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Why Vietnam’s State-Owned Electric Utility EVN is in Financial Trouble

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Why Vietnam’s State-Owned Electric Utility EVN is in Financial Trouble

According to recent reports, the utility is posting huge losses and may run out of cash as early as May.

Why Vietnam’s State-Owned Electric Utility EVN is in Financial Trouble

A view of the EVN Twin Tower in Hanoi, Vietnam.

Credit: Flickr/Mike W.

Vietnam Electricity (known as EVN) is Vietnam’s state-owned electric utility and provides the majority of power to residential, commercial, and industrial customers in the country. According to recent reporting, the utility is also posting huge losses and may run out of cash as early as May of this year with combined losses for 2022 and 2023 expected to reach nearly $4 billion.

The picture has changed much from just a few years ago in 2020, when EVN posted after-tax profits of VND 14.4 trillion (more than $600 million) and ended the year with VND 55 trillion (about $2.3 billion) in cash on hand. The Institute for Energy Economics and Financial Analysis noted that EVN came through 2020 “in surprisingly good financial health compared to many Southeast Asian peers.” Why did the utility’s financial condition change so drastically in such a short period?

The most immediate cause was the COVID-19 pandemic. 2020 was a good year for EVN, in part, because electricity demand moderated. In the years preceding the pandemic, electricity demand in Vietnam was growing by between 9 percent to 11 percent annually. In 2020 demand grew by only 3 percent. This deceleration was a global phenomenon, as much of the world went into lockdowns that year.

Because of this, the price of energy inputs like coal was very low for a while. With slower growth on the demand side, EVN could procure or generate a larger share of electricity from sources like hydropower and the coal that it did need to burn was fairly cheap. This was a good thing for EVN’s margins. But it was only temporary.

In 2021, global demand for energy inputs like coal not only revived, but way outpaced supply, and the price of coal shot up in 2021 and 2022. For Vietnam, which imports a lot of coal and has many coal-fired power plants that burn it, the cost of generating electricity suddenly became very expensive. And this is an especially acute issue in Vietnam, due to the structure of its electricity markets.

Vietnam is in the process of attempting to move from a heavily state-controlled economy to one with more pro-market features. Electricity has been a priority area where the government wants the private sector to play a bigger role. They want this, at least in part, because electricity generation is very capital-intensive and the market can be an efficient way of raising money to finance large-scale investments.

But any transition from state to market is complicated. EVN and its subsidiaries still control the generation, transmission and distribution of the vast majority of electricity in Vietnam. EVN and its three generating companies produced 57.5 percent of Vietnam’s electricity in 2020, with the remainder coming from private companies and imports.

There is indeed more private sector activity in the sector now than there was in the past, including a nascent wholesale market. But EVN remains overwhelmingly the largest and most important player at every stage. The state is reluctant to reduce its control over a critical national function – in this case the production and distribution of electricity – and give more influence to private sector actors.  And I think the utility’s recent financial woes actually help us understand why this is the case.

When generating costs began spiking in 2021, there were basically three options for EVN and its sole shareholder, the government of Vietnam. The costs could be passed onto consumers. They could be absorbed by EVN. Or some combination of the two. They went with the second option, and the state refused to raise electricity prices over the last several years. When costs rise and revenue doesn’t, a likely outcome is big operating losses and depletion of cash reserves.

It looks like the retail price of electricity in Vietnam will indeed go up soon. And with the global price of energy inputs like coal falling, EVN should see its operating deficit shrink. I am quite certain the Vietnamese government will at the end of the day cover EVN’s operating shortfalls and will not let the utility go under. But with economic growth projected to require big investments in grid infrastructure and generating capacity in the coming years, a liquidity crunch at this time could complicate things.

You might think of EVN’s financial troubles as a failure of management or policy. But in reality, the utility is serving the function the state wants it to, which is to buffer consumers from big price shocks. It was probably unwise to wait until they were nearly out of cash to consider raising retail rates, but it does draw a line under the intricate balance between state and market in many emerging economies, and the complex political and economic trade-offs involved in managing that balance.