Unlocking the international financing for renewable energy

It is necessary to unlock the international financing for renewable energy amid rising climate change.

>> Renewable energy sources not fully tapped: experts

In recent years, we have heard much about climate change. Especially since last November, climate change has appeared distinctly in our lives and businesses through policies and regulations. So, what and why does climate change mean for Vietnam? According to World Bank report, Vietnam has been ranked among the five countries that are likely most affected by climate change. Frankly, Vietnam and Bangladesh are two countries with highest exposure to flooding, including riverine, flash, and coastal flooding. Flood represents the largest risk by economic impact in the country.

Vietnam needs to start implementing effective adaptation and mitigation strategies to contain the challenge as climate impacts are quickly getting stronger and unpredictable. We need to take action now and together.

Climate change impacts on the Vietnamese economy and national welfare are already significant. It has been estimated by World Bank that climate change will reduce national income by 3-3.5% by 2050. To confront the situation, what is Vietnam doing?

At COP26, the Prime Minister pledged that Vietnam would reach net zero carbon emissions target by 2050. The Government has agreed to phase out coal-fueled power generation in the 2040s or sooner if possible. In Vietnam's Power Development Plan 8 for the 2021-2030 period with a vision towards 2045 (so called PDP8), the total generation capacity of Vietnam by 2045 will be 333GW, in which 42% will consist of solar and wind energy. The total needed investment is US$127.5 billion.

Since the commitment was made, the Government has mapped out its plan to accelerate Vietnam’s green agenda, with a special focus in the renewable energy sector. Energy transition presents a world of opportunities that together we can open up for Vietnam, however it still poses some challenges. Therefore, Mr. Tim Evans, CEO of HSBC Vietnam, suggested two ideas to unlock the international financing for renewable energy.

Mr. Tim Evans, CEO of HSBC Vietnam

First, the current curtailment risk of the Power Purchase Agreement (PPA) has made it challenging for international financiers to structure effective project finance solutions on a standalone basis. The risk that EVN does not offtake the output of the renewable energy projects introduces uncertainties into the project’s cashflow. This can be resolved via a combination of solutions, including but not limit ed to a “take-or-pay” mechanism into the PPA and to introduce a max disruption in purchase period.

>> Synchronous solutions in energy conversion

“Taking Malaysia as example, Tenaga, Malaysian electricity company which plays similar role of EVN in Vietnam, can have maximum 168 hours per year of grid downtime, beyond such threshold, they will still need to pay the power plants. This will introduce a baseline protection to the developers and its lenders from capacity/revenue point of view”, said Mr. Tim Evans.

Second, Government Green bond would set a benchmark for private sector to tap on international capital markets, particularly in energy transition. ESG bonds contributed for 19.6% of the total Sovereign, Supranational and Agency (SSA) bond issuance in 2021-1Q2022.

Mr. Tim Evans stated energy transition is critical to net zero, but it is not all about energy. There are other areas we need to focus to encourage more green financings. Here HSBC would also recommend three other key areas to focus:

Area 1: Transition pathways of the highly emitting sectors, such as transportation, agriculture, manufacturing, construction, etc., should be considered.

Area 2: Circular economy is a big theme but many companies face challenges to execute it in absence of clear regulatory guidelines to monitor the emission and to define what is “green” in their respective sector.

Area 3: Energy service company (ESCO) is also an interesting model where the companies can outsource to a third party company who would invest into power and electrical equipment/facilities to improve the energy efficiency of their buildings or premises. Such model faces the same challenges of lacking regulatory guidelines and technical parameters to build bankable business cases and scale, although the demand for its services is substantial.

“The strong commitment made by Vietnam’s Government at COP26 was a historic step in the country’s strategy to tackle climate change. All players in this economy are sharing the same objective. Financial institutions shall join hands in supporting Vietnamese Government in their efforts to combat climate change. What we need to do now is focusing on implementation and building partnerships that can deliver the outcomes”, said Mr. Tim Evans.