Potential of Wind Energy Industry in Vietnam
Vietnam has a
significant potential for wind energy with an average wind speed of more than
6m/s, surpassing that of all neighbouring Southeast Asian countries. With more
than 3,000 km coastline and plenty of islands, the total potential of wind
energy in Vietnam is estimated to be as high as 713,000 MW – 510,000 MW on land
and 203,000 MW in islands. In comparison, this is 200 times more than the
production volume of the largest hydropower plant, Son La (Vietnam), in
Southeast Asia and 10 times larger than the projected total capacity of the
electricity industry in 2020.
Since the electricity demand in Vietnam is
forecasted to increase by up to 14.2 pct. annually for the 2011-2015 period and
11.4 pct. for the 2016-2020 period[1],
and the electricity demand is expected to increase 7 times to 800
billion Kwh in 2030, Vietnam will then have to invest in energy sources to meet
this big demand. Such investment is vital given Vietnam’s expected dependence
on imported coal, one of their primary resources for electricity production, by
2015. Additionally, hydroelectric
energy is quite abundant in Vietnam but poses certain underlying risks.
Therefore, Vietnam will have no choice for power development other than renewable
energy in general and wind energy in
particular.
Government’s Policy On Development Of Renewable Energy
The important
role of renewable energy in general and wind energy in particular is recognized
by Vietnamese government and reflected in the Master plan VII about energy
development in Vietnam. The renewable energy is increasingly accounting for
power sources (4.5% in 2020 and 6.0% in 2030 of the total power supply). The
Master plan VII sets the renewable energy target rate at 5.6 pct. of total
primary energy consumption by 2020 and 9.4 pct. by 2030. The Government’s
target is to increase the wind power to 1,000 MW (0.7 pct. of electricity
production) by 2020 and 6,200 MW (2.4 pct.) by 2030.
Moreover, as
the energy prices in Vietnam are not very high, there are many incentives and
preferential treatment offered by the Vietnamese Government to the wind power
industry. Decision 37 offers the following incentives and preferential
treatment in terms of funding, tax and fee to wind energy project as follows:
i.
Funding: The investor
can raise funds in different forms permitted by relevant laws from individuals
and organizations in and out of the country and may have access to State credit
for investment pursuant to the laws.
ii.
Tariff: The investor
is exempted from tariff on goods imported to create fixed assets and goods used
as raw materials, input or semi-finished products that are not available at
home for the project’s operation in line with the Law on Import and Export
Duties[2],
Law on Tax Mangagement[3]
and other relevant regulations on export and import duties.
iii.
Corporate
income tax: Wind power projects enjoy the same preferential treatment in investment in
terms of exemption and reduction of corporate income tax as for other projects
in line with the Law on Investment[4],
Law on Corporate Income Tax[5]
and other documents guiding the enforcement of these laws : Preferential
corporate income tax rate of 10% applies to newly-established enterprises for
15 years.
If the given project is classified
as a large scale project, a project using high or new technology and in special need of
investment, the above preferential tax rate may be extended to less than 30
years following a decision
of the Prime Minister.
In addition,
other preferential treatments in infrastructure for wind energy projects are
available as follows:
i.
Projects on installing wind powers, lines and transformer stations
connected to the national grids enjoy the same exemptions and reductions in
land rental as projects being entitled to special investment treatment.
ii.
In line with the approved power development plan, the provincial people’s
committee allocates land to the investor to implement wind power projects. The
compensation for existing land users and support for site clearance complies
with the provisions of land law in force.
In addition, in accordance
with Decision 37, Electricity of Vietnam (“EVN”) is to buy all of the plant’s
wind energy output and the Vietnam Environment Protect Fund will accordingly subsidize to EVN with the current subsidized tariff of 204
VND/kWh (about 01 UScent).
Market Access Of Foreign Investor
Currently,
there is no foreign ownership restriction in energy sector in Vietnam. The
foreign investor may choose among permitted investment forms: 100% foreign
invested company, joint venture or public private partnership (“PPP”) in the
form of BOT contract.
Wind energy
projects require high investment rates, while the electricity production costs
are always high. Though the Government agrees to buy wind energy at high price,
the investors still do not dare to pour their money into the sector for fear of
the risks resulting from unstable policies.
In such
circumstances, PPP is the most reasonable solution. Recently on 14 February
2015, the Government issued a long-awaited Decree on PPP models, Decree
15/2015/ND-CP which will replace previous legal regulations on PPP or BOT with
the intention of promoting private investment in infrastructure to boost
economic growth in Vietnam. The PPP model can help ease the burden on capital
arrangement, share and minimize risks, take full advantage of the management
resources and improve the policies’ transparency, thus bringing the highest
possible effectiveness of the projects. For its great advantages, PPP has been
applied in many countries in the world.
In Vietnam, BOT
is the best investment form for energy projects since it is easier to negotiate
more favorable electricity rates and obtain more government guarantees,
especially in the context that EVN – a state-owned electricity company, is
obliged to purchase all electricity from the projects. Moreover, the investor
can receive more fiscal and financial incentives.
Wind energy
will be an interesting sector in Vietnam for a foreign investor in the middle
and long term, especially at the stage of fully competitive retail market.
Despite the main obstacles to foreign investors such as high production cost,
time taken for investors for investment capital recovery, and the lack of a
competitive sale price, foreign investors still receive many preferential
policies and incentives. When Vietnam energy market becomes a fully competitive
retail market, the wind energy project will play a more important role and the
investor will gain higher actual profits.
Starting Up A Wind Energy Project
Generally
speaking, the start-up process in Vietnam is now still pretty complicated with
the involvement of many licensing authorities and state agencies that make
time-consuming and costly for developers. However, with the recent promulgation
of new Investment Law and Enterprises Law which will take effect from 01 July
2015, the Government of Vietnam has showed the sign on improvement of bussiness
and investment environment and both new laws are aimed at reducing licensing
complexity and granting easier market access.
Currently there
has yet been any national plan for wind energy and consequently, there is no
specific procedure for investment in wind energy project. Thus, until such a
plan is finalized, the investment procedure remains uncertain. Wind energy
projects must be in alignment with the national energy sector’s development and
priorities will be given to those with high economic and financial efficiency,
as well as plans to connect with national or regional grids.
According to
Decision 37[6], until
the planning is completed and approved, the Prime Minister will have to decide
on any wind energy project. Moreover, under Circular 32[7], the investor can only
invest in the wind energy project included in the list of wind energy projects
approved by the Ministry of Industry and Trade (“MOIT”). The MOIT requires
project owners follow its guidelines and stipulates that capital investment
from a project owner must exceed 20 percent of the project total investment
capital. The provincial people’s committees will be the sole authorities to
grant licenses after getting approval from the MOIT.
In order to commence the construction, the investor must satisfy many
requirements, including but not limited to obtaining the investment
certificate, having signed the power purchase agreement and electricity
integration agreement. Generally speaking, the start-up process involves many
state authorities from local level to the central level.
For reference, according to the GIZ/MOIT Wind Energy Project[8], to set
up a wind energy project, the developer must take the following steps:
Step 1: Site
selection – Due to the absence of a national wind power plan, site
selection is based on relevant past data such as wind data, wind energy atlas,
etc. Permission from the provincial people’s committee (PPC) and provincial
Department of Industry and Trade (DoIT) is needed for site surveying and
resource assessment is needed for a feasibility study.
Step 2: Assessment
of wind resources at the selected site – Wind measuring poles are
installed (if not available at the selected site) and wind is measured for at
least 1 year.
Step 3: Pre-feasibility
study and request for inclusion in the power development plan – If the
project area has wind resources, a pre-feasibility study for investment in the
area is prepared and submitted to the MOIT together with a request to include
the project in the power development plan. The MOIT shall consider and submit
it to the Prime Minister for approval (as wind power is still new in Vietnam
and there is a missing protocol for it, all wind power projects larger than 50
MW need approval by the Prime Minister. After the Prime Minister approval, the
project documents are to be submitted to the DoIT for approval.
Step 4: Investment
report (Feasibility study) – After the DoIT approval of the
pre-feasibility study, an investment report (feasibility study) is prepared and
submitted to the MOIT for appraisal.
Step 5: Signing
of power sale contract with the EVN – In accordance with Decision 37,
EVN is to buy all of the plant’s wind power output. Contracts on power sale,
grid connection and electric measurement system design must be signed.
Step 6: Project
implementation – The project will not start until the approval of the
technical design and investment report by the related agencies such as DoIT,
Department of Construction, Department of Natural Resources and Environment and
others.
Step 7: Building
– Building starts.
Above steps are
the technical approval process that a wind power developer needs to comply with
to be approved for project implementation. However, the developer needs also to
work with the licensing authorities (i.e. the Department of Planning and
Investment of the province where the project is located and the Ministry of
Planning and Investment) in line with the investment procedure under the
Investment Law. In Vietnam, the investment certificate is an official legal
document issued by the State authority to certify the rights and obligations of
the project developer and also the incentives that the developer may enjoy from
the project implementation.
The developer
needs to perform the procedures for obtaining investment certificate in
parallel with the technical approval since the beginning of the site selection
steps . The current Investment Law provides for a 45-day time frame for
issuance of an investment certificate (while the New Investment Law which takes
effect from 01 July 2015 shortens this time frame to 15 days), starting from
the date of receipt of a ‘complete’ application dossier. Our experience in
dealing with typical investment projects indicates that you should anticipate
this process to take longer than the statutory time limit, even from 6 to 8
months at least.
Vietnam - Future International Competitor In Wind Energy?
Theoretically
speaking, Vietnam can be seen as an international competitor in wind energy
because it has a significant potential for wind energy, an increase of
electricity demand and Government’s preferential policies and incentives to
facilitate renewable energy in general and wind energy in particular. According
to World Bank research to build wind
power potential map for Vietnam, Thailand, Laos and Cambodia, Vietnam has higher wind power than other
South East Asia countries with 8.6 percent of Vietnam’s territory having wind energy development potential (in
comparison with 2.9% in Laos, and just 0.2% in Cambodia and Thailand). In
practice, there are increasing interest and new projects in wind energy from
Vietnamese and foreign investors. According
to the website of GIZ Wind Energy Project: http://www.renewableenergy.org.vn/, until May 2012, there are 67
wind energy projects in Vietnam which are developing at different stages and this
number is expected to increase in the upcoming time.
Although
Vietnam possesses considerable potential for the development of wind power, an
energy sector which has attracted
strong interest from domestic and foreign investors, the current wind energy
project development has only tapped into a small portion of Vietnam’s wind
potential, and there are still many things Vietnam needs to change and take
stronger action. Otherwise, Vietnam can hardly become an international
competitor in wind energy.
Up to now, the
total potential of wind energy in Vietnam is only an estimate while a final issue for the bankability
of a wind energy project is the wind speed feasibility studies for that the
investors need reliable wind speed studies and wind speed towers to measure. In
practice, the standard requirements of foreign banks are such feasibility
studies involve about 2 years of measurement. However the
"reliable"studies in Vietnam’s wind energy are still lacking to our
best knowledge.
At present, Vietnam still features the
"Single Buyer Model" with EVN who is the only
offtaker, except for power generation projects under 3 MW. The EVN monopoly in power
sector should be removed and EVN must be restructured by splitting up into many
corporations with separate powers and duties (i.e, operation, transmission,
distribution).
In the
meantime, Vietnam needs to highly prioritize for the application for more
transparent policies and mechanisms. Under Circular No. 32/2012/TT-BCT, Vietnam provides a standard
power purpose agreement (“PPA”) form for all wind energy projects on power
sale, grid connection and electric measurement system design. This standard PPA
is a good start but still needs to be improved to make wind energy projects
bankable. However, the negotiation process of the PPA signing with EVN is very
time consuming and it is almost impossible to predict how long it will take to
negotiate the relevant PPA with EVN, even it has taken up to 6 years in some
cases to negotiate a PPA for a coal fired power plant with EVN in the past. That
is a deterrent for foreign investors if they cannot calculate that into the
development costs. Meanwhile with such red-tape hurdle, the operation costs for wind energy projects in Vietnam are still much more an overall "estimate" than a "real and realistic
calculation".
The low power
purchasing price is also a big barrier to wind energy projects. The Government
should also adopt a feed-in tariff (“FIT”) for wind energy in particular and
renewable energy in general. The basics of a FIT mechanism is that additional
costs for production of energy will be divided among electricity users to
assure a stable cash flow for renewable energy developers. Under Decision 37, EVN
has the responsibility for buying the whole electric output from wind power
projects with the electric buying price at the point of electricity receipt is
1,614 dong/kwh (excluding VAT, equivalent to 7.8 UScents/kwh). This current subsidized tariff is too low in
comparison with that in other ASEAN countries (19 UScents/kWh in Thailand[9]
and 21.8 UScents/kWh in Philippines[10]).
In practice, the wind energy producers in Vietnam keep complaining about very
low purchasing price while the current cost of electricity generated from wind
power plants is still quite high due to large technical investment.
Recently,
Vietnam’s Prime Minister issued Decision 31/2014/QD-TTg on solid
waste-to-energy projects to provide a ground-breaking feed-in tariff for power
suppliers of up to “VND 2,114/kWh (equivalent to 10.05 US cents/kWh)” which is
more than 25 percent higher than the 7.8 cent applicable to wind energy
projects. From the internet, we have also been told that the MOIT proposed to
the Government to approve for an FIT increase of up to 12 UScents/kwh to make
the wind energy projects become more financially feasible. With this trend of
development, the Government shows an effort to pave the way for the development
of more wind power projects in Vietnam.
If the FIT is not increased to region levels and until there is no clear roadmap for negotiating the PPA, it will be very difficult to attract foreign investors. The foreign investors have the choice in which country they will invest and if the FIT for example in the Philippines is about TRIPLE more than that in Vietnam, then the investors will not think twice whether to come to Vietnam or invest in the Philippines.
If the FIT is not increased to region levels and until there is no clear roadmap for negotiating the PPA, it will be very difficult to attract foreign investors. The foreign investors have the choice in which country they will invest and if the FIT for example in the Philippines is about TRIPLE more than that in Vietnam, then the investors will not think twice whether to come to Vietnam or invest in the Philippines.
[1] http://www.adb.org/sites/default/files/linked-documents/42039-033-vie-ea.pdf
[6] Decision 37/2011/QD-TTg of the Prime Minister dated
29 June 2011 on the mechanism supporting the development of wind power project
in Vietnam (“Decision 37”)
[7] Circular No.
32/2012/TT-BCT of the Ministry of Industry and Trade dated 12 November 2012
regulating the implementation of wind power project development and power
purchase and sale contract form for wind power projects
(“Circular No. 32/2012/TT-BCT”)
[8] GIZ/MoIT (2011)
Information on wind energy in Vietnam. Prepared by Khanh NQ. Website: http://www.renewableenergy.org.vn/.
In practice, the state authorities may require further steps or documents.
Author: Oliver Massmann – Ho Gia Le Hoang