Pacific Money | Economy | Southeast Asia

The Reality of Vietnam’s Energy Transition

The country has emerged as a regional leader in renewables, but some thorny challenges lie ahead.

The Reality of Vietnam’s Energy Transition

The Vinh Tan thermal power plant in Binh Thuan province, Vietnam.

Credit: Depositphotos

Earlier this fall, U.S. climate envoy John Kerry shone a spotlight on Vietnam, urging the Southeast Asian nation to “do what is sensible” and refocus its energy sector by investing in renewables and retiring fossil fuels. His remarks coincided with a deal between the European Union and the United Kingdom that made headway last week, which will see the two powers invest at least $11 billion in Vietnam’s green transition. The Just Energy Transition Partnership (JETP) seeks to cancel projects for new coal plants and build out 60GW of renewable energy capacity by 2030. Expected to be finalized at an Association of Southeast Asian Nations (ASEAN) meeting next month, the ambitious package will include public and private financing, technology transfers, and technical assistance.

JETP is not the first deal of its kind. The last decade has seen investors show a growing interest in expanding renewable technology in Southeast Asia. But for Vietnam’s government, the green energy transition is less about a passion for saving the planet and more about driving economic growth by any means possible. Vietnam cares about decarbonization – and renewables do have the potential to become the lowest-cost available energy option. But many political, regulatory, and financing challenges still stand in the way of this goal. Vietnam will ultimately act in its own best interest when deciding its energy future, but it must be wary of not getting overly ambitious with its commitments to the green transition by taking on debt and accepting capital for projects that are premature, imprudent, or ill-advised. An “energy transition” can be dangerous to any developing country that does not have the same risk tolerance as wealthier nations, and Vietnam is susceptible to falling into this trap.

Simply following the energy road maps of developed countries is unlikely to be successful in Vietnam’s case. The country’s solar energy overcapacity and investment in new generation technologies like hydrogen are distractions in advancing its energy sector. Vietnam should prioritize an energy adaptation strategy that addresses its existing vulnerabilities before prematurely discontinuing fossil fuels in favor of riskier green investments that could derail and delay its energy transition over the long run.

In an attempt to wean itself off fossil fuels in the past, Vietnam developed an expansive footprint in wind and solar energy through a series of government-backed feed-in tariffs. The region has some natural ecological advantages in renewables, so explosive early growth led to a boom. Vietnam’s electricity grid, initially designed for conventional resources, is vastly underdeveloped and unable to deliver solar at scale. Additionally, a lack of regulation and an insufficient power purchasing plan led to excesses in electricity generation, forcing Vietnam Electricity (EVN) to cut renewable energy production in 2021, bankrupting solar companies and halting new renewable projects.

The expansion of LNG is another important component of Vietnam’s energy plan that is experiencing growing pains. Vietnam’s current National Power Development Plan VIII (PDP8) projects an increase in LNG capacity over the next 10 years. Vietnam is already seen as a trusted and willing partner in the global fight against climate change, affording it access to exclusive and lucrative sources of capital. But LNG projects supported by PDP8 have struggled to gain financing from investors reticent of its true return on investment. Much like JETP, foreign direct investment opportunities are often geared toward renewables, as climate-focused investors prioritize decarbonization strategies. Carbon-intensive resources like LNG are seen as less attractive investments particularly when the environmental community believes its profitability against renewables will peak in 2037. But there is still a need to develop LNG as an important baseload fuel in supporting Vietnam’s industrial expansion and to close the gap on more environmentally damaging fuels like coal.

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Vietnam cannot afford to be left behind in the green revolution, but at the same time, the over-saturation of solar projects and the misalignment between policy and financing commitments for LNG are forcing domestic producers to source new generation technologies. Left with limited options, investors are now promising the development and expansion of hydrogen as part of 30-year LNG deals as a companion technology to make gas financeable over the longer term and more attractive to climate-conscious investors.

This past spring, the Vietnamese company TGS Green Hydrogen announced its intention to build the country’s first green hydrogen plant in the southern province of Ben Tre. Phase one of the $840 million deal is under construction with a completion deadline scheduled for 2024. Early innovators like TGS believe hydrogen could be used to meet some of these domestic challenges and open an export market to neighboring countries.

But hydrogen energy generation is riskier than its most sanguine supporters would like to admit. Today, it consumes more energy to produce than it generates. Hydrogen is an energy carrier, meaning that its raw form must be converted to secondary energy by splitting hydrogen and oxygen molecules from water in a process called electrolysis. But under current conditions, wide-scale expansion of hydrogen is inefficient, pricey, and not globally coordinated, making it a non-viable short-term solution to Vietnam’s overproduction issues.

We need Vietnam to continue to set the tone for decarbonization in the region but its well-intentioned roadmap for energy transition does not take into account the long-term ramifications of its strategy. Over-commitment to renewables and the disavowal of low-carbon fossil fuels like LNG could threaten its progress. Gas infrastructure is expensive and long-lasting. Countries that invest in this infrastructure will rely on LNG for far longer than the government’s plan intends. Vietnam has a long and chaotic road ahead of it in terms of its energy transition. The cost of change will have to include low-carbon emitting fossil fuels like LNG, and this should not be considered a negative in developing countries like Vietnam.

Investors in Vietnam’s energy sector must take off their rose-colored glasses and understand the harsh realities of its short and long-term energy future. Innovation in the sector has become difficult to track and even harder to predict. Vietnam would be better suited to address policy challenges and infrastructure insufficiencies before recklessly spending on renewables and being held hostage by new and risky technologies like hydrogen. Vietnam will continue to be a clean energy leader in Southeast Asia, but it must first build a strong foundation by addressing existing vulnerabilities before forging ahead with new and misguided ventures.