Vietnam’s High-Potential Energy Transition Needs Clear Policy And Clean Government

As Vietnam aspires to become a high-income country by 2045, the imperative of generating greener growth is also increasingly clear. Vast segments of industry and agriculture are endangered by climate change, with Vietnam ranking among the most vulnerable to flooding on the planet.  Equally, the country possesses unique opportunities for rapidly transitioning industry, and the economy in general, from the present high-carbon path to a greener and more sustainable alternative. As M. Mani, the Lead Environmental Economist for Southeast Asia at the World Bank recently told the present author: “Uptake of renewables remains key to Vietnam’s commitment to the necessary shift to a low-carbon economy.”

Green growth comprises economic activities aimed at long-term social benefits rather than only short-term financial gains. Green industrial policy facilitates climate change mitigation by decarbonising economic activities. Vietnam’s National Strategy on Green Growth 2021-2030 approved by the Prime Minister in 2021, and the Power Development Plan VIII (PDP8), contain principles of a low-carbon economy, but they need to be followed up with action.  

The World Bank estimates that the costs of climate change in Vietnam amount to about 3.2 per cent of GDP (2020), and could rise to 12 to 14.5 per cent of GDP by 2050 without serious mitigation as well as adaptation. At 1.6 kg of CO2/USD, the carbon intensity of Vietnamese exports is one of the highest in the region. While Vietnam currently contributes only 0.8 per cent of the world’s emissions total, during 2000-2015 its carbon emissions quadrupled.  Emissions are exacerbating toxic levels of air pollution, particularly in Hanoi.

While a green industrial or economic policy encompasses signals across the economy, energy transition is its leading edge.  Cutting fossil fuel use is its principal component, enabled by promoting renewables in energy (as well as transportation and other areas). Renewables currently comprise only 13.5 per cent of power generation, with hydropower making up 29.0 per cent, and coal 45.7 per cent. 

Vietnam has huge renewable-energy potential, as it is the most naturally suited country in Southeast Asia to develop wind and solar energy, with the technical potential of 1,000 gigawatts. Indeed, renewable energy production rose nearly 40-fold between 2018 and 2022.  Still, the country has faced electricity shortages and blackouts because of extreme weather, and hydropower plants reaching dangerously low water levels. Yet, after an initial wave of solar projects driven by favourable feed-in tariffs, new renewable-energy projects are seeing roadblocks. The time to ramp up renewable-energy production is now.

Incentives for renewables are fully justified in view of their vast positive externalities, but they make sense only if the subsidies are provided transparently and free of corruption.

Vietnam can tap into its potential in renewable energy development only with proactive action that surmounts regulatory and structural barriers and confronts an entrenched business landscape favouring fossil fuels. It should be noted that while incentives for renewables are justified in view of their vast positive externalities, they make sense only if the subsidies are provided transparently and free of corruption. In fact, a recent Fulcrum article notes that an inspection by the government exposed numerous violations in the licensing and certification of renewable energy projects. Incentives also need to be managed with an eye toward knock-on effects: for example, feed-in-tariffs can be introduced to make renewables more attractive, provided there are concurrent measures to anticipate the negative impact on the state fossil fuel monopoly. 

The potential competitiveness of renewables should be the basis for providing incentives for their development.  McKinsey reports on two provinces — Ba Ria-Vung Tau and Binh Dinh — to make the point about the potential of renewables.  Ba Ria-Vung Tau offers great industrial demand and a natural resource base for renewable energy, while Binh Dinh too has an attractive natural resource setting but less industrial demand.  There is economic justification for tapping into these prospects by providing well-targeted and transparent incentives.

But at current tariffs Vietnam’s renewable-energy projects are not consistently economical.  A key step would be to permit direct power purchase agreements (DPPAs) analogous to Malaysia’s virtual power purchase agreements.  DPPAs, which have been piloted in Vietnam, would let companies sell their renewable energy directly to consumers, without waiting for public infrastructure to improve. They help the financial viability and bankability of projects by showing guaranteed demand and use. 

Allowing clean energy to be purchased directly from private developers rather than a mix of energy from the state-owned Vietnam Electricity (EVN) will help buyers, while also advancing industrial greening.  Essentially, revising Power Purchase Agreements (PPAs) to enable companies to directly sell renewable energy, especially where EVN is unable to purchase offtake energy, will pay off for all sides. Negotiating PPAs with EVN, currently the only buyer of power, is time-consuming and tends to inflate project costs. 

Domestic and foreign investment in renewable energy would also increase if the grid were updated to allow the private sector to participate in grid development and operation. Multilateral development banks could be a much bigger source of financing. The finalisation of ASEAN negotiations for the export of renewable energy would provide a further boost.

The investment climate would also benefit from well-executed learning programs that expand human resource capabilities, and wider and better sourcing and validation of data for renewable energy, including data on the geographical locations of sites, infrastructure capabilities, and government goals and targets.

Vietnam is taking several steps to reach net-zero emissions by 2050, supported by a Nationally Determined Contributions and Power Development Plan. The country’s paramount energy transition from fossil fuels, especially coal, to renewables is a centre piece of that drive. The outcome of a low-carbon economy is viable — but it is not automatic, and calls for concerted action by the government and businesses.

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