Vietnam makes a big push for coal, while pledging to curb emissions

Shaken by news that Vietnam had confirmed plans to build another 40 gigawatts worth of coal-fired power plants by 2030, World Bank President Jim Yong Kim ad libbed a few lines into a May 2016 speech to an audience of government and business leaders. “If Vietnam goes forward with 40GW of coal, if the entire region implements the coal-based plans right now, I think we are finished,” Kim said. “That would spell disaster for us and our planet.”

The people in Hanoi who make energy policy were very likely startled to learn that what Vietnam does or does not do as it develops its energy sector has world-shaking importance. In a mere quarter century Vietnam has raced from the back of the 3rd World pack to middle-income status. In the process, however, Vietnam’s economic growth has had an outsized environmental impact; between 1991 and 2012, the country’s GDP grew by 315 percent, while its greenhouse gas emissions rose by 937 percent.

Now that China, which took the “capitalist road” a decade earlier than Vietnam, is stepping up to the challenge of climate change and taking bold steps to clean its air, its neighbor Vietnam risks becoming the new pariah polluter.

EVN — Electricity of Vietnam — is the state power company. It succeeded brilliantly in the 1990’s when ordered to light up thousands of villages. With Russian help, EVN has done a fair job of building some big dams. In the new millennium, however, EVN has gone from failure to failure. The economy is performing well overall, but EVN has been notoriously slow to change. Current leadership has acknowledged EVN is bloated and inefficient, wedded to old methods and overly fond of yesterday’s technologies, and has vowed to catch up with the company’s ASEAN peers.

Vietnam’s “doi moi” reforms made room for capitalism thirty years ago. For long afterward, however, Soviet-style industrial planning survived at EVN, and to a considerable extent also at the coal and minerals monopoly Vinacomin and the oil and gas monopoly, PetroVietnam (PVN). These three state companies and their nominal supervisors in the Ministry of Industry’s Energy Directorate wield considerable influence in the institutions and councils of Vietnam’s Communist Party. Until recently, all have been dominated by people who cut their teeth on five-year plans for heavy industry and were taught that resources exist to be exploited and that externalities are costless.

EVN, Vinacomin and PVN aren’t typical of modern Vietnam, or even of the state-owned large enterprise sector. In digital telecommunications, for example, state companies display striking capability to embrace, master and deploy new technologies. Nor is the public shy of change. Mobile phones are ubiquitous. In cities and towns, rooftop solar water heaters have become common. A quarter of a million rural families have built biodigesters to recycle farm waste into methane for cooking and heating and fertilizer for their crops.

Up to now In the energy sector, however, Vietnam does not have a comprehensive, reliable energy database. One consequence is that it is virtually impossible to calculate the energy-savings impact of any project.  Nor, noted the Asia Development Bank (ADB) late in 2015, is there an integrated master plan for energy resource development.

EVN has struggled to meet the nation’s surging demand for electricity. Brown-outs are endemic during the dry season. Because it’s forbidden to cut power to foreign-invested factories, households and domestic small business bear the brunt of cuts, and incidentally pay higher tariffs than industrial users.

As sites for big hydro were used up, Hanoi’s attention turned to coal.  In 2011, it announced plans to construct 90 new coal-fired power plants by 2025. That forecast has been revised to zero out a plan to build several nuclear power plants and, after Vietnam signed on to the Paris Agreement on CO2 emissions reductions, to promise a substantial role for wind and solar power. However, there’s little doubt that Vietnam will stick to a coal-centered strategy thru 2030 (when coal will supply more than 50 percent of nation’s electric power) and probably beyond.

Coal is relatively abundant in Vietnam. Exploiting fields in the nation’s northeast corner, Vinacomin can produce about 50 million tons of high-BTU coal annually, or roughly 40 percent of estimated demand in 2030. The rest of the coal Vietnam will need then is likely to be lower BTU coal from Indonesia or Australia. Leaving externalities aside, coal is cheap and likely to remain so. Further, provided they like the price they’re offered per kilowatt-hour,investors will front the entire cost of new coal-fired power plants.

Vietnam can also count on financial support from aid donors for features of its energy plan that aim at improving efficiency (even of coal plants) and lowering overall dependence on coal-fired power. Now that it’s reached the lower middle income rung, Vietnam no longer qualifies automatically for grant aid. However, it’s one of the nations most vulnerable to climate change. On that account, Hanoi is in line for a goodly share of the $100 billion annually that the richest countries have pledged to steer the most challenged toward a lower carbon future.

Until now, the World Bank, the ADB and a dozen national development aid agencies haven’t had much to show from grant after grant intended to ‘build capacity’ at the Energy Directorate or from a host of demonstration projects. Still, they’re not giving up. Perhaps hoping that Vietnam may before long emulate China’s dramatic turn toward green and clean energy, aid donors are still putting lots of dollars on the line. And, indeed, with plentiful aid and cutting-edge technologies, Hanoi just might meet its pledge to reduce greenhouse gas emissions by 25 percent vis a vis a business as usual (BAU) scenario.

Hanoi won’t succeed without energy price reform, however.  Carrying out its recently revised power development plan, or indeed any coherent strategy, depends absolutely on Vietnam’s getting power prices right. There are several reasons for believing that’s going to happen at last.

First, EVN is tottering, and notwithstanding its faults and huge debts, the company’s collapse would be catastrophic. It won’t get well on a starvation diet. Though retail electricity tariffs in Vietnam are among the lowest in Southeast Asia, the state has been curiously reluctant to raise power prices. It’s said, and may be true, that Hanoi’s Communist leaders view cheap power as “an essential component of the party’s social contract.” Insofar as can be discerned, they’ve preferred to cover EVN’s budgetary shortfalls mainly by shuffling funds around within the national budget and guaranteeing payments on EVN’s ever-growing debt burden.

Second, when power prices are low, there’s no incentive to use energy more efficiently.  Vietnam’s energy intensity (the amount of energy needed to produce a dollar’s worth of goods or services) is among the highest in the world. It’s no surprise that in the business-as-usual scenario, Vietnam’s energy use is projected to grow far faster than GNP. Will the populace rise up to protest realistic power prices? Probably not. In fact, residential consumers as well as investors might willingly pay more for reliable electricity supply.

Third, good investors don’t come cheap. Vietnam aims to mobilize a lot more cash, some $7.5 billion annually, to invest in its power sector. A quarter of that amount is to upgrade and extend the national power distribution grid. The rest is to increase power generation, where Hanoi pins big hopes on private sector-financed independent power projects (IPPs) and on BOT (build-operate-transfer) investments by foreign corporations. Nearly all of these will be coal-fired generating plants. They won’t have state of the art emissions-scrubbing technology unless investors are sure they can make a reasonable profit on the cleaner power those plants produce. It’s up to the state, therefore, to require that tenders for new plants specify such technology and to enable EVN to contract to buy the energy those plants produce at a price that enables investors to profit.

Similarly, investors won’t finance solar or wind power farms until EVN guarantees that they can sell power across the national grid and make a profit while doing so. Although Vietnam’s southeastern coast is blessed with reliable breezes and abundant sunshine, solar and wind power entrepreneurs have had little to show from years of filing applications and knocking on doors. That will change, Hanoi insists, and energy produced from solar, wind, small hydro and biogas, currently negligible, will soar to about five percent of the national energy mix by 2030.

There are other signs of more rigorous thinking about Vietnam’s energy future.

Estimates of the nation’s future power demand made in 2011 relied on an assumption that annual GDP growth would be 8.5 percent. Even for one of Asia’s most dynamic economies, that’s dreaming (growth in the last few years has been about 6.5 percent). A revised estimate published in March 2016 reduces the annual GDP growth assumption to 7 percent, which is still ambitious but nonetheless allows planners to lower their forecast of total electric power demand in 2030 by 18 percent.

Hanoi is mandating that all new coal-fired power plants use supercritical or ultrasupercritical boilers, high-pressure designs that cost more and have a lower emissions intensity, i.e., they pollute less.

There’s considerable emphasis on raising the efficiency of the national power distribution grid, which now sheds about 9 percent of its load between generator and consumer.

Apparently mindful of Vietnam’s Paris Agreement pledge, Hanoi’s 2016 revision of its power development plan, PDP-7R, shows a 28 percent reduction by 2030 in total coal use from the 2011 baseline. According to calculations by the International Energy Agency (IEA), that’s possible if all the new plants incorporate supercritical technology, and so result in a dramatic decrease in emissions intensity, the amount of CO2 emitted per kilowatt hour of electricity.

That’s good, but still not enough to realize Vietnam’s CO2 reduction commitment in view of the very large projected increase in power use, concluded the IEA analysts in a study published last year. They judge that Vietnam (or Malaysia or Indonesia, also studied) must commit to stronger measures, and warn that all three countries must therefore get ready to separate CO2 from flue gases, compress it into liquid, and bury it deep underground.

Or perhaps natural gas will fill the gap in Vietnam’s case. Though gas is less polluting than coal in power generation, PDP-7R projects that the natural gas share of the energy mix will decline from about 30 percent as of 2014 to less than 17 percent by 2030.  That apparently reflects fears a few years back that supplies were dwindling, and also a PetroVietnam bias toward exporting the gas it and partners produce. Hanoi now can count plenty of gas from offshore fields in the development pipeline, while world gas prices are falling in consequence of surging US gas production. PetroVietnam may therefore reconsider its export plans.

Then there’s public opinion, which counts for something even in a one-party dictatorship.  As the air in Ho Chi Minh City, Hanoi and other cities has become increasingly soupy, Vietnam’s yuppies have soured on the regime’s coal-heavy strategy.

And last, Hanoi has a history of not reaching its power development goals. That’s not surprising, the ADB concluded in a December 2015 assessment of Vietnam’s energy strategy, because “the persistent mixing of political, regulatory, and commercial functions” has nurtured cozy relationships that frustrate regulatory oversight.  Changing a corrupt environment is hard work; the remedies and reforms discussed above will not succeed unless the nation’s top leaders signal that failure is flatly unacceptable.

Which indeed they may do.

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