Vietnam Energy Transition
What the past decade has taught us
Introduction
On May 23rd, Vietnam’s Prime Minister Pham Minh Chinh approved the long-delayed and awaited Power Development Plan VIII (PDP8). This is the main piece of legislation that will guide the national energy policy for the rest of this decade and beyond. With this approval, the government and the industry can move to the implementation phase to turn the ambitious targets of energy transition and net-zero commitment into reality.
However, before discussing the details of this ambitious plan and the HUGE challenges ahead, it is important to understand the energy market dynamics in Vietnam. The best way to do that is to look back at its national strategy in the past decade.
Context
Since 1990, with the end of the US embargo and the start of a more open market, Vietnam has experienced swift economic growth of around 10% each year. The country passed the middle-income country threshold in 2011. Its natural resource is pivotal in this impressive achievement, especially in the power sector. To catch up with the GDP growth, the yearly electricity demand also grows by 10% on average, making Vietnam one of the most energy-intensive countries in the world.
This characteristic of the economy raises serious concerns about whether Vietnam can sustain its growth rate in the new era with scarcer resources, rising energy prices, and restricted access to fossil fuels. The past decade can give us a glimpse of the ever-changing market dynamics of the country. It can be split into three periods:
- Before 2014: The golden age of hydroelectricity.
- 2014–2018: The coal dominance.
- 2018-now: The rise of renewable energy.
Before 2014: Water is power
This might come as a surprise, but historically Vietnam had a very high share of low-carbon sources in its electricity mix, thanks to its extensive network of hydropower plants on the many rivers across the country.
During the rainy seasons, hydropower plants were prioritized to mobilize first, then came the coal-fired power plants and gas turbines to cover the load curve. In contrast, in the dry seasons, hydropower plants lacked water to function at their highest capacity. Thus, the other electricity sources played a bigger role in supplying electricity to the loads.
The biggest advantage of the power system at that time was that the cost of electricity generation was very cheap thanks to hydropower. This is the reason why it was historically the preferred energy source choice in Vietnam.
2014–2018: The brown growth
By 2014, over 300 hydropower plants were operating across the country. Large capacity projects were almost fully exploited. At the same time, the consequences of climate change on the hydrological regime started to impact the reliability of this electricity source.
During this period, coal-fired plants emerged as a financially attractive choice for the government to keep up with the ever-increasing energy demand. Investors in the region poured huge amounts of money into coal projects in Vietnam. The governments of Japan, South Korea, and China, via their export credit agencies and policy banks, have facilitated state-guaranteed credits to these projects to support their equipment suppliers and contractors.
Coal contribution to the electricity mix raised quickly from around 20% to nearly 50% in 2018, replacing hydropower to be the main electricity source.
The Power Development Plan VII (the one before the PDP VIII that was approved this month) had coal capacity at the center of the national energy strategy, estimated at 55 GW by 2030. This would account for over 40% of the system’s total capacity in the 2020–2030 period, while hydropower share decreases significantly to around 20% in 2030. Vietnam seemed to set itself on an unfortunate path of heavy carbon dependency for the next decades.
2018-now: The (re)new(able) kid on the block
The end of the 2010s marks some important turns of events in Asia. China, South Korea, and Japan, the world’s largest funders of overseas coal-based energy, respectively announced commitments to reduce these types of investment.
With the withdrawal of these major lenders, the future of several high-profile projects in Vietnam was in limbo. Today, some of them are still looking for investors to resume construction, while others were already canceled.
The government sensed the rising risk of a lack of funding for future coal projects and this time decided to bet on green investment instead.
Their first target was solar power. Despite its excellent potential, this resource has not been focused on in the past due to the high cost compared to hydropower or coal. In 2011, solar power's levelized cost (LCOE) was 0.15 $/kWh, much higher than coal's (0.06$/kWh). However, with technological advancement and supply chain expansion, the cost of solar power production has driven down rapidly to 0.05$/kWh in 2018, making this type of renewable energy much more competitive.
In order to encourage solar power development, the government proposed a Feed-in-Tariff (FIT) of 0.09 $/kWh for 20 years, provided that the power plant must be connected to the electricity grid before June 30, 2019. This policy was met with unparalleled responses: by the end of the deadline, 82 solar power plants were commissioned with a total capacity of 4464 MW.
The year after, another FIT was proposed for solar farms and especially rooftop solar panels. In total, over 100 000 rooftop solar PV systems were installed in Vietnam in 2019 and 2020, creating a 25-fold increase in its solar generating capacity in just one year, an extraordinary achievement.
Wind energy soon followed the same path. By connecting about 4 GW of wind power into the grid only in 2021, the total installed capacity of renewable energy sources in Vietnam accounts for 28% of the total energy mix (22 GW/78 GW).
In the lapse of 3 years, Vietnam has emerged as the leader in South East Asia's solar and wind electricity adoption. The country overtook Thailand and had the region's largest installed solar and wind capacity. In general, the increase in the solar plus wind share of the electricity mix in Vietnam in recent years is much faster than that achieved in the broader Asia-Pacific region or the world as a whole.
It’s not all sunshine and roses (and wind)
Although the rapid increase of renewable energy in the system is a very positive sign, a major issue in Vietnam is the inadequacy of its transmission grid.
The massive development of projects concentrated in some provinces has caused periodic grid overload in the area. A study showed that existing transmission could integrate up to 3.3 GW of variable renewable energy in southern Vietnam, but that additional power would require upgrades to transmission lines and transformers. The recent expansion of solar and wind is closer to 22 GW, significantly outpacing the grid’s ability to absorb the new power. Traditional energy sources have been reduced to the technical limit to overcome this situation, but electricity output is still redundant.
Consequently, about 365 GWh of solar output was curtailed in 2020 to ensure the power system’s supply-demand balance. This represents a significant loss of income for the investors of the power plants and also discourages new project investment.
Conclusion
In this article, we have followed the transition journey of Vietnam’s power system in the period of 2011–2021. It has been a decade of radical changes as the country reached the potential limit of hydropower, moved on to coal, ran into financial restrictions from the investors, then found another (better) alternative in renewable energy.
There are two main observations:
- As a low-middle-income country, the motivation behind each transition is predominantly the financial aspect: the government needs to attract international investment in order to keep scaling up the economy. Thus western policy regarding fossil fuels will have a huge indirect impact on Vietnam’s energy strategy. For example, the EU has just recently passed a new law called “Carbon Border Adjustment Mechanism” (CBAM), with the goal of putting a fair price on the carbon emitted during the production of goods entering the EU. To keep being an attractive manufacturing destination for international brands, Vietnam will have to provide these factories with clean energy.
- Domestic and international players respond very quickly to the government's policy if they deem the opportunities promising financially. The FITs have been a huge success.
Finally, we should not lose sight of the big picture: fossil fuels (coal and gas) still dominate the economy.
The recent policies for renewable energy have attracted powerful responses from businesses and enabled the industry's rapid development. However, is that enough to phase out fossil fuels? We will look into that big question in the next article.
