Realising Vietnam’s just energy transition
July 28, 2022
Vietnam is set to achieve net-zero by 2050. The announcement by Prime Minister Pham Minh Chinh at COP26 in Glasgow was a turning point in the country’s journey to sustainable development. The seriousness of intent and purposeful planning towards this net-zero commitment, with related pledges on reforestation and phasing out coal, has established Vietnam as a leader in the global effort to reduce carbon emissions and limit the negative impact of climate change.
It is not an easy path forward. Fulfilling these pledges while meeting a growing demand for energy is a huge challenge. In the electricity sector alone, the Vietnamese government estimates that installed power generation capacity will need to increase fivefold by 2050. With limited scope for new large-scale hydroelectric power generation, the additional capacity will have to come primarily from solar, onshore and offshore wind, and new tech like green hydrogen.
And then there is the money question. The transition to renewable energy – to build and maintain these systems at the scale required - could cost as much as $60 billion per year leading up to 2050. For a middle-income country like Vietnam, this is a significant investment. But, it is achievable and access to capital is not an insurmountable obstacle to the energy transition.
Vietnam’s solar power boom, which began in 2018 and continued until last year, was an important lesson in renewable energy financing. Fixed feed-in tariffs (FiTs), set at a relatively high level, ensured that approved solar projects would generate sufficient revenues to service their financial obligations. From a standing start, investors installed 16.6GW of capacity by the end of 2021. Most of the investment capital absorbed by these projects came from domestic sources.
Looking back, while fixed FiTs worked at the beginning, they were an expensive option given the rapid pace of technological change and the falling cost of renewable power generation. Setting continuous high tariffs reduces pressure on power plants to reduce costs and compete with new providers. Moreover, new projects came online so quickly that they outstripped the capacity of the national electricity grid to integrate and distribute the electricity produced.
The numbers can be computed, and they provide clarity. As renewable energy technologies have improved, solar and wind have replaced coal and gas as the cheapest sources of electricity. The cost of hydrogen electrolysis is also falling rapidly, which will then become an attractive option for industry and transportation in the near future.
The high and volatile oil, gas and coal prices, as we see today, make renewables even more competitive. With the war in Ukraine, unpredictable price fluctuations, and supply chain disruptions, energy security has become central to the strategic development choices being made by many countries. And as domestic gas supplies decline, the greater reliance on renewables may become the standard bearer of Vietnam’s national energy security policy and practice.
The financing of renewable energy projects is limited by initial profitability. Hence, the role of government as the startup investor in essential physical infrastructure and as the guardian of an attractive regulatory environment that fosters renewables is key.
The most pressing infrastructure requirement is the modernisation of the electricity grid to redistribute power from surplus to deficit regions and deliver power efficiently within regions. Smart grid technology that uses AI to purchase power at the lowest price and balance energy supply and demand across locations and, over time, can replace fixed FiTs for a more efficient cost-cum-distribution solution.
Vietnam’s energy partnership with the G7 countries, announced in May, is a potential source of additional support for this transition. So is the consideration of carbon taxes and the issuance of green bonds. There are increasing opportunities through which to realise the benefits of the Just Energy Partnership.
We are working closely with the Vietnamese government to realign key national strategies with COP26 priorities, such as the National Climate Change Strategy, the Power Development Plan VIII, Vietnam’s Nationally Determined Contribution, and the National Adaptation Plan.
Countries worldwide are now establishing specialised energy banks and non-bank financial institutions that are commercially viable, to expand energy financing. They do so by providing guarantees for commercial bank loans, organising structured finance for complex, slow-gestating projects, and taking equity stakes in projects that deliver important social and environmental benefits. It is a potential option for Vietnam to consider.
A national energy bank could also invest in Vietnamese companies producing equipment for and providing maintenance for solar and wind energy systems. The scale of investment in renewable energy will provide a large internal market for domestic companies in these industries.
Governments play a critical role in supporting research and development, building institutional and individual capabilities, facilitating links between domestic and foreign companies, and ensuring an appropriate regulatory environment that ensures outcomes are not only about energy efficiency but also about access and affordability – so truly a just transition.
Realising such an energy transition from fossil fuels to renewables is a defining development challenge for this generation. With sensible policies, political commitment, and close collaboration with development and investment partners, Vietnam will achieve a just energy transition, while demonstrating to others that it can be done.
Article originally published on Vietnam Investment Review
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