Renewable energy is typically touted as the solution to climate change and the world’s over-reliance on fossil fuels. In Vietnam, renewables are also a solution to a more localised problem: rising energy demand.
The country has witnessed steady economic growth, with of an annualised rate of 6.9% over the five years prior to the pandemic, according to IMF statistics. This has had a clear knock-on-effect in the form of a rising middle class and household energy consumption. And as one of the few countries to have ridden a wave of economic growth in 2020, it looks ahead to a 6.7% gross domestic product (GDP) expansion in 2021.
In order to keep up with demand, the country will need $150bn in capital investments — half of its GDP — for generation and grid upgrades by 2030, according to a McKinsey report.
In 2015, the Vietnamese government in Hanoi issued a renewable energy strategy until 2030, and a vision for 2050, as a way of stimulating business and diversifying its energy mix, as well as mitigating the effects of climate change. The government started with setting a high-priced solar feed-in-tariff in 2017 and having generated interest and investment from developers, has broadened its sights to both onshore and offshore wind.
Now, Vietnam is aiming to boost wind power generation capacity to 2000MW by 2025 and 6000MW by 2030 — a significant increase from its 2020 target of 800MW.
In 2020, Copenhagen Investment Partners (CIP) struck a deal with the Vietnamese authorities to lead the country’s and Asia’s largest offshore wind project, worth $10bn. Solar feed-in-tariffs are also poised to give way to an auction system in the latest sign that the market is maturing. But in a country where the prerogative is the rising energy demand, not the transition from coal, the next phase of Vietnam’s renewable journey remains an open question.
Greenfield investment announcement tracker fDi Markets recorded 11 renewable projects in Vietnam in 2020 with a capital expenditure of roughly $1.1bn.
For Dave Seibert, deputy head of regional energy, mining and infrastructure at law firm DFDL, the deadline for the first solar feed-in-tariff was the “catalyst” and represented a pivotal moment when “Vietnam and the world realised that Vietnam was serious about deploying renewable energy”.
With the feed-in-tariff set at the high price of 9.35 cents per kilowatt hour, the country welcomed 4500MW of solar energy onto its electricity grid in 2019. Were it not for this deployment, there would not be such an interest in offshore wind now, Mr Seibert says. International sponsors and lenders had previously criticised Vietnam’s power purchase agreement, he says, as potentially being unbanked and would therefore not lead to large deployments of solar. “But the facts speak differently,” he explains.
Minh Khoi Le, a research analyst at Rystad Energy, says the government surpassed its own targets thanks to its high price feed-in-tariffs; the rise of mega-scale photovoltaic (PV) farms, ranging from 350MW to 600MW, followed, particularly in the south-east of the country. The Xuan Thien Ea Sup solar project*, the largest solar plant in south-east Asia with a generating capacity of 600MW, is one such example.
Feed-in-tariffs to auctions
He expects the government will switch to an auction system as the solar industry matures. “We won’t see gigawatt-size installations in the PV space in the next year as there will be a transition period where the auction mechanics will need to be worked out,” he says, adding that Vietnam has found itself “leading this energy transition in the region through its market force, without much of an actual concrete transition push from its government.”
Wind projects, by contrast, are set to continue with feed-in-tariffs until 2023, but the government has slashed its feed-in-tariff to 7.02 US cent per kilowatt hour in what the Global Wind Energy Council (GWEC) calls “one of the most dramatic reductions seen in any wind power market globally to date”.
Ben Backwell, chief executive of GWEC, said in a statement that while Vietnam is set to become the leading wind market in south-east Asia, if the proposed feed-in-tariff (FIT) is implemented, it “would jeopardise long-term development and ultimately result in higher energy prices at a time when the country’s energy demand is soaring”.
Alongside CIP’s $10bn project, other European firms are set to pile into offshore wind in Vietnam. Irish wind and solar developer Mainstream Renewable Power plans to develop a 500MW offshore wind farm off the coast of Ben Tre province in the south of Vietnam in a joint venture with local company Advance Information Technologies. Chief financial officer at Mainstream APAC, Adrian Dempsey, told fDi that the company is exploring other opportunities both onshore and offshore.
Despite all this, the fact remains that solar and wind only occupy 10–15% of the country’s energy mix, according to latest government estimates, which is still weighted towards hydro and fossil fuels.
The Vietnamese Ministry of Industry and Trade issued the draft power development planning VIII in February 2021, which lays out the road map of Vietnam’s power sector development until 2045, with significant increases in renewable energy and gas-fired plants, in contrast to previous plans. The government is now targeting 127GW of renewable capacity by 2045 with solar, onshore wind and offshore wind accounting for 43%, 31% and 17% of this respectively.
Fossil fuels, however, have not been removed from Vietnam’s future, as it plans to increase coal capacity from around 21GW to 50GW by the same period.
“This [target] will be increasingly challenging, as there is a decreasing number of financiers still open to financing coal projects,” Joo Yeow Lee, associate director at data provider IHS Markit, points out.
In February, Japanese trading house Mitsubishi Corp decided to withdraw from the Vinh Tan 3 coal-fired power plant project in Vietnam amid growing international concern about climate change, according to Nikkei Asian Review. Activist Greta Thunberg has also come out and criticised investment into the Vung Ang 2 coal-fired plant.
An interesting example
Rahul Kitchlu, sector leader for infrastructure and coordinator for the energy sector at World Bank Vietnam, advises that in addition to renewable infrastructure support, “parallel programmes should also be developed to support a ‘just transition’ for all from coal” in Vietnam, involving the physical, human and natural capital required to maintain such a socio-economic transformation.
Lucila Arboleya, energy economics and financial analyst at IEA, says that these challenges relating to coal are not unique to Vietnam, and maintains that Vietnam still provides “an interesting example” for other countries in south-east Asia, which accounts for nearly 5% of global energy demand.
Ms Arboleya says it has successfully attracted a lot of capital to the region and now is shifting its attention to upgrading its transmission grid, in line with a trend seen in other emerging economies that have bet on renewables.
It is difficult to predict where it will go, but what is true is that the energy demand is not abating, says Mr Seibert. “I tend to think we’re closer to the beginning of this renewable journey than the middle of it, and certainly not at the tail of it.”
This article first appeared in the April/May print edition of fDi Intelligence. View a digital edition of the magazine here.
*This article has been amended to change the name of south-East Asia's largest solar plant to the Xuan Thien Ea Sup project.