Philippe Le Houérou, CEO of the International Finance Corporation (IFC).
By Philippe Le Houérou
Việt Nam is at a crossroads. Its economic rise has been remarkable, driven by a strong manufacturing base and a young, dynamic labour force. But this rapid growth is contributing to an emerging energy supply crisis that could endanger Việt Nam's economic competitiveness and its ability to share prosperity more widely.
Fortunately, there are practical ways for Việt Nam to address its power needs, while reducing air pollution and carbon emissions – and gaining better value for money from its power investments.
Việt Nam’s demand for power has grown by double digits since 2000, and the government estimates that demand will continue to grow by at least 8 per cent annually to 2030. Meeting this burgeoning need will require installed power capacity to increase from 39 gigawatts in 2015 to 130 gigawatts by 2030. However, many of Việt Nam’s new power projects are behind schedule and the government warns that power shortages could begin as early as next year — the first in nearly a generation.
In response, Việt Nam has begun some load shedding in the southern manufacturing heartland. But electricity shortfalls could still reach 12 million megawatt hours annually by 2023, the equivalent of 8 to 10 per cent of expected industrial power demand.
Việt Nam’s power sector requires an estimated US$8 to $12 billion annually until 2030 to service the increasing demand. The country’s financing model for power has traditionally relied on public investments, often funded by concessional financing and commercial loans backed by government guarantees. This is no longer feasible as Việt Nam is approaching its sovereign debt ceiling of 65 per cent of gross domestic product and its newfound status as a middle-income country has limited its access to lower-cost donor funding.
Việt Nam is also one of the most vulnerable countries in the world to the impacts of climate change. Yet, plans to build 42 gigawatts of coal-fired power plants by 2030 will add to air pollution and make it more difficult for the country to meet its emissions reduction target under the Paris climate agreement.
So, there is a clear case for Việt Nam meeting its energy needs in a quick, clean, sustainable, and affordable way. Renewable energy is the quickest way for Việt Nam to add new power capacity. It does not create local pollution and, if done right, it is more cost effective than using fossil fuels.
The government has already declared renewables to be part of its energy mix, with plans to add 18 gigawatts of solar and wind power by 2030. This is a good start.
Tariff incentives for renewables offered over the last 18 months resulted in more than 4 gigawatts of solar photovoltaic and wind power being built through June 2019. This included Việt Nam’s first grid-connected solar project by Gia Lai Electricity Joint Stock Company, backed by an investment from the International Finance Corporation (IFC), a member of the World Bank Group and the largest global development institution focused on private sector solutions in emerging markets.
But Việt Nam needs better value for money from its renewable energy projects. By adopting simple, common, and internationally accepted contractual standards in power-purchase agreements for renewables, Việt Nam could attract much more renewable power at lower prices — even lower than the cost of coal-fired power. And importantly, this could be done without adding to the country’s debt.
At IFC, we estimate that by making these simple contractual changes, Việt Nam could have obtained a quarter to a third more power for the same total yearly electricity bill that it needs to pay for this first wave of renewable projects. That is at least 1.5 to 2 million additional megawatt hours per year, a considerable boost for the power-starved country. And by procuring projects in a competitive manner, as done in many countries, even better value for money can be obtained.
There is no shortage of interest from the private sector to help Việt Nam bridge its energy gap. And with the right policy reforms in place, IFC stands ready to finance and mobilise up to $1 billion to support renewable energy in Việt Nam over the next two to three years, and more as the country ramps up its installed capacity. The World Bank Group can also help Việt Nam with advice and investment to strengthen its transmission grid to handle these large increases in renewable (and other) generation capacity.
But renewables alone are not enough. Việt Nam needs to be able to draw on other cost-effective primary energy sources, including to manage the intermittency of renewables. Gas is an important bridge to a low-carbon future and a more flexible and less polluting alternative to high-carbon coal. In the face of declining domestic gas reserves, this means importing liquefied natural gas (LNG). IFC has helped countries like Brazil, Panama, and Bangladesh with LNG projects, and we are also keen to support Việt Nam.
It is also important to cut demand through energy efficiency. IFC is supporting that effort with our EDGE green building program that makes it faster, easier, and more affordable than ever to build green. In Viet Nam, EDGE-certified buildings are saving annually about 12,000 megawatt hours of electricity and delivering nearly $1.4 million in savings for people’s utility costs.
Access to quick, clean, and lower-carbon sources of power at attractive prices is vital for Viet Nam to remain competitive economically. Through a few – but key – policy reforms, Viet Nam can access cleaner power at a lower cost — helping to write the next chapter in the nation’s inspiring economic rise. — VNS