September 2, 2024
Vietnam’s Promising Solar Energy Expansion and Potential – Background and Insights for Investors and C&I Leaders
Vietnam’s Promising Solar Energy Expansion and Potential – Background and Insights for Investors and C&I Leaders
Kanchuya Sukdheva, Senior Advisor
Tú Bùi Khắc, Associate
Farzana Hoque, Senior Advisor
Kanchuya Sukdheva, Senior Advisor
Tú Bùi Khắc, Associate
Farzana Hoque, Senior Advisor
Background
A few years ago, Vietnam pledged to reach net-zero emissions by 2050 during the COP26 summit in Glasgow. This commitment reflects the country’s determination to address climate change and contribute to global efforts in decarbonization.[1] To achieve this goal, a transition to green and clean energy is essential. According to World Wildlife Fund Vietnam (WWF-Vietnam), Vietnam’s solar energy is evaluated as having high development potential renewable energy (RE) sources.[2] On average, the solar radiation ranges from 1,300 to 2,900 kWh per year, increasing towards the southern regions.[3]
This article examines Vietnam’s key policies and models that have played a crucial role in driving the expansion of solar energy. They can provide guidance for addressing market challenges, drawing in new investments, and advancing a country toward its climate targets. We seek to make the case that Vietnam is a key country to watch for growing opportunities in commercial and industrial (C&I) solar installations and rooftop solar expansion.
Impact of the Feed-in-Tariff (FiT)
The development of solar energy has accelerated since 2017 following the introduction of Decision 11/2017/QĐ-TTg, which established a feed-in tariff (FiT[4]) price to incentivize investment in renewable energy. Originally, this policy was set to expire on June 30, 2019, but Decision 13/2020/QĐ-TTg extended the FiT incentives, pushing the expiration date to December 31, 2020.
After the establishment of the FiT, the share of solar energy capacity experienced significant growth in Vietnam, increasing from nearly 0% in 2018 to 21% in 2022.[5] Vietnam’s solar and wind generation accounted for 69% of Southeast Asia’s solar and wind generation in 2022.[6] By 2023, renewable energy, including solar and wind, accounted for 27% of Vietnam’s total installed capacity, making it the country’s third-largest power source. The distribution of installed capacity by power source is illustrated in Figure 1.
Figure 1: Vietnam's Installed Capacity by Sources (MW) in 2023
However, challenges with the FiT emerged in Vietnam. FiT mechanisms set a fixed price for solar energy, overlooking regional variations in solar potential. This resulted in underdevelopment of solar PV in northern Vietnam, where solar radiation is low, while leading to overdevelopment in the south-central and southern regions, where solar radiation is high. Consequently, the FiT was not extended due to these imbalances, along with the grid’s inability to absorb the excess solar energy generated in areas of overdevelopment.
Vietnam is now developing a competitive bidding mechanism for solar energy to improve grid efficiency, promote competition, and ensure a stable energy supply, but it’s currently in the works and hasn’t been implemented yet. As such, Vietnam has been in a transition phase since the end of the FiT policy. There is a transitional mechanism for this period, but only certain plants can take advantage of it and negotiate their selling prices directly with Vietnam Electricity (EVN), the national and the sole public power company in Vietnam.[7] Specifically, only plants that did not reach commercial operation (COD) by December 31, 2020 and as such weren’t able to benefit from the previous preferential FIT price, are able to use the transitional mechanism. Other projects must wait for the competitive bidding mechanism policy to be implemented. This has led to a significant stalling of grid-connected solar power growth in Vietnam.
The next sections of this article review Vietnam’s Energy Service Company (ESCO) model and national-level policies that are showing promise of expanding solar energy growth in the country, despite the expiration of the FiT and challenges in the transition phase.
Benefits of the Rooftop Solar ESCO Model
An ESCO is a company that specializes in delivering comprehensive energy solutions. It can be a state-owned or privately-owned company. The rooftop solar ESCO (RTS ESCO) model is an energy supply contracting and shared savings model. It is built on the foundation of mutual benefit among three parties: the client (electricity consumer), the investor, and the Engineering, Procurement, and Construction (EPC) contractor.[8]
The RTS ESCO model has been instrumental in advancing rooftop solar development in Vietnam following the conclusion of the FiT mechanism. Initially, EVN offered a substantial FiT for solar rooftop projects, which set high expectations among investors (the FiT for projects operational before December 31, 2020 was 8.38 US cents per kWh[9]). Despite the end of the FiT, the RTS ESCO model continues to deliver compelling advantages for both investors and clients.
Under the RTS ESCO model, the investor finances the installation of a rooftop solar system on the client’s asset(s), typically manufacturing facilities or office buildings. The EPC contractor is responsible for conducting surveys, designing the system, supplying equipment, and overseeing its installation, operation, and maintenance. With the investment cost covered by investors, this model enables the client to access solar energy without a significant upfront investment. Additionally, it reduces the client’s dependence on the national power grid.
During the contract period, typically 20 years, the client pays the investor for the electricity consumed from the system at a rate lower than the prices charged by EVN. After the contract period ends, the system is transferred to the client. The implementation process of the RTS ESCO model is illustrated in Figure 2.
Figure 2: ESCO Stakeholders and Implementation Process
Currently, to successfully implement the RTS ESCO model, it is ideal if the client consumes a high amount of electricity during the day to absorb all of the electricity generated by the RTS system. This is due to the limited ability to sell excess electricity to the grid. The new direct power purchase agreement (DPPA), discussed in the next section, may bypass this limitation as it allows an investor to sell excess electricity to other corporates with high electricity demand.
Next, we will examine the DPPA policies and the upcoming RTS incentive regulation, which could further unlock and expand Vietnam’s solar energy generation potential.
National Policies Poised to Accelerate Solar Energy Development
Under the Law of Electricity 2022, the development of energy sources, including grid-connected solar power plants, must align with national power sector planning policies. Vietnam’s Eighth National Power Development Plan (PDP 8), released in 2023, emphasizes the expansion of rooftop solar, particularly in off-grid areas and for self-consumption systems. PDP 8 includes a list of projects for large-scale solar power plants, but while planned, they are not slated for implementation until after 2030. These include both ground-mounted and floating large-scale solar power plants. The delay in implementation for these types of projects is due to capacity limitations of the national grid, which currently is unable to absorb more energy from renewable sources.
In early July 2024, the Vietnamese government introduced Decree No. 80/2024/ND-CP, establishing a direct power purchase agreement (DPPA) mechanism. This mechanism allows the direct sale and purchase of electricity between renewable energy generating units and large electricity consumers.[10] Previously, owners of private solar power plants, whether rooftop or large-scale, could only sell electricity to the grid through conventional power purchase agreements (PPAs), with no option for direct sales to consumers.
In Vietnam, there are two types of DPPAs: private-wire DPPAs and on-grid DPPAs. In a private-wire DPPA, the seller and buyer enter into an agreement to exchange electricity directly through a dedicated transmission line.[11] On-grid DPPAs, on the other hand, are more intricate and involve EVN. In this arrangement, both parties participate in the wholesale electricity market, where they can trade electricity on the spot market and enter into a Contract for Difference (CfD), setting the price and quantity of electricity for the entire duration of the CfD contract.
The DPPA mechanism gives the PDP 8 more mileage. Specifically, with the DPPA mechanism, the development and implementation of large-scale solar power plant projects previously slated for post-2030 can now be expedited if they are not connected to the grid (i.e. they are instead using private-wire DPPAs) and receive government approval.
Furthermore, a draft decree[12] that we refer to as the “RTS incentive regulation” outlines regulations for mechanisms and policies to encourage the development of self-produced and self-consumed rooftop solar. It is expected to be released in final version in 2024. This decree would help reduce barriers for the development of RTS with policy incentives including:
- License Exemption: RTS for self-generation and self-consumption would be exempt from needing an electricity operation license.
- Construction Regulations: Buildings with installed RTS for self-generation and self-consumption would not need to adjust or supplement land and functional use.
- Energy Storage: Organizations and individuals would be encouraged to combine RTS for self-generation and self-consumption with the investment, installation, and operation of energy storage systems to store surplus electricity for local use, enhancing efficiency and savings.
- Streamlined Procedures: Organizations and individuals developing RTS for self-generation and self-consumption would have their applications processed through a one-stop-shop mechanism.
- Self-Certification: Organizations and individuals developing RTS for self-generation and self-consumption would be able to self-certify their use of renewable energy.
Conclusion
Vietnam’s solar energy journey has been marked by a series of transformative policies and innovative models that have collectively propelled the sector forward. The introduction of the FiT was a significant catalyst, driving a rapid increase in solar capacity and establishing Vietnam as a leader in Southeast Asia’s renewable energy landscape. Although the FiT mechanism has since expired, new opportunities have emerged to sustain and expand solar energy development in the country.
The ESCO model has proven to be a vital instrument in continuing the momentum, particularly for rooftop solar systems. By offering a financially viable alternative to the FiT, the ESCO model has enabled both investors and clients to benefit from solar energy without the need for large upfront investments. This model has not only provided a solution to the challenges posed by the end of the FiT, but also paved the way for broader adoption of rooftop solar in Vietnam’s commercial and industrial sectors.
Looking ahead, the implementation of the DPPA mechanism and the forthcoming RTS incentive policy signal a new phase in Vietnam’s solar energy expansion. The DPPA will open up the market, allowing renewable energy generators to sell electricity directly to large consumers, bypassing the traditional grid constraints and creating new revenue streams. Simultaneously, the RTS incentive policy is poised to reduce barriers to entry, simplify processes, and encourage the integration of energy storage solutions, further enhancing the appeal of rooftop solar investments.
As Vietnam continues to navigate its path towards a net-zero future, these policies and models are crucial in sustaining the growth of solar energy. They offer a blueprint for overcoming market limitations, attracting new investments, and driving the country closer to its ambitious climate goals. By capitalizing on these developments, Vietnam can solidify its position as a regional leader in renewable energy and set a compelling example for other nations striving to achieve a sustainable energy transition. Commercial and industrial businesses in Vietnam stand to benefit from this positive momentum.
Notes
[1] Nhandan News, Roadmap to Realize Vietnam’s Commitments at COP26, accessed July 17, 2024, https://special.nhandan.vn/lotrinhcop26_en/index.html
[2] World Wildlife Fund Vietnam (WWF-Vietnam), Viet Nam’s Energy Sector Vision: Towards 100% Renewable Energy By 2050 (2023), https://100re-map.net/wp-content/uploads/2020/10/100REMAP_-Scenario-Report_VN_summary.pdf
[3] Ibid.
[4] FiT: A FiT is a policy mechanism designed to encourage the adoption of renewable energy sources, such as solar power. It involves setting a fixed, long-term price that electricity producers are paid for the renewable energy they generate and feed into the grid.
[5] EREA & DEA, Viet Nam Energy Outlook Report, Pathways to Net-Zero (2024), https://ens.dk/sites/ens.dk/files/Globalcooperation/1._eor-nz_english_june2024_0.pdf.
[6] EMBER, ASEAN’s Solar and Wind Growth Slowed Last year, Despite Huge Potential, November 16, 2023, https://ember-climate.org/press-releases/aseans-solar-and-wind-growth-slowed-last-year-despite-huge-potential/
[7] Tư vấn Pháp luật, Circular 15/2022/TT-BCT on Methods for Determining Electricity Generation Price Range of Solar Power Plants and Wind Power Plants, October 3, 2022, https://thuvienphapluat.vn/van-ban/tai-chinh-nha-nuoc/thong-tu-15-2022-tt-bct-phuong-phap-xay-dung-khung-gia-phat-dien-nha-may-dien-mat-troi-531246.aspx.
[8] TechPal Solar, ESCO là gì? Mô hình đầu tư điện mặt trời 0 đồng cho nhà xưởng, accessed July 17, 2024, https://solar.techpal.vn/esco-la-gi-mo-hinh-dau-tu-dien-mat-troi-0-dong-danh-cho-doanh-nghiep-nha-xuong/.
[9] VnExpress, The FiT Price for Solar and Wind Energy, September 1, 2023, https://vnexpress.net/gia-mua-dien-mat-troi-gio-chuyen-tiep-toi-da-1-508-1-816-dong-mot-kwh-4557358.html
[10] Government of Vietnam, Decree No. 80/2024/ND-CP Mechanisms for Direct Electricity Trading Between Renewable Energy Generation Units and Clients who are Large Electricity Consumers, July 3, 2024.
[11] EVNPECC3, Update on the Development of Direct Power Purchase Agreement (DPPA) Mechanism in Vietnam, September 29, 2023, https://www.pecc3.com.vn/en/update-on-the-development-of-direct-power-purchase-agreement-dppa-mechanism-in-viet-nam/.
[12] Government of Vietnam, Draft Decree Regulations on Mechanisms and Policies to Encourage the Development of Self-Produced and Self-Consumed Rooftop Solar Power, April 15, 2024, https://luatvietnam.vn/dien-luc/du-thao-nghi-dinh-quy-dinh-ve-co-che-chinh-sach-khuyen-khich-phat-trien-dien-324562-d10.html.