Financing for renewable energy towards green growth in viet nam

Nội dung text: Financing for renewable energy towards green growth in viet nam

1. FINANCING FOR RENEWABLE ENERGY TOWARDS GREEN GROWTH IN VIET NAM Dang Le Ngoc* 1- Nguyen Dinh Dung ABSTRACT: Viet Nam is considered as one of the best successful model for escaping poverty and becoming a low-middle income country within three decades. Notwithstanding that the country enjoyed average 6% of annual growth rate over the last decade, it has been facing with a variety of impediments that may threaten its sustainable development. Renewable energy deployment is placed as a remedy in curing existing economic and social issues towards national green growth strategy that responds to the country’s environmental problem, energy security and untapped rich renewable energy potential. In addition, Vietnamese government strongly committed in reducing greenhouse gas emission that demands at least US$ 27 billion by 2020 (equals 15% of GDP in 2015) to finance green energy sector (GIZ, 2016). However, calling such large amount of money is a challenge due to unattractive investment conditions combining with under-developed domestic financial market. Based on existing issues, authors proposed recommendations containing more luring conditions as well as strengthening domestic financing environment through a functional financial market for bankable investment in renewable energy in Viet Nam. Keywords: Green energy, Viet Nam, Renewable-energy financing 1. INTRODUCTION Currently, Viet Nam is fossil fuel-intensive economy when nearly two third of energy supply derived from coal, oil and gas (Revised PDP, 2017). With increasingly demand of energy of domestic market in recent years makes the country has become coal importer since 2015. Viet Nam, however, is a rich potential country with abundant source for renewable energy (RE) particularly wind power, solar power and biomass that are substantially untapped. In 2015, only 3.7% of total electricity supply derived from renewable energy. Over reliance on fossil fuel with lack of diversification in energy mix are threatening energy security of the nation. In addition, Viet Nam has been suffering with severe environmental issues related to climate change and local air pollution. All of those issues require a gradual replacement offossil fuel exploitationby green and environmental – friendly energy ones.This chapter is aiming to analyse the rationales of development RE industry in Viet Nam following by currently positioning RE financing in the country. Furthermore, underlying obstacles that challenge RE financing are studied.Although having advantages in finding financial sources for renewable energy namely a proper national energy strategy in place to make a concrete foundation to lure private investment with basic financial incentives such as FIT, preferential tax; there still exists a large number of hindrances such as low- regulated price of electricity that makes RE projects difficult to be profitable with uncertainty of creditworthiness of Viet Nam Electricity (EVN)- a state-owned enterprise (SOE) dominating electricity industry. Moreover, an underdeveloped financial system that lacks of capacity to deliver long-term capital with weak competence of banking system in implementing green * International Finance Faculty, Academy of Finance, Hanoi, Vietnam International Finance Faculty, Academy of Finance, Hanoi, Vietnam
2. 284 HỘI THẢO KHOA HỌC QUỐC TẾ KHỞI NGHIỆP ĐỔI MỚI SÁNG TẠO QUỐC GIA credit appraisal. Based on existing challenges, authors proposed recommendationsincluding reviewing energy price policy with implementing fiscal policy reform to encourage RE investment; developingafully functional domestic financial system, combining with sustaining business performance of EVN to make it more trustworthy in foreign investors’ eyes. 2. MOTIVATIONS FOR ACCELERATING GREEN ENERGY DEPLOYMENT IN VIET NAM 2.1. Diversification of the Energy Mix and Energy Self-sufficiency Viet Nam possesses a basket energy supply with prominent of coal, oil and biomass and geothermal (figure 1). In 2015, the total primary energy supply was 70,588 KTOE, of which coal occupied the largest part with 34%, following by oil (25%) and biomass and thermal (21%), meanwhile natural gas and hydro accounted for minor shares of 13% and 7% respectively (IEA, 2016). Source: IEA (2016) For final energy consumption (figure 2), basing on 2015 data (IEA, 2015), energy consumedby industrial sector ranked first with 41.72% of total energy consumption nationwide, following by residential (32.23%) and transportation sector (19.54%). Significant share of energy used for industrialization that consists of many energy-intensive industries such as production of steel, fertilizers, cement, pulp and paper which often rely on outdated production technologies (Danish Energy Agency, 2017). Source: IEA (2015) When looking at the evolution of primary energy supply during longer period from 1990-2015 (figure 3), we can see a gradual increase in total amount of energy supply over the years. More notably, an obvious
3. INTERNATIONAL CONFERENCE STARTUP AND INNOVATION NATION 285 increasingly trend of coal in both absolute number and percentage is found. The proportion of coal supply in energy basket in the country went up significantly from average of 14% in 1990s to 19% in 2000s and ended up with 30% in the period from 2001- 2015. This noteworthy figure is as a result of Vietnamese government’s policy that determined coal is the primary source of energy supply for the country (PDP 7 rev, 2016). In contrast, biomass and waste to energy tend to decrease for contribution. There was a dramatically decreasing proportion in renewable energy supply (mainly biomass generated in countryside) during 1990 - 2015, biomass used to be the first primary source that comprised 70% in 1990 and above 50% of total energy supply before 2000, however it was replaced by oil and coal rapidly and stood at only around 20% in 2015 that partly due to the increasing of rural area’s income (Dang et. al 2009). Source: IEA (2015) When analysing primary energy mix position (figure 4), although a variety of energy sources are currently included, the major attribution is from coal that is also in line with energy strategy of the government in meeting domestic energy demand basing on its cheap - operation cost for energy generation. In Power Development Plan 7 revised (PDP 7 rev) in March, 2016 the government expressed its interest in coal-fired energy by developing future plan that a majority of energy supply for industrialisation will be derived from coal. The component of coal is forecasted to be dominant with 49.3%, 55% and 53.2% in 2020, 2025 and 2030 respectively (PDF 7rev, 2016). Figure 4: Structure of power sources as share of total electricity supply in Viet Nam Source: PDP 7 revised (2016)
4. 286 HỘI THẢO KHOA HỌC QUỐC TẾ KHỞI NGHIỆP ĐỔI MỚI SÁNG TẠO QUỐC GIA In order to meet high demand of domestic energy, import volume of coal has climbed up significantly since 2014 (figure 5). Value of energy import is greater than export as a result of decline of coal export and increase of coal import with a net import of 12% in 2015. The coal import in 2016 was more than 10 million tons and expected to increase in the coming years (PDP 7 revised, 2016). With the increasing energy demand and recent fluctuations in energy import and export, Viet Nam has become a net energy importer since 2015 (figure 5). At the same time, volume of energy export declined in recent years, with an export volume of nearly 12 thousand KTOE in 2015 that equals to only 40% compared to 2009. Source: IEA (2015) The situation of coal imported and the forecasted energy supply as demonstrated in Revised Plan 7 has raising significant concerns with regard to energy security for the country. First, this makes the country more import dependent and reduce the self-sufficiency of energy and vulnerable to external energy price shocks. Several studies found that reliance on fewer energy resources will reduce the energy security, among which Taghizadeh-Hesary et al. (2017) shed light on energy consuming sectors in Japan, after Fukushima nuclear disaster that resulted in nuclear power shutdown and substituting the nuclear loss with importing more coal, oil and Liquefied natural gas (LNG). Their results show that absolute value of elasticities of most oil consumption sectors in Japan reduced after this disaster because of increaseddependency on oil consumption, which endangered energy security in thecountry. They proposed that to raise energy self-dependence and energy security, Japan needsto diversify its energy supplies from too much dependency on fossil fuel, to a combination of fossil fuel and RE. Second, as the domestic price for fossil fuels currently is set below the world market price, for imports this price gap would have to be met by public sources, putting pressure on an already deficit government budget. Third, as above 50% of energy supply is coal illustrates an improper energy diversification for the country. 2.2. Higher energy efficiency and lower GHG emission Vietnam’s GHG emission growth is one of the largest in the world and its carbon intensity is the second highest in Asian countries (World Bank, 2015) with the energy intensity is gradually increasing and predicted to become a major greenhouse gas (GHG) emitter in the region with regard to declining among
5. INTERNATIONAL CONFERENCE STARTUP AND INNOVATION NATION 287 countries East Asia and Pacific as well as lower-middle income country (figure 6). Theseissues are majorly projected basing on growth in the use of coal when this source accounts for more than 50 percent of the energy mix by 2030 for power generation illustrated in PDP rev 7. Source: World bank (2015) Source: World Bank (2015) Figure 7 shows the positive correlation between CO2 emission per capita and GDP growth per capita of the country in three consecutive decades (from 1985 to 2015). Viet Nam witnessed impressive economic growth rate with average per annum of 6% from 1985 to 2014. However, at the same time, amount of C02 emission per capita experienced an identical pattern when increasing 4 times during the periods with the absolute number of emission from 21.168,924 kt in 1990 to 166.910,839 kt in 2014. The strong coupling between economic growth and C02 emission generation requires less C02 – intensive industrialization strategy in future. As mentioned before, Viet Nam continues to develop coal-fired thermal power plants, determining it as the first primary electricity supply source for the economy. Koplitz et al.,(2017) in their study broke up emissions growth in the relation with changes in the carbon intensity in Vietnam, they found that high increases after 1990 can majorly be attributed to an
6. 288 HỘI THẢO KHOA HỌC QUỐC TẾ KHỞI NGHIỆP ĐỔI MỚI SÁNG TẠO QUỐC GIA increased use of oil, but coal plays a significant role. Emission that is the main source of air polluting and lead to climate change has been adversely affecting the national growth and poverty reduction in many nations including Viet Nam. If global climate change is a broad extend when measuring the impact of Viet Nam in responding the universal phenomenon (Zimmer et a. 2015), severe local pollution issue seems to be more obvious to take into account. Generating coal-made energy is more costly than it appears due to the underlying expenses for local environment, health, livelihoods. Furthermore, huge waste from coal projects must be transported and landfilled while air pollution and other externalities are often not included in its price. As of 2011, Vietnam has 38 Coal-fired power plants in operation and is projected to reach 133 by 2030. Coal-fired power plants are considered to be important polluters in the local environment where factories are established. If all plants are scheduled to go into operation, the bottom ash slag up to 14 million tons per year by 2020, and nearly 35 million tons of bottom ash in 2030, along with tens of millions fly ash, mainly SO2, NOx, and primary PM2.5 gases. In a study by Koplizet et. al (2017) predicted that by 2030, the total number of deaths due to coal pollution in Vietnam would be 19220 people mainly involved in heart disease and stroke. Therefore, with ambitious strategy from authorities towards cleaner, more environment – friendly not only for global in broad extent but specifically for local environment first, that requires a significant change in strategic energy deployment of the country. Because it is impossible to exit and discontinue a large number of coal-fired projects, employment of technology for cleaner coal-fired power plant must be considered as the most important solutions since currently, almost all of coal-energy generators in Viet Nam are out of date (ECA, 2016). A variety of model for greening and modernizing the technology of coal-fired industry that benefit greening energy sector process can be found, Isogo thermal power plant in Japan should be an example. 2.3. Unleash substantial untapped potential of renewable energy Viet Nam has abandon source for RE generation basing on a large number of advantages in geography location. Wind, solar and biomass are the most three promising energy sources for generating green energy. Biomass is an important and abundant source of energy in Viet Nam when a large number of citizens located in rural area and agricultural sector. Agricultural waste is abundantly presented in the Mekong Delta region, accounting for roughly 50% of the waste of the whole country, for the Red River Delta, it comprises 15% of the country’s waste. Before 2000, nearly 90% of rural areas energy consumption is derived from biomass such as fuel wood, agricultural residues and charcoal. Moreover, biomass fuel is also an important source of energy for micro and small industries located mainly in remote areas. In terms of solar energy, based on its favorable geographical conditions, Viet Nam has huge potential for solar energy production, with 1,600-2,700 sunlight hours per year and an average direct normal irradiance of 4-5 kWh per sqm per day (GE, 2018). Specifically, Viet Nam has rich potential for solar Photovoltaic (PV) power. This type of energy production has great advantages such as very few negative environmental impacts and zero GHG emissions. After initial investment, except for some small amounts of costs for maintenance, solar panel cleaning and liability insurance, there are no other operational costs. Cost of generating electricity from solar PV are steadily reducing. With regard to wind energy,Vietnam’s wind energy potential capacity is considerably high if compared to Thailand, Laos or Cambodia. With a coastline of more than 3,000 km and located in the monsoonal climate zone, Viet Nam has considerable potential for harnessing its wind resources. The provinces with the most promising wind potentials include BinhThuan, NinhThuan, Vung Tau, Ben Tre, SocTrang, Bac Lieu, Ca Mau and the Central Highlands. The total technical potential for wind power development in the country is estimated be at 24GW according the atlas. (GIZ, 2013)
7. INTERNATIONAL CONFERENCE STARTUP AND INNOVATION NATION 289 In terms of renewable energy generation from solid waste, with a population of more than 93 million people, the volume of waste disposal in Viet Nam is huge. On average, nearly 35,000 tons of urban daily- life waste and 34,000 tons of domestic waste discharged. In big cities like Hanoi, Ho Chi Minh City, there are 7,000 to 8,000 tons of waste each day (Schneider et al., 2017). However, the amount of waste has not been thoroughly used as a source of energy for life. Currently, nearly 85% of the current waste in the country is treated mainly by landfill technology, which requires many land funds, of which 80% of landfills are not hygienic, potentially contaminating the environment. With 35,000 tons of rubbish buried each day, this is a wasted resource that Viet Nam has not fully utilized for energy generation. 3. FINANCING FOR RENEWABLE ENERGY IN VIET NAM 3.1. Renewable energy investment in Viet Nam Figure 8: Renewable energy investment in Viet Nam (2011-2016) Source: Global-climatescope(2017) Figure 8 shows value of annual new investment in RE in Viet Nam from 2011 to 2016. At the beginning of the period covered, investment for RE industry annually is small amount with all under US$ 300 million from 2011 to 2015, even in 2014, the figure decreased significantly by 48% compared to previous year. However, turning to 2016, there was a noticeable sign when investment soared a further 130% and stood at US$ 682 million that makes the total value of renewable energy industry in Viet Nam until 2016 ended at US$ 2355.73 million (figure 8). It is believed that, amended Power Development Plan 7 has positive effect to Viet Nam RE industry and aslo 2016 became a remarkable year for renewable energy investment in the country. Moreover, in that 2016, the value of new RE investment in Viet Nam was also equal to that of Singapore and Taiwan but it was still lower than Thailand’s and Philippines’s (table 1). Table 1: Renewable energy investment in 2016 in Asian countries Renewable energy Growth rate -% (compared with Criteria investment in 2016-US$ previous year) Billion Thailand 1.4 4% Philippines 1 -47% Pakistan 0.9 -58% Singapore 0.7 1328% Vietnam 0.682 143%
8. 290 HỘI THẢO KHOA HỌC QUỐC TẾ KHỞI NGHIỆP ĐỔI MỚI SÁNG TẠO QUỐC GIA Taiwan 0.7 -2% Indonesia 0.5 84% Source:Global-climatescope(2017) It is noteworthy that, when comparing whole amount of RE investment value over the years among Asian countries such as Thailand or Indonesia, Viet Nam is only a minor player. Figure 9 shows accumulated value of RE financing in Viet Nam and Indonesia during 2010-2016. Surprisingly, in 2010, the value of two markets are similar, it was even slightly higher in Viet Nam. However, Indonesia witnessed a dramatic increase in following years meanwhile Viet Nam lagged far behind the neighboring nation. At the end of 2016, the accumulated value of RE investment for Indonesia is US$ 5643.7 million that is more than two times of Viet Nam’s. Source: Global-climatescope(2017) As estimated by GIZ (2013), renewable energy tapped in Viet Nam is currently only 3.4% of total potential and therefore it requires a huge capital to unleash. There has an explosion of renewable energy investment all over the world and South-East Asia is one of leading region that has huge amount of money invested for RE projects. In 2015 and 2016, the values of new investment for RE in that location are US$ 3.8 and 2.6 billion respectively (Irena, 2017). It can be said that value of RE industry’s investment in Viet Nam is negligible and not commensurate with the country’s demand to unlock the substantial potential. This industry was not received adequate attention from the government in long time and seems to be neglected until the revised PDP 7 issued. Viet Nam is considered as “late comer” in a trending industry and therefore requires stronger commitment from authorities to unleash this huge potential in future. Without the government’s efforts and commitment to invest renewable energy, Viet Nam may become a “outsider” of the globally investment waive. 3.2. Financial incentives for renewable energy projects in Viet Nam Regarding financial incentives to unlock RE potential in the country, Feed-in tariffs is an important component that helps to initiate a surge of renewable energy in the market. In Viet Nam, FITs for multiple types of renewable energy sectors are illustrated according to regulations as below (Table 2). Table 2. Financial incentives for renewable energy projects
9. INTERNATIONAL CONFERENCE STARTUP AND INNOVATION NATION 291 Renewable Regulation Investment area Supporting Supporting in detail electricity mechanism source Wind Decision no: 37/2011/ Electricity FIT for 20 years 7.8 US cents/Kwh excluding QD _TTg (6/2011) production VAT Biomass Decision No: 25/2014/ Electricity FIT for 20 years 7.551 US cents/KWh (north) QD-TTg (3/2014) generation 7.3458 US cents/KWh (central) 7.4846 US cents/KWh (south) Solid waste Decision No: 31/2014/ Direct burning FIT for 20 years 10.5 US cents/KWh (south) QD-TTg (5/2014) Landfill for gas FIT for 20 years 7.28 US cents/KWh (south) Solar Decision No: 11/2017/ Grid connection FIT for 20 years 9.35 US cents/KWh QD - TTG (4/2017) generation Small hydro Adjusted annually by Electricity Avoided cost tariff ~ 5 US cents/KWh power MOIT generation Source: GOV (2011, 2014, 2017) Despite the fact that Vietnamese government adopted a feed-in tariff for multiple types of renewable energy (with EVN has the sole responsibility for buying the whole electric output from renewable power projects), this current subsidized tariff is not attractive in comparison with that in other ASEAN countries (for example, wind power’s FIT is 19 US cents/kWh in Thailand and 21.8 US cents/kWh in Philippines). 4. MAJOR CHALLENGES IN FINANCING FOR RENEWABLE ENERGY IN VIET NAM 4.1. Inappropriate energy pricing policy Electricity price in Viet Nam has been under highly regulated in a long time. Domestic coal prices are set well below world market prices. There are price ceilings in the refined petroleum markets as well as various taxes and tax waivers applied. Source: GIZ (2016)
10. 292 HỘI THẢO KHOA HỌC QUỐC TẾ KHỞI NGHIỆP ĐỔI MỚI SÁNG TẠO QUỐC GIA It might be irrelevant to compare the electricity tariff among different countries due to difficulties in calculating the average for each country that varies from customer type, volume of electricity used, high demanded time or day, etc. Nevertheless, not many countries possess low average electricity tariff as Viet Nam. Figure 10 shows the comparison of electricity price within ASEAN region, it can be seen that Viet Nam is one of the lowest - electricity price country, only higher Myanmar, Laos and Brunei and almost same tariff as in Thailand. The fossil fuel subsidies through electricity price control place pressure on state budget that has been experiencing deficit in long term and insufficient to invest into other development projects. Subsidy fluctuates between $US 1.2 billion and $US4.49 billion per year for the period 2007-2012, based on the price gap approach with the largest component was spent for electricity. After 2012, total amount of subsidy for energy and electricity is gradually decreased and stood at 1.8, 1, 0.2, 0.1 ($US billion) in 2013, 2014, 2015 and 2016 respectively. (GIZ, 2016). In PDP 7 revised, with application of FITs for multiple types of RE projects, forecasted subsidy for power generation in Viet Nam is still significantly increasing in volume as illustrated in table 3. Table 3: Forecasted subsidy for power generation RE type 2020 2025 2030 2035 Power Solar 3.88 7.62 18.86 24.77 generation Wind 4.31 7.97 17.55 55.45 Biomass 1.67 5.59 15.67 30.54 Forecasted Solar 0.16 0.31 0.77 1.01 Subsidy * – Wind 0.11 0.20 0.44 1.39 billion US$ Biomass 0.01 0.03 0.08 0.16 Total 0.28 0.54 1.29 2.56 Note: (*) as a gap between FIT and average electricity price set by EVN at the end of 2016 Source: (PDP 7, 2016) In addition to increase in budget spending, artificial low price of electricity is considered as a weak factor in liberalizing and opening domestic market and one of the most concerning issue that prevent investment from private sector. A numerous number of investors expressed the concerns relating to bankability of RE projects as low energy price means projects’ proper rate of return is not ensured when electricity tariff may not compensate production cost. 4.2. Unpreferential Feed-in tariff While some RE technologies are already cost-competitive, almost all of RE projects are difficult to rival the subsidized conventional energy power generation. In fact, negative externalities in traditional energy generating is not considered, leading to artificially low electricity prices that do not reflect the true cost of manufacture. The Feed-in Tariffs offered by Vietnamese government to remedy this situation, however they are considered as not reasonable to ensure RE projects bankable, the standard electricity tariff is still lower compared to manufacturing cost in conventional energy projects, in RE ones, the cost is even much higher. For example, in 2011, the weighted average retail electricity price in the country was only US 6 cent per kWh while Long Run Marginal Cost was US 9.5 cent/kWh (Nguyen, 2012).
11. INTERNATIONAL CONFERENCE STARTUP AND INNOVATION NATION 293 4.3. Undeveloped financial system that is inefficient in funding long term loans and applying innovative financial devices Viet Nam’s financial market is immature with small-market size and undiversified-financial instrument types. Domestic stock market is small in scale and weak in structure with lack of diversity in market’s commodity. In addition, with immature bond market structure when government bond segment holds the majority market share. In 2014, government bonds were issued up to VND 248.024 trillion that is equivalent to 6.24% of GDP, whilst, corporate bonds accounted for only VND 22.922 trillion that equals less than 1% of GDP. Furthermore, it is difficult to issue long-term bonds since market prefers short - maturity ones. In 2017, the bonds with over 10 year - period only comprised 22% of total outstanding value of bonds issued. Because of the small size of the capital market, financing for businesses is heavily reliant on bank credit capital (Banking Strategy Institute, 2015). However, funding via Viet Nam’s banking system is also challenging due to domestic banks are often considered RE projects as risky and strange business. Although to date, Vietnamese banks are more interested in their green lending portfolio, the most significant obstacle of banks is inadequate capacity for processing green credit appraisals including risk assessment and evaluation of new technologies. Green energy lending deals therefore have often only been successful with involvement of international financial institutes such as ADB or World Bank or donors as development organizations. New and innovative financial vehicles suchas green bonds are expected to provide additional financial channel for renewable energy financing. However, not-fully developed financial market in Viet Nam seems to be not yet ready with those type of instruments. 4.4. EVN’s creditworthiness concern EVN is a giant state-owned enterprise among three SOEs in energy sector. It possesses a robust market share in energy market and make up above 60% total of electricity generation of the country (World Bank, 2018). In the PDP 7 rev, the government regulated that EVN is a major buyer and responsible for consuming electricity generated from all RE projects in the country. However, financial health status of this SOE raises significant concern for RE developers especially foreign ones. In fact, energy price is highly controlled that lower than manufacturing costs means that it is highly likely for EVN to make losses. In 2010 and 2011, more than VND 10,000 billions of loss reported that equals to US$ 500 million at that time, and value of debt shared 85% of total assets (World Bank, 2018). Although since 2012, there has been a noticeable improvement in EVN’s financial performance when it has been turning to be profitable and recently it was ranked BB for credit rating by Fitch that equals sovereign rating of Viet Nam (Fitch, 2018), EVN’s creditworthiness is still an issue. From 2014 to 2020, EVN demands an investment of US$ 53 million to deal with an increase in energy need, address shortage of existing power plants and finance for new power generation, transmission and distribution including nuclear and renewable-energy projects (World Bank, 2018). With ambitious and unprecedented plan for capital expenditure, EVN has huge pressure in finding long term funding. At the same time, EVN’s debt structure is unhealthy when a half of it occupied by short-term loans with maturity is less than 5 years, meanwhile, the assets acquired by EVN have long lives up to 25 years. Thus, there is a mismatch between assets/liabilities of the enterprise. Under the uncertainty in securing its profitability in future, the worry of investors for EVN is reasonable for how it creates profit in future and implement its responsibility in payment in full and on time once their RE projects take place.
12. 294 HỘI THẢO KHOA HỌC QUỐC TẾ KHỞI NGHIỆP ĐỔI MỚI SÁNG TẠO QUỐC GIA 5. CONCLUSION AND POLICY RECOMMENDATIONS In order to achieve green growth strategy that Vietnamese government committed, development of renewable energy is a stepping stone. Allowing integration of RE into energy system is beneficial in ensuring national energy security in responding with increasing dependence on energy import. Furthermore, severe impacts of climate change and local environmental pollution that partly due to exploiting fossil fuel require deployment of alternative source especially when Viet Nam is a rich-RE potential country particularly in wind power, solar power and biomass. Viet Nam are lagging far behind several neighboring countries in investing into non-hydro renewable energy. To be able to meet the annual growth in energy demand of 13%, Viet Nam needs investments of US$ 27 billion until 2020 for green energy sector (GIZ, 2016). However, due to the limitation of state budget and unprofitable energy SOEs, it is estimated that 50% of total investment for RE development must be from private sector. In order to attract private investment, the government offered investment incentives such as FIT, preferred tax rate and fees. However, those financial incentives are considered as unattractive, combining with low electricity tariff basing on subsidy questioned bankability of RE projects that require huge initial investment and are vulnerable with political and environmental changes. In addition, not-fully developed domestic financial systems with poor finance infrastructure and limited financial channels for calling long-term loans is another issue. From those barriers for financing RE projects in Viet Nam, major recommendations are proposed as below. 5.1. Revise energy-price policy thatresults in more-reasonable energy price and Feed-in tariff Adopting market mechanism for electricity price determination and privatization of the power generation and transmission similar to the most recent experience in many countries such as Japan and the earlier experience of France would make the power market more interesting for the private investors in the RE sector as well as sustain profitability of EVN. Artificially low electricity price in domestic market is one of the worst unattractive criteria for participating of private sector to RE industry in Viet Nam. Energy pricing should be revised to make it more reasonable and commit a higher chance for bankable renewable projects if implementedin terms of removing fossil fuel subsidies, there are debates in the country whether increasing in energy price particularly electricity will lead to negative impact on remote area and vulnerable businesses such as SMEs. According to a research from Neefijes and Dang (2017), the advantage of cutting subsidy outweighs its disadvantage in Viet Nam due to GDP in general will increase by better energy efficiency and it in turn contributes more to social welfare that have long term positive impact. Furthermore, low income household may be suffered by energy price increase but at the same time may enjoy additional revenue if RE projects located in that area. With regard to SMEs as believed as the most vulnerable and energy inefficiency, higher electricity price could be a motivation for energy efficiencyapplication and the gain is achieved in long term period. The government of Viet Nam should have stronger commitment to create market-oriented pricing that would reduce the demand for coal compared to cleaner- burning natural gas and other alternative energy sources. Nguyen (2012) in his research also affirmed that the benefit of restructuring energy price system will exceed the cost at a wide margin for Vietnam when makes opportunity for increasing social welfare system instead of energy subsidy spending. 5.2. Increase the creditworthiness of EVN It is notable that, pricing reform cannot be done without the reform in wide range aspects such as reducing and constantly phasing out government subsidies, restructuring energy SOEs that requires serious
13. INTERNATIONAL CONFERENCE STARTUP AND INNOVATION NATION 295 dedication and commitment from the government. Achieving healthy and profitable business for EVN is also a way to increase the trust of private investors for RE development in Viet Nam. Meanwhile, to increase the creditworthiness of EVN in particular and SOEs in general is a broad issue that involved in a wide variety of policy implications. However, the major aforementioned threats of EVN’s financial stability is mismatch between debt and assets as well as high risk of exchange rate loss. Therefore, with the purpose of sustaining profitability, reconstruct debt portfolio with proper ratio between short-term and long-term loan by is a must. In addition, risk management in terms of foreign exchange rate risk is crucial in the case of foreign currency-denominated debt still remains a major part in total value of debt. 5.3. Implement fiscal policy reform with discouraging CO2-intensive sector and facilitating the deployment of RE technology How to find financial source for funding renewable energy project under limited budget especially in developing countries where state budget is constraint is still a fundamental problem. One of major solution is designing carbon tax system that taxes collected will re-finance for green energy technologies. Yoshino and Taghizadeh-Hesary (2018) in their paper argued that, due to the electricity especially renewable energy is public goods, therefore, in order to maximize its potential, investing in to infrastructure projects is believed as government’s’ responsibility. Otherwise, investment incentives need to be adequate to lure private investment. One of the best practice to providing better incentives for investors is utilizing spillover effect from Carbon tax to reallocate into renewable energy projects financed by private sector. This fiscal policy via tax regime will be beneficial for discouraging C02 emission as well as creating a funding source for renewable energy projects in the country. 5.4. Develop a wide range of financial vehicles to facilitate long-term finance and risk mitigation Cuong and Dersch (2014) showed that availability of debt funding is a key to unlock RE investment. It is believed that even FIT is amended with a sufficient value, a lack of adequate long-term funding with below 6% interest rate still does not ensures bankable RE wind power generated projects that require IRR of 10%. Since 2014, domestic interest rate for long maturity- loan in banking system has fluctuated at 6-6.5% that is affordable for RE financing, however, in history, the interest rate for long-term maturity loans climbed up to over 9% (in 2013, 2014), maintaining a healthy monetary system to ensure stable and predictable interest rates is crucial for attracting RE in future. World Bank (2018) indicated that the failure in obtaining proper debt structure of EVN is as a result of inadequacy of Viet Nam capital market rather than the enterprise’s competence. Viet Nam’s financial market is currently underdeveloped with lacking a sufficient financial infrastructure. Thus, despite the preparation of financial instruments to finance green energy projects such as green bonds, so far these vehicles have not been put into practice. In order to attract more private sector to involve green energy development, the functions of the domestic financial market should be enhanced especially through a number of key areas: Developing the domestic bond market as a basis for the development of the green bond market for clean energy projects; Building and developing investment funds, venture capital market for seeding capital for startup in RE development; Enhancing effectiveness in implementing credit guarantee scheme to provide more concessional loans and increase access to finance for RE projects as well as green SMEs; Building up credit rating agencies with high capacity in credit appraisal of energy projects; Strengthening the capacity of financial and banking institutions in funding for RE energy projects via effective and efficient lending appraisal.
14. 296 HỘI THẢO KHOA HỌC QUỐC TẾ KHỞI NGHIỆP ĐỔI MỚI SÁNG TẠO QUỐC GIA In addition to rely on banking system for long term financing, introducing pension funds for bringing long-term finance might be also a practical solution.In the bank dominated financial system of Viet Nam with relatively high level of interest rate, and significant amount of non-performing loan (NFSC, 2017), and due to the limitation that banks have for entering to RE energy sector due to Basel Capital Accord, many banks are not showing interest to finance RE projects. In this situation pension funds and insurance companies could be alternative choice, as they are holding long-term money (20 years, 30 years and 40 years) which are proper for long-term lending to RE sector. On the other hand, Viet Nam does not have pension fund system, due to an aging population that Vietnam will face in future, development of a strong pension fund system will secure the future social security payments and at the same time will provide long-term financing for those sectors that are seeking long-term financing and will provide high return such as RE sector. REFERENCES Banking Strategy Institute 2015: Summary Report. Green Banking and Green Credit in Vietnam. In cooperation with GIZ. Climatescope (2017) Vietnam — Climatescope 2017.In: Climatescope. vietnam/. Accessed 13 Mar 2018 Cuong, N.D. and Dersch, D. (2014): Proposal on an appropriate support mechanism for wind power in Viet Nam (Short version), Project study Dang T, Saito O, Tokai A, Morioka T (2009) Biomass potential and material flow in Mekong delta of Viet Nam. Environmental system research 37:45. Danish Energy Agency (2017) Viet Nam energy outlook report. Hanoi ECA (2016). Made in Vietnam Energy Plan. London: Economics Consulting Associate. Garg V, Bridle R, Clarke K (2015) Energy Pricing, Energy Supply and FDI Competitiveness in Viet Nam:An Assessment of Foreign Investor Sentiment. GE (2018). A Bright Outlook For Solar Power In Vietnam. [online] Available at: [Accessed 20 Aug. 2018]. Ghosh S, Nanda R (2010) Venture Capital Investment in the Clean Energy Sector. SSRN Electronic Journal. doi: 10.2139/ssrn.1669445 GIZ (2013) Policies and regulatory framework promoting the application of biomass and biogas for power generation in Vietnam. GIZ (2016) Green Financial Sector Reform in Vietnam. GOV (2001) Decree No. 45/2001/ND-CP on electric power operation and use. GOV ___ (2011) National Power Development Plan 2011-2030 (suspended and revised in 2016) ___ (2013) Accelerated depreciation tax relief for renewable projects ___ (2014) Decision on support mechanism for waste-to-energy, biomass power projects (Biomass FIT)GOV (2001) Decree No. 45/2001/ND-CP on electric power operation and use. GOV ___ (2016) Viet Nam Renewable Energy Development Strategy 2016-2030 with outlook until 2050 ___ (2016) Revised Power Development Plan 7 GOV (2011) Decision no: 37/2011/QD _TTg (6/2011) ___ (2014) Decision No: 25/2014/QD-TTg (3/2014) ___ (2014) Decision No: 31/2014/QD-TTg (5/2014) ___ (2014) Decision No: 11/2017/QD - TTG (4/2017) HOSE (2018). VNSIreview. In: Accessed 7 Aug. 2018. IEA (2015) Viet Nam. In: Iea.org. Accessed 13 Mar 2018
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