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Proposed steep tariff cut risks disruption in Vietnam’s wind market, industry body warns

Based on market projections and experience in other markets, a rate reduction of this size would deter investors, shrink Vietnam’s project pipeline, and wreck job opportunities, imperilling the nation’s position as Southeast Asia’s clean energy frontrunner, said GWEC.

The industry body, which represents over 1,500 companies in the wind sector, said the slowdown would result in around 4 gigawatts (GW) of total installed wind power capacity in the country by 2025—far below its wind potential, and a drastic shortfall from the government wind target of 11 GW by 2025.

This would stall power development at a time when Vietnam desperately needs more of it. By 2030, experts estimate 130 GW of electricity will be required to sustain the nation’s rapid economic growth.

In a letter submitted to Vietnam’s Ministry of Industry and Trade (MOIT), GWEC urges energy planners to reconsider the proposal. The document, seen by Eco-Business, stresses that the proposed reduction underestimates the cost of financing and capital expenditures facing developers, and recommends a six-month extension of current rates to allow planned projects to come online, followed by a milder tariff cut commissioned from May 2022 onward.

MOIT did not respond to requests for comment.

Introduced in September 2018, the current tariff scheme—which stipulates 8.5 US cents/KWh for onshore wind and USD 9.8 cents/KWh for offshore wind—has sparked enormous interest from investors and developers, with pre-pandemic forecasts that wind capacity in Vietnam would jump to 1 GW by 2021, up from 375 megawatts (MW) currently.

In June, the government approved a staggering 7 GW worth of new wind projects to be built, putting the country on track for a total generation capacity of nearly 12 GW by 2025. One month later, news emerged that energy planners were mulling scrapping nearly half of Vietnam’s planned coal power capacity in favour of cleaner alternatives.

Amid this year’s challenges, however, GWEC has downgraded its projection for 2020 by 41 per cent, predicting that the nation will not reach its goal of having 800 MW of wind power installations up and running.

A development rush was expected in 2021 ahead of the expiry of the tariff programme, but the delays mean much of the expected volume may spill over into 2022. If Hanoi goes ahead with the tariff reduction and disgruntled financiers withdraw, up to 80 per cent of planned installations may never materialise, GWEC estimates.

When the coronavirus outbreak began wreaking havoc on supply chains and Vietnam’s new planning law brought project approvals to a deadlock earlier this year, GWEC and nearly a dozen local governments appealed to Hanoi to extend the tariff scheme to give developers more time to complete their projects.

They warned that investors will not take the risk to finance wind farms that may not be commissioned by next year’s cut-off date, as projects become less attractive without a guaranteed fixed tariff for the power they generate.

But Vietnam risks losing more than investors if it fails to send a clear signal of continued support to the industry, GWEC has cautioned. Construction firms and manufacturers, for instance, could move their business to more attractive markets, such as Thailand or the Philippines. Rebuilding supply chains from scratch later won’t come cheap and could raise the cost of power.

Mark Hutchinson, chair of GWEC’s South East Asia Task Force, said with wind power “a critical pillar” for Vietnam’s decarbonisation and industrialisation strategies, the country “simply cannot afford to lose momentum in developing its wind power market”.

“The wind industry is on the cusp of achieving economies of scale and cost reductions which will make Vietnam the leading wind market in Southeast Asia,” said Ben Backwell, chief executive officer of GWEC.

“But if the proposed feed-in tariff is implemented, it would jeopardise long-term development and ultimately result in higher energy prices at a time when the country’s energy demand is soaring,” he said.

Thu Vu, a Vietnam-based energy finance analyst at the Institute for Energy Economics and Financial Analysis (IEEFA), an energy think tank, said while the proposal was still under deliberation, it would be unlikely for the current programme to be extended without a downward revision to the tariff.

“The reason is simple: while the goal of attracting and retaining private investment in the sector remains, MOIT also needs to consider the cost implications for EVN [Vietnam’s state-owned utility],” she said.

She said the current scheme had been remarkably successful, attracting 11.6 GW of wind project proposals, with around 3 GW slated to come online by the end of 2021. “Regarding the 8.7GW of wind power remaining in the pipeline, I do not think anyone expects all of this to come to fruition, and the revised feed-in tariff will serve as a filter for the most committed and efficient developers to come through,” she added.

Nicolas Payen, co-founder and chief executive at Positive Energy Limited, a Singapore-based digital platform for renewable energy investments, said having a tariff cut scheduled could help spur developers to complete installations faster, but that Hanoi needed to take the fallout of the coronavirus crisis into account.

“It is important for Vietnam to ramp up capacity quickly to meet surging demand and avoid building more coal plants. Due to the reduction in levelised cost of electricity, it also makes sense for the government to reduce tariffs over time,” he said.

“But Covid-19 has had tremendous impacts on the operations of both investors and developers. It would be fair for the government to give them more time to execute their projects, and this extension should not impact the granted tariffs,” he said.

Payen said the cut may result in project cancellations, as many ventures might not be feasible under the updated scheme. He added: “Investors and developers hate writing off past investments. This move may motivate them to look at other markets for their future plans, making it even more difficult for the government to achieve its capacity goals.”

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