Roadmap for Vietnam’s energy transition

Vietnam have much untapped potential, as wind in these areas can exceed 10 metres a second (m/s), and 8 m/s is typically considered viable for offshore wind power development. Photo: Wind power in Mui Ne, Vietnam

The goal of energy is to gradually reduce the country’s dependency on coal while diversifying energy sources to wind and LNG

Hungry for energy

Energy transition has been a key focus for Vietnam’s policymakers in recent years. A flurry of energy-related diplomacy highlights its ambition in the green transition. Last December, the G7 announced a package of USD15.5bn to assist Vietnam’s decarbonisation efforts. This made Vietnam the third developing country, after South Africa and Indonesia, to receive sizeable funding under the Just Energy Transition Partnership (JETP) agreement. Meanwhile, Vietnam is also engaging with ASEAN peers, with Singapore taking the lead in agreeing to invest and develop an offshore wind farm with Vietnam. The long-anticipated Power Development Plan 8 (PDP8) for 2021-30, with a vision to 2050, which was released in May, sets out a roadmap for its long-term renewable energy goals.

From recent El Niño-related risks, it is not difficult to understand Vietnam’s urgency in seeking alternative energy sources in response to its rising power needs, as the country has been growing at a remarkable pace over the past two decades. As recently as June, Vietnam’s northern provinces, many of which host electronics giants, such as Samsung and Foxconn, faced electricity shortages. The electricity outages were caused by a shortfall in hydropower, a major source of electricity in the north, as El Niño-related heat and droughts have caused reservoirs to dry up. While water levels at all reservoirs have exceeded the threshold for safe electricity generation, thanks to recent moderate rainfall, energy risks warrant closer attention, particularly for Vietnam’s promising manufacturing sector.

However, Vietnam has not always been so vulnerable to global energy volatility. Recall the years when fossil fuel was an important pillar of Vietnam’s exports, but this changed after 2015. Given dwindling domestic oil production and rising energy demand, Vietnam has turned from an energy exporter to an importer, with increasing demand for energy imports over the years. Looking at Vietnam’s energy consumption, it remains largely dominated by coal, with renewable energy only accounting for 20%. To compensate for the growing gap of energy needs, Vietnam has had to increase its coal imports from Australia and Indonesia. But oil imports are relatively more diversified, with Korea, Singapore and Malaysia supplying a combined 80% of Vietnam’s petroleum imports.

The PDP8 roadmap

HSBC said Vietnam has ambitious plans to transition from a coal-dependent economy to one embracing renewable energy. Vietnam, along with more than 40 other countries, pledged to phase out coal-fired power generation at COP26. In May, the long-anticipated PDP8 was approved, with a plan to double power generation capacity from 69GW in 2020 to more than 150GW by 2030 while diversifying power sources away from coal and hydropower. In particular, wind (both onshore and offshore) and LNG are set to make major strides, with the government aiming for 18.5% and c15% share, respectively, by 2030 – a significant jump from now.

Coal: As revealed in PDP8, Vietnam will phase out coal power plants gradually, aiming to reduce its dependency ratio from 30% to 20%. As a result, the pace of expansion of coal-fired plants will likely slow down, and investment in building infrastructure to support renewable energy will grow. During 2021-22, some of the largest financiers of Vietnam’s coal-fired plants, including China, Japan, and South Korea, agreed to end new funding for international coal power plants. Meanwhile, Vietnam has received international funding to support the transition from coal-fired power to renewable energy and help upgrade the transmission and distribution grid.

Wind: Vietnam’s wind capacity has outgrown that of regional peers, rising more than 18-fold in the last five years. The central and southern coastal regions in Vietnam have much untapped potential, as wind in these areas can exceed 10 metres a second (m/s), and 8 m/s is typically considered viable for offshore wind power development. Consistent wind speeds, a relatively shallow coastal depth and proximity to energy demand make an attractive proposition, with international companies seeking to expand their wind farm footprint in Vietnam. For example, US-based AES Corp is looking to build a USD13bn wind farm with a combined capacity of 4,000MW in Binh Thuan.

LNG as a transition fuel: Liquefied natural gas (LNG), as an alternative fuel, is in transition when it replaces coal. LNG can help Vietnam meet growing consumption demand and fill the void left by exiting coal-powered energy. That said, existing gas fields are dwindling and annual domestic production is in decline. In addition, the cost of exploring and generating new domestic supply makes it harder to attract investment.

As a result, Vietnam is expecting to see a material increase in LNG imports, with LNG expected to generate 22.4GW of power by 2030. In recent years, major utility companies such as US-based AES Corporation, Japan-based Tokyo Gas and Marubeni, as well as Korea’s Hanwha Energy, Korea Gas, and Korea Southern Power are rolling out various LNG-to-power projects in partnership with domestic entities. In HSBC’s view, the next step will be locking in long-term LNG purchase agreements to ensure that these up-and-coming facilities are utilised.

Challenges ahead

HSBC said the two main challenges would be infrastructure and funding. For one, energy demand is mostly centred in the north and south, where most manufacturing activity is concentrated. However, new energy generation, particularly renewable energy, is under construction in the central and southern regions. This means that transmission capacity to the north, which is expected to see growing power demand, will have to be upgraded. However, Vietnam’s current grid infrastructure does not support the rapid growth in solar and wind power.

For example, according to the World Bank, existing transmission can integrate only up to 3.3GW of variable renewable energy in the south, while current installed solar and wind capacity totals around 20GW. The development of transmission systems will be key to achieving the new target – with at least 47% of electricity generation to come from renewables in 2030, up from the current 36% – as revealed in the Vietnam JETP Resource Mobilisation Plan (JETP-RMP).

This brings up the question of funding. Vietnam is in increasing need of infrastructure spending to sustain its economic growth and accommodate rising urbanisation. According to the Global Infrastructure Hub’s estimates, Vietnam requires at least USD25bn per year on average for infrastructure spending over the next 20 years; among sectors, energy accounts for almost 45% of this.

Historically, private sector involvement in Vietnam’s energy sector has lagged behind that of ASEAN peers. The authorities have been seeking to address the obstacles on all fronts – the approved revised petroleum law in late 2022 is an example – to further incentivise private sector participation in energy infrastructure. In recent years, energy investment with private participation has been picking up steam in Vietnam.

ASEAN’s joint efforts

In HSBC’s opinion, regional co-ordination is a key factor in renewable energy generation and transmission, as it can help create a more resilient and reliable power supply system. Fortunately, some ASEAN initiatives and cooperation are under way. For example, solar energy generated in Vietnam can compensate for a lack of power generation from hydropower in Laos during the dry season. Meanwhile, Singapore is looking into importing offshore wind power from Vietnam. The two countries will jointly develop an offshore wind power plant with a total capacity of 2.3GW that will be connected through an undersea high voltage cable. There is great potential for cooperation among ASEAN countries to improve connectivity, realise their respective energy mix targets and ensure stability of the power supply.

“All in all, realising the importance of the green transition, Vietnam has been paving the way to achieve its net zero commitments. The long-anticipated PDP8 reflects its ambitions, providing a roadmap for growth in renewable energy over 2021-30. No doubt there will be challenges, mainly in infrastructure and funding. However, Vietnam has been addressing some of these hurdles through close cooperation with ASEAN peers and G-7 partners. Overall, the green transition should pave the way for Vietnam’s long-term growth”, said HSBC.