WB helps Vietnam reduce use of coal, mobilize funding for clean power

Between now to 2030, Vietnam needs to raise another US$150 billion for its power sector.

The World Bank has drawn out ways to support Vietnam in raising private finance for power generation and cut the use of coal in the future.Ousmane Dione, country director of the World Bank in Vietnam, made the statement at the 2nd High Level Meeting of the Vietnam Energy Partnership Group (VEPG) on the sustainable energy future for Vietnam on November 26.

Ousmane Dione, country director of the World Bank in Vietnam.

Vietnam – a global success story in developing the power sector

Vietnam has been a global success story in developing the power sector over the last few decades, Ousmane said. The success of the power sector has been a key contributor to Vietnam’s socio-economic development and the country’s high and sustained economic growth, excellent performance in terms of poverty reduction and well-being of its citizens.

The WB director highlighted two areas on the success story, one is on rural electrification and the other on power sector reform.

On rural electrification, Vietnam’s access rate increased from 14 percent in 1993 to over 99 percent in 2018. Over that 25-year period, more than 14 million households or 60 million people have been connected to the grid.

The financing requirements of the sector have been huge. Only since 2010, the sector invested about US$80 billion in generation, transmission and distribution and between now to 2030 another US$150 billion needs to be raised.

Electricity consumption remains comparatively low in international standards. For example, per capita electricity consumption is currently about 1,700-kilowatt hour a year – which is one third of China or one fifth of Australia. As the economy continues to grow strongly and as the Vietnamese become more affluent, electricity demand will continue to grow at about 8 percent per year for the next decade.

Electricity tariffs remain below full cost recovery levels and EVN does not receive direct subsidies from the government. He stressed that EVN and the sector have been highly effective and efficient using ODA funds.

On power sector reform, about a decade ago the government set out a clear roadmap for implementing competition and restructuring the sector. The motivation was to move from a vertically integrated monopolistic market structure to a fully competitive power market.

The Government needs to be complemented to continue to be fully committed to introduce a competitive power market. We are half way through implementation and by 2020 the wholesale electricity market will be fully operational. Experience with market liberalization have been positive to date contributing to a well-run power sector public utility EVN, which is technically and operationally sound, but also allowing private sector participation in generation.

Development partners have contributed to that success story. International finance institutions and bilateral donors have provided technical assistance and financing over the last two decades to support the Government on the rural electrification agenda, upgrade and expand vital transmission and distribution networks, develop public and private power generation projects and support the electricity and gas sector reform and restructuring agenda.

Challenges

The challenges the power sector needs to overcome over the next two decades are substantial to ensure it achieves its goals to provide sustainable, clean, affordable and reliable power supply to the people of Vietnam, the WB director noted.

One key question is how to meet future energy demand, while also complying with Government’s objectives to reduce greenhouse gas emissions and meet its climate change targets. That refers to the contentious issue on the role of coal in the future energy mix.

Another challenge is how to mobilize the large investment requirements, estimated at around US$8 billion annually to meet fast growing power demand. EVN and the public sector cannot raise those funds and private sector, both domestic and international, will need to play a more prominent role in power sector financing.

WB offers help

To tackle those two key challenges, the World Bank’s strategic energy engagement in Vietnam centers around two initiatives, Ousmane Dione said.

First, on the Energy Transition, the bank supports the Government to identify and implement technically, financially and socially sound solutions to reduce the future use of coal, primarily for power generation.

While there are no quick fixes or a silver bullet to tackle the coal challenge, Ousmane said there are four central activities that need to be implemented in parallel by the Government to reduce coal update for power generation. They are scaling up renewables (especially wind and solar); promoting natural gas and LNG; increasing energy efficiency investments; and promoting regional power trade, especially with Laos and Southern China.

Second, the public sector and ODA financing will not be sufficient to meet the power sector’s huge investment requirements. Hence, under the Bank’s Maximizing Finance for Development (MFD) Initiative, the WB is supporting the Government to find and implement solutions to bring in more private and commercial financing for the energy sector.

This MFD initiative is particularly relevant in the context of Vietnam’s recent IDA graduation and sovereign borrowing constraints due to the Government’s debt ceiling policy.

Three key pillars need to be tackled to mobilize more private and commercial finance in the power sector:

i. Developing and launching a competitive independent power producer (IPP) program in power generation as part of developing Power Sector Development Plan 8 with a contractual framework that attracts both international and domestic investment at scale;

ii. Preparing electricity and gas SOEs to access commercial finance through credit ratings and non-sovereign bond issuance;

iii. Supporting banking and capital market reforms to improve availability of local currency finance which is critical for both project and corporate finance for energy investment projects.

“We stand ready to support the Government on the Energy Transition and Maximizing Finance for Development agenda and coordinate with the VEPG on key policy engagements,” the WB director for Vietnam stressed.