Promoting Solar Power Potential in Vietnam

10:21:49 AM | 23/3/2020

Vietnam has huge potential for developing solar energy systems, especially in the South and Southern Central regions. Commercial solar power projects are attracting economic resources, but its potential is not tapped on the lack of grid infrastructure.

The levelized cost of energy (LCOE) for solar power in Vietnam decreased by 106% in the past four years and the supply of projects and investments is greater than the demand to meet the national target for solar power. According to the Power Master Plan, the expected capacity for solar power is 850 MW in 2020, 4,000 MW in 2025 and 12,000 MW in 2030.

In fact, after Decision 11/2017/QD-TTg on investment incentive mechanism for solar power development was issued, as many as 135 projects with a total capacity of 8,935 MW were added to the power development plan. Under this decision, the feed-in tariff is about VND2,100 per kWh of electricity in 20 years for projects operating before July 2019.

By the end of June 2019, nearly 4,500 MW of solar power facilities were put into commercial operation and helped ensure electricity supply for socioeconomic development and daily public needs.

Solar energy accounts for 8.28% of the installed capacity of Vietnam's electricity system. However, many licenses are granted to companies that lack experience in building power plants in Vietnam, have limited financial resources, exert significantly negative impacts on land use and reduce transmission grid safety.

According to IRENA's 2019 report on accelerating renewable energy in Vietnam: Perspective of the electricity sector on key challenges and opportunities,” Vietnam needs to mobilize nearly US$10 billion of investment capital every year from now to 2030 to accomplish objectives set out in the current electricity development plan. In terms of renewable energy, including hydroelectricity, Vietnam's annual investment is only US$290 million a year on average since 2012, much lower than the need.

On April 11, 2019, the Ministry of Industry and Trade announced the third draft of the Prime Minister's Decision on mechanisms to encourage solar energy development in Vietnam, effective from July 1, 2019. Unlike previous feed-in tariffs for all solar power projects, the Ministry of Industry and Trade proposed different tariffs for regions based on local solar radiation potential. Region 1 includes 28 northern provinces with low solar radiation potential; Region 2 consists of six central provinces with medium potential; Region 3, stretching over 23 provinces in the Central Highlands and the South, has high solar radiation potential; and Region 4, including six provinces in the South Central region, has very high solar radiation potential.

Solar power feed-in tariffs also vary, depending on installation models: floating solar power, ground solar power and rooftop solar power, effective for projects with commercial operation dates (COD) from July 1, 2019 to December 31, 2021. The feed-in tariff is applied in 20 years from the date of commercial operation. Solar power projects with integrated storage systems apply their own regulations and estimate higher feed-in tariffs than the grid-connected solar power.

The tax rate may be even lower, averaging approximately 7.5 US cents if the solar power FIT agreement model is amended to eliminate risks of capital recovery for solar investors, for example terms of price cuts and termination. When risks are reduced, financial institutions - banks and fund managers - will possibly offer lower interest rates, meaning lower electricity production costs. Moreover, as the market develops, tax incentives may be replaced by competitive bidding.

On September 19, 2019, the Ministry of Industry and Trade submitted a new feed-in tariff (FIT) to the Prime Minister while keeping source differences and eliminating local differences. According to the Electricity and Energy Working Group - Vietnam Business Forum, this flat FIT has been criticized by both energy experts and investors, especially those who are developing projects in areas with lower solar radiation intensity.

Mr. Tran Viet Ngai, Chairman of the Vietnam Energy Association, said, the previous tax policy led to the concentration of grid-connected solar power projects in places where radiation intensity is high, causing local overload and affecting power supply safety. Feed-in tariffs should be changed by region instead of a universal rate applied to the whole country, he said. This will avoid the future imbalance of solar sources, given unevenly distributed solar energy projects. “Therefore, a general FIT should not be applied to solar energy,” he added.

Most recently, the Ministry of Industry and Trade completed a draft decision based on Government Office Notice 402/TB-VPCP dated November 22, 2019 (notice of Prime Minister Nguyen Xuan Phuc’s conclusions on draft mechanism to encourage solar power development in Vietnam from July 1, 2019 at the cabinet regular meeting). Accordingly, as for grid-connected solar power, grid-connected solar power projects signed power purchase and sale contracts, conducted construction before November 23, 2019 and started commercial operation from July 1, 2019 to December 31, 2020, they will be applied at feed-in tariff specified in the Appendix of this Decision.

According to Vietnam Electricity Group, by the end of November 2019, there were 19,378 rooftop solar PV systems installed nationwide, with a total capacity of 318 MW, mainly located in the southern region (73% of total systems). In order to ensure the application of a sustainable and practicable rooftop solar power development mechanism, the encouraged tariff should be more reasonable to reduce retail price hike pressures. For that reason, the Ministry of Industry and Trade proposed taking the tariff in Region III where the surcharge load is 8.38 US cents per kWh (similar to grid-connected solar power quoted at 7.09 US cent per kWh.

According to the feed-in tariff annex, FIT at floating solar power projects is VND1,758 (7.69 US cents) per kWh, at ground solar PV projects is VND1,620 (7.09 US cents) per kWh, and at rooftop solar power projects is VND1,916 (8.3 US cents) per kWh.

Vietnam needs to focus on creating direct sales contracts for solar energy that can be traded. However, given the current view of focusing on FIT as a means of encouraging and directing investment, regional FIT provides a better policy tool. Moreover, since many speculative projects are not allocated project land, auctions can become an effective means of establishing renewable energy purchasing prices.

By Quynh Chi, Vietnam Business Forum