Towards a Clean Energy Transition in Viet Nam

Since the passage of the Paris Agreement and the adoption of the SDGs, clean energy has fast become a priority item on the global agenda. The push for a green recovery following the COVID-19 pandemic has reinforced this trend. As we enter the ‘decade for delivery’, transitioning to a low-carbon energy system will be critical to achieve climate and development objectives globally. Viet Nam is no exception.

Since rolling out the Doi Moi reforms, Viet Nam has made remarkable progress in the electricity sector. Over the past 3 decades, the country has steadily modernised its electricity infrastructure, with virtually non-existent commercial losses and technical system losses of only 7.5%. However, to sustain current levels of economic growth, Viet Nam will have to nearly double its installed capacity in the next decade—a significant challenge.

The OECD’s Multi-Dimensional Country Review of Viet Nam provides a transdisciplinary analysis of the principal drivers of Vietnamese socio-economic well-being. Among other things, this report explores the various aspects of the energy transition with a view to identify near-term priorities. Drawing on research and in-depth interviews with Vietnamese and international experts, the Review outlines two medium-term priorities to accelerate the transition in Viet Nam: (i) synchronised development of generation and transmission infrastructure; and (ii) lowering the cost of capital for renewables and energy efficiency projects.

A key bottleneck to scaling-up renewables in Viet Nam is the insufficiency of transmission infrastructure. The national grid needs to be both reinforced and expanded to integrate higher shares of variable renewable energy. However, lack of coordinated licensing for new capacity complicates grid planning. This was recently seen in the sudden addition of over 4 GW of solar capacity in June 2019, as developers scrambled to take advantage of an attractive feed-in-tariff before its expiry. To address this challenge, the forthcoming Power Development Plan PDP VIII aims to divide the country into zones and assign zonal capacity quotas. This approach is expected to provide greater clarity and direction for developing transmission infrastructure, although it will be important to address issues such as the allocation of provincial quotas, coordination between provinces within a zone, safeguards to avoid over licensing, and distributional effects.

Another closely linked priority to accelerate renewable deployment is lowering the cost of capital. Viet Nam’s USD 11 billion green credit market is the largest source of finance for domestic clean energy projects. However, loans extended by local banks often carry a high interest rate. The high costs of debt finance can be attributed to a variety of factors including: perceived technology risk; liquidity risk due to absence of secondary market structures; and high prescribed risk weighting for project finance by the Vietnamese central bank, leading to high capital adequacy requirements.

Many investors recognise the opportunity offered by the Vietnamese market. However, a variety of barriers impedes the flow of capital. These include for instance: curtailment[1] of power production at some solar plants; the bankability of the government prescribed power purchase agreement; the absence of government guarantees; and an uncertain policy environment. Diversifying sources of finance for clean energy projects will be crucial to expedite the energy transition. Given the constraints of Viet Nam’s public debt ceiling and a tightening fiscal space, it is critical for the government to mobilise domestic and foreign private capital to meet the investment needs of the economy.

Through its new multi-year Clean Energy Finance and Investment Mobilisation (CEFIM) Programme, the OECD is working with the government of Viet Nam to strengthen clean energy policies to help mobilise domestic and international private capital. A variety of instruments and techniques can be employed by governments to de-risk projects and facilitate private investment. The CEFIM programme is taking a multi-stakeholder approach to develop innovative and effective solutions to increase the private sector’s participation in Viet Nam’s low-carbon energy transition.

[1] Curtailment refers to artificially reducing power production, at a plant, to account for reduced demand from the offtaker. Curtailment can happen due to reduced demand, gird inefficiencies etc.