It was recently reported that Vietnam’s state-owned electric utility EVN has started cutting back on payments to some solar and wind power producers. Reuters was shown a petition signed by a number of renewable energy companies claiming they are in danger of breaching loan commitments and face increased risk of default if EVN continues to cut down these payments.
Investors have seemingly united around a narrative that EVN’s actions will undermine Vietnam’s clean energy ambitions by raising doubts about the safety of doing business in the country. For its part, EVN claims it is withholding payment only from wind and solar generators that failed to meet certain regulatory requirements. So, what is going on here?
First, some background. Starting in 2019, Vietnam uncorked a tremendous boom in renewable energy, mostly from solar power. Renewable energy, excluding hydropower, went from essentially zero in 2018 to 14 percent of the generating mix by 2023. The installed capacity of renewables was more than 21,000 megawatts in 2023. Any way you look at it, that is a phenomenally rapid expansion of renewable energy in just a few years. But this has come at a cost, which is that the payments EVN is now required to make to renewable energy developers have ballooned.
These developments are part of a wider structural shift toward more private sector investment in Vietnam’s energy sector, which has both upsides and downsides. Historically, EVN has been the biggest electricity generator in Vietnam. The utility and its subsidiaries accounted for 61 percent of Vietnam’s installed capacity in 2016.
In recent years, rather than building and operating its own power plants, EVN has been tasked with buying electricity from developers in order to stimulate more private sector investment. By 2023, EVN’s share of national installed capacity was down to 37 percent. This tells us that a significant shift toward privately owned and operated generation is underway, with EVN helping to drive this shift by buying more and more power from independent producers.
Renewable energy has been a big part of this process. Vietnam was able to increase investment in renewables quickly because it offered developers and investors very attractive terms if they built solar and wind power. The tool they used is called a Feed-in-Tariff, which requires EVN to buy clean energy from private developers at a fixed above market price for a long period of time (20 years or more).
The idea is that a country like Vietnam needs private investment to build renewable energy at scale. And because the market is underdeveloped, one way to attract private investment is to offer developers and investors a really good deal that is designed to reduce their risk exposure. Because Feed-in-Tariffs offer attractive returns with lower risk, they are often effective at boosting investment.
But there’s a catch. Because EVN was offering to pay a premium to purchase solar and wind power, the scheme attracted a massive flood of investment in a very short period of time. At the same time, the Vietnamese government tightly regulates the price at which electricity is sold to consumers. Unless they absolutely have to, the government will try to avoid raising the price of electricity and passing on cost increases to Vietnamese consumers.
This means that as EVN was attracting a massive inflow of private investment in renewable energy and entering into agreements to pay renewable developers a premium rate for their energy, it had very limited scope to raise prices on consumers. You don’t need a PhD in economics to figure out why this is a problem.
In 2018, EVN paid about $4.5 billion to purchase electricity from external parties. By 2023, it was paying $11.5 billion. As costs soar due to the proliferation of new purchase agreements with private developers, EVN is raising rates on consumers, but not fast enough to keep up. As a result, the utility posted a net loss of over $1 billion in 2023. And since raising rates on consumers remains politically unpalatable, EVN is now trying to close the gap by cutting back on payments to the generating companies themselves, citing regulatory compliance issues.
Will this undermine market confidence and make investors think twice about building wind and solar in Vietnam? Probably. But we should also consider that the initial contracts were pretty heavily tilted in favor of the private sector in the first place, with much of the risk shifted onto the state and EVN while investors and developers were guaranteed attractive rates over the long term.
Given that the cost of building clean energy has dropped a lot even in just the last few years, getting locked into long-term above-market rates to buy wind and solar power just isn’t a terribly attractive or even necessary option these days. EVN, much to the chagrin of some developers who rushed into the sector over the last few years, seems to be realizing that now.