Vietnam: The World Bank Report On Retail Tariff Increase Solutions To Recover Electricity Of Vietnam

Last Updated: 13 May 2016
Article by Oliver Massmann

For the past few years, Vietnam has made the transition from a predominantly agricultural to a mixed economy with substantial development of commercial and industrial activities. Rapid growth in population and improvements in living standards together with the Government's effort to improve access to electricity throughout the country have led to growing increase in the demand for electricity. This now poses a major challenge for Vietnam to maintain sustained growth of the power sector and to achieve energy security. Meanwhile, Vietnam's electricity demand continues growing at double-digit number. Electricity infrastructure capacity is limited, operation of certain power projects has been delayed, and private investors are reluctant to invest in the sector due to their concern of low rates of return on equity and low feed-in-tariff. These factors, among others, have left the Electricity of Vietnam (EVN) with no option but to increase debts to cover its operation needs. This article studies and proposes some solutions to improve EVN's operation in the coming years.

Current situation of the Vietnam's power market
As of December 31, 2015, the total generation capacity in Vietnam's interconnected power system was 141.34 billion kWh, an increase of 11.6% compared to 2014. During the period of 2011-2015, electricity generation output increases by 11%/ year on average. Meanwhile, according to World Bank's report in 2014, Vietnam is one of the most energy intensive economies in the world, and more energy intensive than other countries in the Southeast Asia at the same level of development.[1] Electricity demand has grown at a rapid pace averaging 15% per year from 2008 to 2010 before dropping to 9% in 2011 due to the macroeconomic situation.[2] Electricity demand is expected to be twice as much as GDP growth between 2014 and 2020. The Power Development Plan VII (PDP VII) projects a strong increase in power demand to 2030.[3]

Amended PDP VII sets the target of electricity output in 2020 to be 235 -245 billion kWh, 352 – 379 billion kWh in 2025 and 506 – 559 billion kWh in 2030. In this amended PDP VII, in 2020, the targeted total capacity of power plants is 60,000 MW, in which electricity output from renewable energy sources will account for 9.9%. These numbers in 2025 will be 96,500 MW and 12.5% respectively. In 2030, a target of 129,500 MW being the total capacity of power plants and 21% of electricity output generated from renewable energy sources is also set.

Total investment in the power sector was US$2.6 billion in 2012 and slightly increased in 2013. This is relatively small compared to the investment requirements of about US$7.5 billion per year. Meanwhile, the Vietnam Government as well as state-owned enterprises in the sector is unlikely to invest more due to prohibition from investing in non-core businesses by state-owned enterprises. In addition, the total investment cost from 2014-2020 corresponding to the capacity requirements totals US$53 billion. Thus, most of the expected total investment during 2014- 2020, which is of about US$25 billion should come from private sector. EVN will then still need a substantial investment program, which is hard to be financed until 2020.

The role of EVN in the power market and its financial problems

EVN and its subsidiaries play a vital role in the power sector. Key activities of the subsidiaries are generation, transmission and distribution. EVN acts as the only off-taker from the generators. It incurred significant financial losses in both 2010 and 2011.

EVN's operation results in 2012 were much better, from a loss of 12% of income in 2011 to a profit of 14% of income. The profitable results maintained in 2013, although the result in 2013 was not as good as in 2012 and investment was still far below the level of needs. EVN has also had a high and rising level of borrowing in foreign currency. EVN is in a total debt of VND86 trillion in 2007, increasing to VND284 trillion in 2013. Total debt is expected to increase from US$14.6 billion in 2014 to US$28.2 billion in 2020.

The reasons behind EVN's unstable, inefficient and risky operation are largely beyond EVN's control. In particular, we have to name hydrology, substantial devaluation in the Vietnamese dong against EVN's major borrowing currencies, lack of strong Government's commitments in adopting tariffs to cover full cost of power provision as main challenges to the power sector in general and EVN in particular.
In contrast, EVN's subsidiaries in generation, transmission and distribution have a quite strong operational performance and are well managed. However, low tariffs and low level of equity have put them under considerable financial constraints.

These financial and investment challenges could be solved by appropriate actions from EVN, the Ministry of Industry and Trade – the parent ministry and the private sector. In the worst scenario that EVN could not fulfil its financial obligations, the Ministry of Finance – the guarantor of EVN's loans must bear the payment responsibility for the loans, resulting in possible decrease in investment and increased levels of supply interruption accordingly.

EVN is not under immediate threat of insolvency. However, if the current delay in payment to its fuel suppliers due to a prolonged delay in increasing tariffs and a series of years with low rainfall continue, EVN could be placed under a much more serious financial pressure. Where its liabilities exceed its assets, insolvency is unavoidable.

EVN's challenges and solutions

Challenges Solutions
Achieving sufficient level of private investment in the power sector to meet investment needs (1) Improving regulations on guarantees on the remittance of funds, licensing procedures, project appraisal mechanisms, negotiation process with EVN and reducing the numbers of required permits as much as possible;
(2) Maintaining dialogue with private sector;
(3) Improving the MOIT's capacity to manage IPP projects; and
(4) Divesting GENCOs.
Addressing the current low retail tariffs to enable EVN to improve the electricity system, which in turn improves the reliability of power supply (1) Setting PPAs in line with international standards;
(2) Allowing market prices for new generation investment;
(3) Amending current regulations to attract more private investment; and
(4) Carrying out electricity tariff adjustments to the extent necessary. The tariff adjustment path should be phased over the next 3-4 years (about 40% in total) so that EVN could achieve full cost recovery and financial stability by 2018.
Improving operational efficiency at EVN (1) Appointing a senior EVN leader to coordinate among ministries and agencies to move the financial recovery plan forward;
(2) Better technical management by (i) maintaining a reasonable number of working staff to improve labor productivity; (ii) making use of older coal plants during poor rainfall season and efficiently managing capital program; (iii) enhancing service quality;
(3) Fully unbundling EVN into independent companies;
(4) Disposing non-core assets and focusing only on core business;
(5) Rehabilitating assets; and
(6) Improving governance.
Enhancing EVN's capacity to manage financing risks (1) Increasing revenues arising from the implementation of cost-based tariffs;
(2) Negotiating with lenders to extend the loan terms;
(3) Establishing a stabilization fund to manage the risks that EVN faces; and
(4) Reducing foreign exchange risks.
We note that these above recommendations are not mutually exclusive. In other words, implementation of any single recommendation could facilitate the implementation and effectiveness of the others. Moreover, these recommendations are not exhausted considering the on-going changes in Government policies and power market situation.

Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.

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