vietnam as (i) EVN is a vertically integrated utility, meaning it often has little incentive to be more transparent; and (ii) power demand is increasing rapidly and therefore the reliability of grid infrastructure could be changing as a consequence.
3. If Vietnam remains committed to coal-fired power, EVN’s finances could become a proxy for the nation’s fiscal health. If Vietnamese policymakers remain committed to coal power the nation will be forced to make a difficult decision: increase debt and taxes to subsidise electricity prices or undermine economic competitiveness through higher electricity prices. This situation is particularly challenging for policymakers in Vietnam as debt as a percentage of GDP is reaching the ceiling of 65% and end consumers already receive subsidised electricity (which is why EVN’s operating cashflow has historically been negative). In our below 2-degree scenario, where coal capacity is forced to shut-down in a manner consistent with the temperature goal in the Paris Agreement, the operating cashflow of Vietnam’s coal generation could decline by $6.5 bn relative to a ‘business as usual’ scenario. This figure only includes operating capacity and capacity under construction. Vietnam also has 32 GW of planned coal capacity which, assuming a capital cost of $1,400/kW, could have an overnight investment cost of over $40 bn. For this reason, if the Vietnamese government continues to incentivise new coal, EVN’s finances could become a proxy for understanding the nation’s fiscal health. A similar situation has already emerged in South Africa.
4. Next steps: data transparency and least cost analysis. The intention of Here Comes the Sun (and Wind) was threefold: start a conversation about the economic potential of renewable energy, showcase our data and build a rapport with local experts. Due to the nature of power supply and demand, our levelised and marginal cost analysis is indicative of a wider mega trend eclipsing power markets globally. As such, we now need to prove unequivocally that coal will become a net-liability to the end consumer, and therefore the financial and economic interests of Vietnam. Through data transparency, Carbon Tracker, in close collaboration with Green Innovation and Development Centre (Green ID), aims to showcase the economic opportunities of renewables and the financial risks of coal. In doing so, we hope to help the government minimise the fiscal liabilities associated with stranded coal assets and ensure the Vietnamese people get access to the cheapest energy possible.

Carbon Tracker would like to thank our local partner, GreenID, as well as the British Embassy for their help and guidance during our time in Vietnam.

Regards,

Matt Gray
Head of Power & Utilities