With Vietnam’s economy expected to grow at 7- 8 percent in the medium term, the key priorities and challenges in the energy sector are:
Meeting the Financing Needs of the Power Sector
Improving Rural Electricity Service Quality
Meeting the Financing Needs in the Power Sector
The capacity of Vietnam’s power system need to double in next five years to meet the demand growth projected at 16 percent per year during 2006-2010. The demand is being driven specially by industrial load growth; heavy increases in residential uses as incomes are increasing and dramatically increased electricity access in Vietnam, from around 51 percent households in 1995 to around 90 percent in 2005. This means that the system must add some 2,000 MW per annum during the period 2006-2010, from 11,340 MW at the end of 2005 to over 25,400 MW in 2010. The demand growth is expected to reduce to 10-12 percent per year during 2011-2015.
By the end of 2005, the total installed generation capacity of 11,340 MW was dominated by hydropower (39 percent) and gas-fired plants (38 percent) with the rest supplied by coal-fired (14 percent), oil-fired (5 percent), and diesel generators (6 percent). By the year 2015, the government aims to maintain the dominance of hydropower at 40 percent while aggressively developing gas to a share of 40 percent and an increase in the proportion of coal-fired plants to 18 percent.
The government estimates that up to 2010 the power sector will need investments of US$3 billion per year (8.6 percent of 2002 GDP), of which more than 70 percent is for generation expansion, the remaining is for transmission and distribution). The gas sector development will require US$800 million/year and for the coal sector will be US$100 million per year.
Vietnam has laid a good planning framework for the coming massive capacity expansion program through the completion of the Sixth Power Master Plan for period 2006-2015 with view to 2025. As hydropower source is generally identified as the lower cost alternative than average costs of thermal power.
The major financing shortfall will be in the power sector. The Vietnam Electricity Group, the successor of the vertically integrated state-owned power utility (EVN), is a profitable company which has the capacity to make contributions towards investment needs without receiving subsidies from the government. But, EVN can only meet 40 - 50 percent of the power sector’s substantial investment needs in the 2004-2010 period. About US$1.5 billion per year financing gap will need to be closed.
Donor support will be important but not sufficient to close the financing gap. By the end of 2005, Vietnam’s power sector has received a total of US$1.4 billion of ODA support of the World Bank, ¥3,040 billion from JBIC and about US$0.65 mil from ADB. Other bilateral donors also contributed significant ODA support to the power sector.
In concert with the effort to mobilize financing, the Government has sanctioned a program to restructure the power sector, which is expected to gain momentum in the coming few years. This includes increasing reliance on independent power generation (financed by a variety of partners, not only foreign companies), “equitization” of EVN’s main generating facilities into independent power generation units, and gradual equitization of distribution companies. EVN has completed equitization of several power plants and a distribution company. It will accelerate this process in coming years.
The Electricity Law requires setting up an electricity market in Vietnam. The Ministry of Industry has developed a road map for the electricity market and it is comprised of two phases to be implemented during 20 years to get a fully competitive electricity market in Vietnam.
Vietnam established a new power sector regulator, the Electricity Regulatory Agency of Vietnam (ERAV) under the recently enacted Electricity Law, the Government hopes that this setup will prove more attractive for mobilization of independent finance. The Government hopes to attract up to 20 percent of the required investment from the private sector.
Major private power developers, however, remain skittish about large-scale investment in Vietnam. While there is significant interest in financing gas-fired power generation in the south, companies are still reluctant to invest without the backing of sovereign guarantees. For its part, however, the Government is reluctant to issue further guarantees although guarantees covering a small portion of the investment risk may be contemplated.
In the gas-fired power generation sub-sector, the Bank is ready to play a role to catalyze investment from the private sector, with potentially large impacts. However, further Bank engagement would involve complex coordination efforts among many private and public actors. And this will introduce inherent uncertainty in the determination of the most appropriate support vehicles and timing of closure on specific potential operations. Whenever opportunities arise, they will be taken to ensure an impact.
With growing enthusiasm for the Bank to assume a leading position in a re-engagement in hydropower investment support, considerable caution needs to be taken concerning potential cross-border water use issues, and social and environmental risks, especially given Vietnam's recent launching of the development of the 2400 MW Son La Project, using its own resources.
Bank investment support, even for a relatively small project with low social and environmental impact, would have to involve scrutiny of environmental and social impact mitigation practices in the hydropower sub-sector more broadly. A broader, sustained and programmatic approach, possibly involving several operations, might be best.
The Vietnam energy team is currently working towards better clarifying and understanding possible Bank involvement in hydropower generation in Vietnam before a decision can be made on whether or not the Bank should proceed in this sub-sector. The Bank has conducted a series of activities and technical assistance on the issues to initiated a preparation of a hydropower development program in Vietnam.
World Bank lending involvement for coal-fired power generation would be based on firm commitments from the Government to proceed with restructuring reforms in the coal mining and marketing sector.
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Improving Rural Electricity Power Service Quality
Electricity access has increased dramatically in Vietnam, from around 51 percent households in 1995 to around 90 percent in 2005. But rural areas still receive low service quality with poor reliability and low voltage.
The Bank is supporting Vietnam to overcome the issues through the Second Rural Energy Project. The need is for improved access to all households. The government has set the target of reaching 95 percent coverage by 2010.
By the end of 2005, all provinces, 89.8 percent of communes and 81 percent of households in the country had access to electricity. Despite this expansion, rural electricity consumption is only about 15 percent of the total consumption in the country.
Vietnam's power distribution sub-sector is uniquely complex, from an institutional perspective. The highly disaggregated structure of several thousand small distribution entities, the near-complete absence of the capacity to manage and operate distribution systems in a commercially, financially and technically sound way, and the decentralized governance structure presents challenges.
IDA’s sustained involvement in the Vietnamese power sector provides it with a comparative advantage in assisting the government to prioritize investments and to sequence reform.
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Security of oil supply. Vietnam has oil reserves of 600 million barrels. In 2004, its production capacity was 20 million ton, with no operating refineries within Vietnam, a large proportion is exported and all refined petroleum products are imported.
The first refining facility is under construction, which is expected to commercially operate in late 2009. Government controls both upstream and downstream oil sectors and any private participation is conducted in cooperation with PetroVietnam.
On the demand side, motorization has kept up with GDP growth in Vietnam. Between 1991 and 1996, road traffic increased at 13 percent per year for freight and 9.2 percent for passengers while annual real GDP growth was 9 percent. During the same period, Vietnam experienced spectacular motorcycle growth from 200,000 to 4.2 million (equal to 56 motorcycles per 1,000 people). Motorcycle and car ownership are both expected to match the growth of the economy by growing at 8 percent per year between 2003 and 2012 (with buses at 5 percent and trucks at 6 percent).
To contain oil supply insecurity, PetroVietnam is building an oil storage facility with a capacity of 3.68m barrels (3 weeks of total national consumption) expected to be complete in 2006. PetroVietnam is also building the country’s first US$1.3 billion Dung Quat Refinery with a capacity of 0.14 mbbl/day expected to come on-stream in 2009. The reform of the oil sector towards addressing its own financing needs may become a more visible priority in the coming years.
Biomass as cooking fuel. Some 70 percent of Vietnam’s urban households use LPG for cooking and other purposes. The country also exports LPG and the sector is open to private investors. But since only a quarter of Vietnam’s population lives in urban areas, most Vietnamese continue to rely on biomass (wood, dung, and rice husks) for cooking and lighting needs. According to the FAO, the share of biomass (mostly comprising wood fuel) in Vietnam’s total energy use was 65 percent in 1995. This is an important reason why Vietnam’s per capita modern energy consumption is among the lowest in Asia.
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