Analysis: Vietnam’s leadership flex shows how to drive electricity reform

Dealing with climate change should be a no-brainer, right? To paraphrase Greta Thunberg, the science is done and only denial, ignorance and inaction remain. Or is that really all?

We live in a world of sovereign states. In none of them is it an easy matter for political leaders to require short-run sacrifices to achieve a larger and far-off goal — particularly if achieving that goal depends in large part on the leaders of other nations holding up their end of a multilateral agreement.

In a story for Mongabay several years ago, I quoted the World Bank’s then-president, Jim Yong Kim: “If Vietnam goes forward with 40GW of coal, if the entire region implements the coal-based plans right now, I think we are finished. That would spell disaster for us and our planet.”

Kim can sleep better now. This story is about a remarkable reorientation of Vietnam’s power development plans that flows from a top-level decision to implement fundamental reforms. To a climate scientist, economist or engineer, these reforms may seem long overdue and obvious. In the abstract and for the most part, that’s true, but it misses the biggest part of this story: that Vietnam appears to have found the political will to force structural change.

A nation of 95 million energetic people, Vietnam is in most respects an economic success story. Since its leaders abandoned an attempt to implement Soviet-style socialism circa 1990 in favor of a market-driven system, the economy has grown forty-fold since 1990 and is now well and profitably integrated into the world trading system.

Politics is another matter entirely: the Communist Party maintains tight control over the institutions of government and denies any interest in evolving. Judging by how effectively Vietnam has managed its brush with the COVID-19 pandemic, the political system could be described as well-regimented. Judging by its treatment of vocal freethinkers, it could be called a police state.

Though market forces determine the allocation of most resources in Vietnam’s economy, the energy sector has been a big exception. Communism, Lenin famously said, “is Soviet power plus electrification.” That worked well enough as long as the nation’s demand for electricity could be met by big hydroelectric dam projects and a bit of domestic coal production.

Vietnam’s energy sector – effectively three big state-owned companies and counterparts in the Ministry of Industry and Trade – was a throwback to the days of socialism and five-year plans. Regarded as a cornerstone of national security, it retained a monopoly on domestic resources, information and expertise and a mandate to produce all the power Vietnam needed.

By 2010, however, electricity demand threatened to outstrip supply. No suitable sites were left for big dams. Energy planners proposed Power Development Plan (PDP) 7, which aimed to meet incremental electricity demand mainly by investing in coal-fired power plants and importing thermal coal. The plan built on existing expertise and was routinely approved by the Party’s top leaders, the Politburo, in 2011. Five years later, the plan was revised as it became apparent that offshore natural gas development was lagging. PDP-7R doubled down on coal and again was routinely approved.

Times had changed, however. The revised plan elicited a collective gasp from the architects of the climate change convention that had been signed in Paris just four months earlier.

Though nature has endowed Vietnam with an extraordinary supply of wind and ample sunshine, particularly along its long southeast coast, PDP-7R and its predecessors relegated wind and solar power to a marginal role. EVN, the state-owned electric power monopoly, regarded the growing clamor by environmentalists and entrepreneurs for renewable-friendly policies as a nuisance and a threat to the stability of Vietnam’s overtaxed national power grid.

As recently as 2017, analysts from the International Energy Agency found Hanoi’s energy sector managers so committed to coal that the IEA team focused its report on persuading them to invest in high-efficiency (supercritical) boilers and carbon sequestration rather than replicate the cheaper but much dirtier Chinese coal-fired power plant model.

Coal-fired power generation increased by 72% in Vietnam from 2010-2017. With every new coal project, the marginal cost of electricity increased while consumer tariffs lagged behind. The result was ever larger subsidies to EVN to cover the difference, mostly in the form of state guarantees of loans for capital improvements. By 2018, Vietnam had $40 billion (32 GW) in further coal-fired generating capacity under construction or planned, but financing was proving more and more difficult. Most projects were falling substantially behind schedule and others would soon be cancelled.

PetroVietnam (PVN), the state-owned conglomerate charged with exploiting offshore oil and gas, and Vinacomin, the state-owned coal and minerals conglomerate, had troubles of their own. PetroVietnam’s were mostly beyond its control: China, pressing baseless claims to parts of Vietnam’s continental shelf, was scaring off PVN’s foreign partners and thus obstructing development of new fields offshore. Vinacomin, meanwhile, had been tasked to supply coal to the power plants planned or under development. It could not increase production substantially from its mines in Vietnam’s far northeast, and though it redirected those mines’ high-quality coal from export markets to new power plants, this was not nearly enough. To fill the gap, Vinacomin began to arrange thermal coal imports from Australia and Indonesia.

Ensuring adequate supplies of electricity for Vietnam’s fast-growing economy wasn’t a big concern at the Party Congress early in 2016. However, members of the newly elected Politburo soon realized that the state energy companies had made a muddle of it, and that they could not duck the problem of restructuring Vietnam’s power development strategy. Brownouts and rolling blackouts had been a feature of daily life in Vietnam for decades. How in years to come was Vietnam going to supply the electricity on which economic growth depends? EVN’s answers all assumed that demand would grow by 8% annually, and that the Bank of Vietnam would guarantee foreign investors against losses.

The end of business as usual

In November 2016, Nguyen Xuan Phuc, the new prime minister, assigned a deputy, Trinh Dinh Dung, to lead a newly formed National Steering Committee for Power Development. In parallel, the Party’s Central Economic Commission launched its own strategic review.

Meanwhile, citing the rapidly falling cost per gigawatt of electricity produced by utility-scale wind and solar power projects, the think tank Carbon Tracker warned in October 2018 that Vietnam’s existing coal-fired power plants, with an average age of about 15 years, will be stranded assets by 2028. Ordinary citizens as well as party and state leaders were concerned. In online media, citizens argued against growing reliance on coal plants that are Chinese-built and operated as build-operate-transfer (BOT) projects. In Hanoi, Ho Chi Minh City and other places downwind from power plants, citizens complained about deteriorating air quality. Leaders in several provinces withdrew their support for planned coal plants. A Vietnamese NGO, Green ID, lobbied vigorously for investment in wind and solar power.

EVN, however, backed by Vinacomin and PetroVietnam, argued for a go-slow strategy on renewable energies. Production would be inherently unstable, EVN said, fluctuating at Mother Nature’s whim, and this would stress the national electricity distribution grid, risking frequent interruptions and worse. However, the state companies’ credibility was shot. With coal-plant projects falling further and further behind, the Ministry of Industry forecast that electricity supply would fall short of demand by 6.6 billion kilowatt hours (kWh) in 2021, increasing to 15 billion kWh by 2023, equivalent to about 5% of forecast demand.

Details of the regime’s internal discussions are sparse, as is usual in Vietnam. This much is clear, though: Party and government leaders have chosen the risk of instability posed by fast development of renewables over the certainty of frequent brownouts. The prime movers of the shift away from coal have been Prime Minister Phuc, his deputy Dung, and two former ministers now helming the Party’s Central Economic Committee, Nguyen Van Binh and Cao Duc Phat. For technical and policy backup, they have turned in part to foreign experts.

The European Community delegation in Hanoi was ready with state-of-the-art technical assistance. A trip to study European experience relieved several senior leaders’ concern over the technical feasibility of integrating wind and solar energy supply into Vietnam’s power grid. On a parallel track, foreign direct investors offered “Made-in-Vietnam Energy Plan 2.0,” which argues that Vietnam’s commitment to a green-energy future will persuade more global corporations and their suppliers to invest in Vietnam. John Kerry, the former U.S. secretary of state, is credited with lining up financing for infrastructure that would enable Vietnamese grid managers to rely on liquefied natural gas from the U.S. to balance dips in solar and wind power availability.

In 2018, Hanoi conducted a practical test of investor interest in utility-scale solar; it succeeded brilliantly. Offered an attractive feed-in tariff (FIT), banks loaned funds and entrepreneurs scrambled to complete projects before a mid-2019 deadline. The result was 4.5 gigawatts of new supply — considerably more than the national power grid could immediately handle, and exceeding a target that EVN hadn’t expected to reach before 2025. Another 3 gigawatts of solar capacity was awaiting grid connection by the end of 2019, and would raise solar power to more than 8% of the electric power system’s installed capacity.

Of particular note, in February 2020 the Politburo (that is, the Communist Party’s collective leadership) issued Resolution 55, guidance to the managers of the nation’s energy sector. The resolution is an authoritative and unusually prescriptive document. Dispelling any remaining doubt that Vietnam’s power sector reorientation is real, Resolution 55 has refocused the state’s role on removing bottlenecks and facilitating market solutions, rather than doing everything.

Deal-making in the power sector had slowed in anticipation of the Politburo resolution. In the weeks after its publication, the government issued rules that put flesh on the Party leaders’ endorsement of renewables as the new focal point of power sector development and create a larger and more stable space for both solar and wind power developers. Inter alia, solar power developers are no longer required to deal exclusively with EVN; they may, for example, build rooftop solar arrays in industrial parks and sell power either directly to manufacturers or to EVN. Meanwhile, the developers of some 4 GW of wind energy projects, nine times Vietnam’s current installed capacity, seem eager to take advantage of a revised FIT that’s still awaiting formal approval; it’s intended to apply to any projects that reach completion by end 2023.

In short, the mood is bullish and the stage is set for Vietnam’s Power Development Plan VIII, which will lay out the party-state’s energy goals up to 2030, and in less detail, to 2045. In July, the Ministry of Industry’s Energy Institute began releasing portions of its PDP-8 draft for public comment. It is generally understood that there will still be a substantial role for coal, including continued investment in a handful of new plants. Hydro, too, will remain a mainstay of the nation’s energy budget. However, PDP-8’s emphasis will be squarely on rapid deployment of solar and wind power, on using domestic and imported LNG to meet load-balancing needs, on building out the national transmission grid, and on marketizing energy supply and demand.

Vietnam’s policy reorientation away from coal is just in time. Carbon Tracker analysts say the world “coal fleet” can be replaced with renewables plus storage at a net annual savings as early as 2022. It will take longer in Vietnam; a big unknown is the availability of financing at reasonable cost to address critical bottlenecks, e.g., to build out the power grid and to build regasification terminals for imported LNG. PDP-8’s projection of Vietnam’s future energy mix is expected to include 18 GW of new coal-fired capacity, projects that are currently licensed or already under construction. These power plants are forecast to be complete by 2025, after which the policy is said to be “no new coal.”

Resolution 55 reiterated that Vietnam will no longer issue state guarantees for power generation projects. Financing electricity supply from here on out thus depends on investor confidence that power prices will be high enough to assure a profit, and thus it is high time for Vietnam to get power prices right. They’re among the lowest in Asia, a relic of socialist-era subsidies to heavy industry. Consequently, demand is high and energy efficiency is very low. The Politburo document also stressed development of wholesale and retail energy markets, ending EVN’s role as sole purchaser of power generated in Vietnam.

The Vietnamese regime has a history of not reaching its power development goals. Now it has caught a break with the rapid maturation of solar and wind power technologies. Making a course correction challenges cozy relationships in the energy sector. Disrupting the tangle of political, regulatory and commercial functions that has frustrated regulatory oversight is thus an implicit goal of NQ-55. PDP-8 is to be issued in final form in March 2021. With the public cheering it on, Vietnam’s top leaders give every appearance of having set the nation on the path toward a cleaner and greener energy future.

David Brown, a retired American diplomat, is now a frequent writer on contemporary Vietnam and its neighborhood. In 2016 he produced an in-depth, four-part series for Mongabay exploring threats facing the Mekong Delta and how they might be addressed.