Renewable energy: Unresolved policy bottlenecks

Solar power recorded a stable output throughout the years and slightly dropped in 4Q to make room for wind power mobilization

>> A policy boost is expected for renewable power

Due to significant capacity reductions among solar power facilities, renewable energy (RE) power output fell marginally to 6.45 billion kWh in 2M23. Wind power, on the other hand, had a 9% year-on-year increase in output due to a higher wind speed season beginning in November 2022.  

“According to the National Load Dispatch Centre (NLDC) daily capacity mobilized data, we can see that energy sources have an annual cycle. For example, while wind power usually records solid output mobilization during the 1Q and 4Q period, solar power recorded a stable output throughout the years and slightly dropped in 4Q to make room for wind power mobilization”, said Mr. Nguyen Duc Tung, analyst at VNDirect.

Following the capacity increase during the FIT price period, which increased total RE proportion from 9% in 2019 to 27% total capacity in 2022, the next development stage faces numerous challenges. Particularly, since the FIT price policy expired in November 2021, investors have been waiting for more than a year and have been unable to develop new RE power sources due to the delay of the PDP8 as well as the official RE price mechanism, which has yet to be released.

In the context of numerous factors of congestion, the Ministry of Industry and Trade published a price structure for transitional solar and wind power facilities on January 7, 2023. The judgments are based on the prior calculation results supplied by EVN. As a result, the new pricing for the solar farm project is VND1,184.9/kWh, which is 29.5% less than the FIT price. On the other hand, the price of onshore and offshore wind electricity drops by around 21% to VND1,587/kWh and VND1,816/kWh, respectively.

>> Power demand surge to underpin sector outlook

Although we believe the new price is the first sign of hope for transitional RE developers, whose projects have been stalled for a long time since the FIT expired. However, VNDirect believes that with this price range, not every project will be profitable. It also ran an internal rate of return (IRR) test with assumptions for conventional RE power plants, and the results showed that the increased price will drastically diminish the IRR of these projects. Solar farm IRR is 5.1%, while onshore and nearshore IRR are 8.0% and 7.9%, respectively, down from over 12.0% in the preceding FIT.  

To increase profitability under the new pricing system, RE developers must work hard to reduce investment expenses, operational costs, and loan interest. At the time, it appears that transitional RE developers are not interested in such low costs, as just 4 applications exceeding 84 transitional pricing have been received by the end of March 2023. There are still various conflicts over the PPA between buyers (EVN) and sellers (RE developers), including ASP currency, contract terms, and pricing level. As a result, despite the publication of the official transitional RE pricing structure, the possible start date for these projects is still uncertain.

Mr. Nguyen Duc Tung believes that the transitional RE pricing will provide the framework for the MOIT to continue providing more guidelines, particularly for the official price mechanism of newly created RE projects. Notably, Vietnam is testing a direct power purchase agreement (DPPA) mechanism and intends to promote its use.

“While implementation progress is still unclear, and it is currently difficult for investors to predict when policies will be enacted, we see the government's vision for the next phase of renewable energy development becoming clearer. As a result of Vietnam's strong commitment at COP26, as well as ambitious changes in the newest PDP8 draft - favoring RE power - we continue to expect an appealing yet competitive price mechanism to encourage qualified investors to join in this industry. In terms of mobilization, we expect an additional 2,000MW transitional RE project to boost total sector output by 30% year on year in 2023F, before stabilizing in 2024”, said Mr. Nguyen Duc Tung.