Power Strategy Managing growth and reform Vietnam's infrastructure challenge As Vietnam becomes richer it faces challenges in adapting its infrastructure policies and institutions. While the old challenges of providing basic services to all remain, new challenges are emerging, such as accessing new sources of finance, refining planning processes, preparing for rapid urbanization, improving the efficiency of infrastructure service providers, developing stronger institutions to encourage private finance of infrastructure or direct private provision of infrastructure, and developing more targeted approaches to poverty alleviation. This report on Power Strategy - Managing Growth and Reform is one of six volumes dealing with Vietnam's Infrastructure Challenge. Other volumes deal with Infrastructure Cross Sectoral Issues, Water and Sanitation, Transport, Telecommunications, and Urban Development. The work for these reports was carried out between 2004 and 2006 by World Bank staff and consultants. The reports have been revised to take account of comments made by the Government in workshops during May 15-17, 2006. The comments of numerous colleagues from the World Bank, the United Kingdom's Department for International Development Bank, the Asian Development Bank, and the Japan Bank for International Cooperation are gratefully acknowledged. Table of contents Excutive summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3 The Twin Challenges of Growth and Reform . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3 Optimizing Power Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4 Financing Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5 Power Industry Restructuring, Equitization and Development of a Power Market . . . . . . . . . . . .6 Developing the Electricity Regulatory Authority of Vietnam . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8 Recommendations for Follow-up . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8 Section one: Current status of Vietnam's power sector . . . . . . . . . . . . . . . . . . . . . . . . . . .9 Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9 Policy and institutional framwork . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12 Power sector structure and ownership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13 Investment needs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15 Sector performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16 Section two: Main Power Sector issues and Study Recommendations . . . . . . . . . . . .21 Optimizing power sector investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21 Financing investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .32 Securing Investment Independent from EVN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .33 Sector restructuring, equitization and the development of a power market . . . . . . . . . . . . . . . . .37 Economic regulation of the power sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .44 Summary of recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .46 Short-term Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .46 1 Executive Summary V ietnam's electric power industry is Vietnam's power sector, intended primarily for facing tremendous challenges. With those new to the sector. Section Two outlines annual growth in electricity demand of the main current issues facing the sector, and 15% or more expected to continue as the provides analysis of potential solutions and economy grows further, a massive expansion of recommendations. the power system is required over the next decade. Funds for investment must be The Twin Challenges of Growth and mobilized from all sources, including greater Reform self-financing from the domestic power industry itself and large-scale development of The capacity of Vietnam's power system to independent power production (IPPs). At the deliver power to consumers needs to double in same time, the country is embarking on a major just five year, to meet demand growth power sector reform program, designed to projected at 16% per year during 2006-2010. establish new institutional arrangements, Demand is being driven especially by restructure the dominant utility and gradually industrial load growth, but also heavy develop a competitive power market. The increases in residential power use as incomes pressure to meet soaring power loads, urgently are rising. During 2011-2015, demand growth mobilize investment for new capacity is expected to remain very strong, projected at construction, and ensure that the new corporate 11% per year. configurations and institutions being created During the last five years, performance of for the reformed and restructured power the power industry has been good overall, with industry will best serve long-term needs, sound financial performance, declines in system combine together to create probably the most losses, and improved reports on service quality. critical juncture of the country's power A particularly noteworthy achievement has industry. been an increase in rural access to electricity to In an environment where the dominant 88% of households in 2004. Beginning in 2005, power utility, Electricity of Vietnam (EVN), and however, shortages became apparent, and are supervising and regulating government entities expected during the dry seasons in 2006 and are facing major decisions on a weekly basis, 2007, with difficulties to add capacity to the this report seeks to provide an integrated, system fast enough to meet demands. Short- medium-term perspective on the intertwined run options to mitigate shortages include issues, and some independent suggestions for addition of gas turbine capacity to meet peak consideration. The bulk of the report was loads, aggressive demand-side management, prepared by World Bank staff in consultation and increases in imports from neighboring with Vietnamese counterparts during mid and countries. While demand-side management late 2005. Section One provides an overview of must be pushed as hard as possible, the main 3 solution to the inadequate reserve margins and for the first time all under Ministry of Industry gap in meeting demand lies in efficient (MOI) purview. implementation of a large-scale medium-term The new Plan emphasizes growth in all power system capacity expansion program. three major power generation subsectors-- Vietnam's far-reaching power sector reform hydropower, coal-fired power, and power program has been launched with passage of the fueled by offshore natural gas. As hydropower forward-looking Electricity Law in late 2004, the projects identified in Vietnam generally establishment of the new Electricity Regulatory provide lower cost alternatives than the Authority of Vietnam (ERAV) under the average costs of new thermal power through oversight of the Minister of Industry, and the much of the load curve, a strong focus on Prime Minister's approval in early 2006 of a development of the country's hydropower Road Map for the reform. The country's efforts resources is retained. However, expansion to restructure the power industry and develop a programs for thermal capacity, using domestic competitive power market are a long term coal and eventually imported coal, and large proposition. Yet, there are key immediate quantities of new natural gas, are also decisions and actions which will have major necessarily aggressive, providing the biggest implications for the success of the reform over capacity additions. Demand-side management the longer term. It is important to ensure that efforts--including both improvements in decisions on the restructuring and equitization energy efficiency as well as load of various entities now under EVN and on management--should play a more significant agreements for new IPP developments provide role than in the past. Finally, imports from the proper building blocks for the future. The China and other neighbors are expected to capacity, credibility and effectiveness of ERAV increase sharply and make a larger relative need to be established to put a regulatory contribution in the future. framework in place that ensures predictability While both coal-fired and gas-fired power for investors. Subsequently, over a period of are critical for Vietnam, the optimal balance several years, careful design work and between these two and specific project consensus building are required as preparation scheduling priorities are highly sensitive to to roll out the new market. future relative fuel prices and specific fuel supply arrangements. Ultimate supply levels Optimizing Power Investments of domestic coal and natural gas are limited, and use of imported coal for power generation Vietnam has laid a good planning framework is planned to meet primary energy supply for the coming massive capacity expansion gaps that emerge. Following basic analysis of program through the completion of the Sixth the sensitivity of the relative economics of Power Master Development Plan, covering these options, two broad conclusions emerge: 2006-2015, with a view to 2025. As of early (a) Aggressive promotion of exploration and 2006, the Plan was under final Government firming up of natural gas resources, and review. The basic institutional arrangements, continued gas field development, is a key analytical capacity and analytical tools being priority for the country's power development, used are fundamentally sound. The effort is to ensure least-cost generation, and (b) far being coordinated with similar planning more than in the past, updated review of both exercises for the coal and petroleum industries, emerging overall fuel supply availability and 4 the latest relative economic costs of coal and Major progress has been achieved in recent gas supply should be carefully reviewed years, including in policy development and before sanctioning major specific power financial commitment to resettlement work. investment projects, even if they are already The challenge is in the details of listed in the Plan. implementation to achieve the best long-term results. Vietnam's demand-side management Discussed in further detail in pages 13-20, programs need to be sharply expanded, as a several conclusions concerning specific strategic measure to help bridge the power investment options include: supply and demand gap. The main issue is In reviewing coal-fired generation, it is development of the institutional capacity to important to evaluate investments using deliver effective programs, both in EVN and economic values for coal inputs as opposed to MOI. actual prices,. In lieu of development of a In addition to short-term measures to truly competitive coal market, the increase imports, increasing interconnection Government needs to review domestic coal with Thailand, China, Laos and Cambodia pricing strategies. Environmental impacts are through development of the Greater also a major issue, requiring strict attention Mekong System, can bring larger and long when considering the scale of development, term benefits to Vietnam in the coming siting and choice of technology. years. More active efforts are required to coordinate the actors and interests involved Financing Investments in new gas field-pipeline-power plant development, given needs for new projects Annual power sector investment requirements to proceed as quickly as possible. To to meet power demand during 2005-2010 are achieve competitive power pricing at the expected to be over $3 billion. The country end of the chain, firm, large-scale and seeks to mobilize investment through a variety sufficiently long-term commitments from a of vehicles, from both domestic and foreign number of parties are required. Given sources, to meet this challenge. The two basic EVN's financing and borrowing constraints, categories include EVN's contribution to IPP investment is critical. However, lack of investment, from its own resources and competition is a major disadvantage in different types of borrowing, and independent arrangements where IPP projects are investment, primarily by independent power negotiated solely with fuel suppliers, and producers. Both are critically needed. where this is undertaken, separate review Financing of new investment through the and close monitoring of fuel supply and current EVN system, including sub-entities, is power supply cost accounting is important. essential for key parts of the construction effort, Further work n the hydropower subsector is including the network, most of the hydropower especially important to improve detailed program, and selected elements in the thermal planning and implementation of reservoir power program. EVN exhibited strong financial resettlement programs, and alignment of performance during 2002, 2003 and 2004, environmental assessment to better inform allowing substantial self-financing contribution to the investment program. With increased project designs and focus on key issues. 5 costs stemming in part from power shortages in than negotiated deals. The Phu My 2.2 success 2005, and the sharp increases in investment in competitive bidding provides a platform of requirements, however, self-financing ratios prior experience in Vietnam. Support is needed will plummet unless EVN's unit sales revenue for MOI's efforts to (a) develop a government increases substantially. The corporation is guarantee strategy which can meet the needs of proceeding to borrow from a wide variety of investors today but also provide a pathway for sources, including issuance of bonds. However, limiting government exposure in favor of EVN will reach borrowing limits very quickly, increasing reliance on Vietnamese corporate unless revenues are increased (or there is a assurances and creditworthiness; (b) develop a major injection of equity, which is unlikely). standard framework for competitive bidding for Overextension of borrowings above a full new patch of IPP projects; and (c) resolve internationally recognized rations would be outstanding gas field/transmission/power highly imprudent, as maintenance of EVN's generation development issues hindering creditworthiness is essential for any sustainable development of gas-based IPP projects. investment mobilization effort. It is very clear that average retail power price Power Industry Restructuring, levels must be increased quickly to cover Equitization and Development of a greater costs but also, especially, to expand Power Market revenues for financing of the massive power sector expansion. Ultimately, consumers must The objectives of Vietnam's power sector contribute to the financing of the new capacity reform are to maximize efficiency through to meet their needs. Power prices in Vietnam competition in the power industry and to are relatively low by international standards, expand mobilization of investment and including industrial tariffs, but especially in the managerial resources from outside of the residential sector. current state-operated system, in order to EVN's purchase of power from sources minimize costs and provide reliable, high currently independent from EVN, including quality service to consumers. As described in mostly IPPs but also imports, is expected to the recently approved Road Map, the reform account for more than one-half of new power process is expected to span twenty years, and production during 1995-2010. A number of IPP proceed through (a) a preparatory phase and projects will be developed by other domestic initial "trial" market, followed by operation of a state-owned companies, or by those companies competitive market for supply from generators in joint venture with EVN. However new IPPs to a Single Buyer; (ii) a second phase wholly owned by foreign or private firms are introducing a wholesale competitive market for expected to provide several thousands of new bulk supply to distribution companies and large megawatts of build-own-transfer (BOT) IPP users, and (iii) a final phase introducing capacity. competition at the retail level. Use of competitive bidding is strongly The implications of the approved reform recommended as the standard method for path need to be clearly understood by all awarding new IPP power purchase agreements. parties. Four points worthy of special emphasis include: In country after country, and project after project, prices and terms awarded through EVN will need to be broken up into truly competitive bidding have provided lower costs separate corporations. The model of EVN as 6 a holding company for the state's assets in experience elsewhere strongly suggests that generation, transmission and distribution vested interests and pricing imbalances may be cannot be retained if true competition is to created by giving a legal monopoly to a Single be achieved and a level playing field created Buyer, which can create difficult barriers to to facilitate private investment. further reform and limit the benefits of Reductions in costs to consumers should not competition. Suitable time and care is required be expected soon. The main efficiency gains during the preparatory phase of the reform. of competition will only be realized when However, once preparation is in place, it may be large consumers and distribution companies best to roll out the reforms towards direct are able to contract directly with power contracting as quickly as possible. generators in a competitive environment. Decisions made now and in the next few These benefits are not expected during the years on how to restructure the power sector, next five years. The most important factors especially as part of the Government's affecting costs of supply to consumers over equitization program, will have far-reaching the medium term will be the degree of implications for the industry in the future and success in using competitive bidding for IPP the extent to which Vietnam can achieve the contracts, changes in fuel prices, the degree power reform goals set forth in the Electricity of success in maintaining development Law. The size, structure and operational scope according to the least-cost investment plan, and the degree of success in load of newly formed shareholding companies need management and achieving system to be conducive for the future power market. operation efficiency gains. Companies need to be strong enough to be Prospective power shortages and tight active market participants, but should not wield reserves provide additional challenges for the excessive control. Distribution companies, in reform. Use of an internal, "trial" market that particular, need to have sufficient financial emulates the future power market, and strength and managerial capacity to be careful advance preparations are crucial. perceived as credible and make long-term Greater predictability and flexibility in retail contracts with generating companies. For this, electricity pricing will need to be introduced and other reasons, it is strongly recommended over time. If a power market is desired, that the Government review the results of market forces must be brought to play, and current pilot projects to equitize distribution at hence flexibility in setting the retail tariff is the provincial level before further rolling out essential, through mechanisms which allow this particular equitization strategy. The changes in costs to be passed through to concern is that such small provincial consumers, and for consumers to respond. distribution companies cannot become the The current Road Map outlines a solid set of reliable revenue collectors and power directions and steps for the reform. However, purchasing agents upon which the rest of the serious consideration should be given to allow power industry must depend, unless the direct contracting between generators and large Government continues financial backing of consumers and/or distribution companies for many of them indefinitely. special conditions (e.g. financing new With the introduction of the power market investment) during the single buyer phase. This on the horizon, another current issue concerns way the main efficiency benefits of the reform the balancing of new IPP investors needs for can begin to be realized earlier. In addition, bankable power purchase agreements (PPAs) 7 with the need to move steadily and smoothly from MOI's regular business and departments, towards the power market. Clearly, PPAs must and (b) establishment of clear technical provide investors with sufficient medium-term competence in addressing the complex issues security of cash flow for them to obtain project surrounding regulation of the sector. Some areas financing. It also is important to protect for ERAV's attention during its first year include: Vietnam`s security of power supply and to (a) establishment of itself with a distinct identity; ensure adequate reserve margins in the system. (b) definition and publication of a clear work The key here is to design the power market to program, (c) staff training and development, (d) mitigate these concerns. For example, emphasis agreement with power industry participants on may be given in the market design to cover load clear arrangements for information collection primarily with contracts, and limit spot trading and monitoring, (e) definition of ERAV's to non-contracted surpluses and to clearing enforcement powers, and (f) definition of differences. mechanisms for resolution of disputes. Developing the Electricity Recommendations for Follow-up Regulatory Authority of Vietnam Recommendations in this report are summarized Two important factors which will define the in the final pages (pp. 34-36). Follow-up actions degree of success of ERAV in its important and on many of these recommendations are already very necessary position as the new regulatory underway. Given the challenges which Vietnam agency for the power sector include: (a) ERAV's faces in development of its power sector over the ability to establish itself as an objective next five years, in particular, international institution, charged with implementation of the assistance will be important, both in financing country's laws, with a mandate recognized by and as a source of ideas and lessons from all parties, and operating as an agency separate experience elsewhere. 8 Section one: Current status of Vietnam's power sector Overview gas. All natural gas is planned for domestic use for the foreseeable future-the industry will do well Introduction to Vietnam's Energy Sector to meet planned domestic needs, especially for the powersector,butalsoforfertilizerproductionand Vietnam is a net energy exporter, and is expected several other large industries. In 2005, about 6.6 to remain such for the foreseeable future. The billion cubic meters of natural gas were brought country is endowed with offshore oil and gas on shore. Production is expected to increase to resources in the south, coal in the north, and some 15-20 billion cubic meters by 2015. hydroelectric power resources in the mountains Currently exploitable coal resources in running from north to south along the country's Vietnam are sufficient for an increase in western regions. The country is not exceptionally production from the current 20 million tons per well endowed in any of these resources, however, year to about 45 million tons per year. so Vietnam's exploitation of its energy resources Predominantly anthracite, the highest quality will continue to be primarily for its own use. coals are exported as metallurgical coal, and Vietnam produced about 20 million tons of lower quality coal is used domestically, crude oil in 2004, up from 16 million tons in 2000. primarily in the power and cement industries. Almostallwasexported,earningsome$5.7billion Coal production has increased sharply over the in foreign exchange revenues, and accounting for last few years, rising from some 11 million tons about 21% of the country's total export earnings. in 2000. With the rise in international energy However, Vietnam imported some 11 million tons prices, export earnings from the 7.5 million tons of petroleum products in the same year, at a cost exported in 2004 totaled $355 million. of $3.6 billion, so that net petroleum exports Less than one quarter of Vietnam's estimated totaled just $2.1 billion. Vietnam is currently economically exploitable hydropower resources constructing petroleum refining capacity, so that had been developed by 2004. With the notable an increasing portion of its domestic petroleum exception of the Da River in northern Vietnam, product demand will be met by processing its the country's hydro potential is not amenable to own crude oil. Crude oil production is expected massive single development projects, but rather to increase in the future, but not dramatically: to medium and small-scale hydro plant average production rates of 25-40 million tons per construction. Except for the Hoa Binh, Son La year are expected through to 2020. and Lai Chau sites on the Da, all other hydro Vietnam has substantial offshore natural gas sites in Vietnam are earmarked for hydro plant resources, both associated, and non-associated development well under 1000 MW. 9 system by the end of 2004 was almost 11,200 MW Introduction to Vietnam's Electric Power (see Table 1). A 500 KV backbone transmission Sector line connects the regions and generation sources, Vietnam's Power System. Vietnam's electric enhancing the optimal use of resources during power system caters to the country's resource different seasons and as the generation mix and endowment and geographic configuration. With demand evolve. This basic configuration of the hydro resources available in all three of the system is expected to continue over the long country's main regions (see Figure 1), term as the overall system expands. Although hydroelectric power was the dominant source of the mix will continue to vary from year to year, power generation from the late 1980s until very as new large plants are added, hydro and gas recently. Thermal generation from coal adds are each expected to contribute about 40% of base load capacity in the north. Thermal power generation, and coal about 20%, over generation from new offshore natural gas has medium term. been developed in the south since the late 1990s, Electricity of Vietnam (EVN) is now adding to small amounts of oil-fired thermal completing a parallel, second north-south 500 capacity. Total generating capacity on the KV line, and strengthening power transfer capabilities. With additional 500 KV lines for power evacuation from new major generation Table 1. complexes and work beginning on high-voltage Vietnam's Power Generating Capacity (MW) rings around Hanoi and Ho Chi Minh City, the total 500 KV network will increase from 2423 km 2002 2003 2004 in 2004 to 3533 km in 2005. At the end of 2004, Hydro 4187 4154 4227 Coal 1245 1245 1495 220 KV lines totaled 4798 km and 110 KV lines Oil and gas 3428 4496 5475 totaled 9339 km. Power transfers with Total 8860 9895 11197 neighboring China, Cambodia and Laos were small in 2004, but will grow significantly in the Source: EVN. future. Vietnam's power industry has struggled over the last decade to expand the system to meet rapidly growing demand, and has been generally successful, although serious shortages did appear during the summer of 2005, when drought conditions coincided with tight capacity constraints. From 1995 to 2004, electricity sales grew by 15.1% per year, at almost double the 7.1% p.a. rate of GDP growth (see Table 2). Electricity production during the same period grew by 13.6% per year, growing somewhat slower due to power system efficiency gains. 10 Table 2. Total Electricity Production and Sales (1995-2004) 1995 2000 2001 2002 2003 2004 Total production (TWh) 14.6 26.6 30.6 35.8 40.8 46.2 Total Sales (TWh) 11.2 22.4 25.8 30.3 34.9 39.7 Own Usea/ (%) 9.3 4.1 4.2 4.9 4.8 4.3 Transmission & Distribution Loss (%) 21.4 14.5 14.2 13.4 12.2 12.2 a/ Unidentified consumption inaddition to internal use may be included. Source: EVN Staff calculations. Transmission and distribution losses, for in total capacity to 22% by the end of the year. example, fell sharply during the period from an Sources of Demand Growth. Electricity use unfortunate 21.4% of power production in 1995 in Vietnam is growing from a very low base for to a reasonable level of 12.2% in 2004. a country of its size. In 1995, total power sales Total power production amounted to 46.2 of 11,185 GWh amounted to only 156 kWh per TWh in 2004 (Table 3).1 Power generation from person per year. Even after growth of more oil and gas surpassed hydropower generation than threefold in electricity use during 1996- for the first time in many years, as a number of 2004, total end-use consumption amounted to units in the natural-gas based Phu My complex only 484 KWh per capita per year, compared to came on line. Power purchases from an average of 1265 kWh per capita per year in independent entities rose to about 6.3 TWH low and middle income countries worldwide. (14% of total generation) in 2004. In 2005, the Industrial and residential electricity use each share of independent power production will be accounted for about 45% of total sales in 2004 substantially higher, as capacity additions (See Table 4). Although the service sector has during the course of 2004 brought the IPP share played a role, industry and household use have been primarily responsible for the total growth in electricity demand, and this trend is expected Table 3: to continue. The share of agriculture in Electricity Production by Generation Type electricity demand, which is not an electricity- (2002-2004) intensive sector, has fallen sharply. Rapid increases in industrial electricity use 2002 2003 2004 are following rapid growth in the Hydro 18.2 19.0 18.1 Coal 4.9 7.2 7.2 manufacturing sector. Industrial value added Oil and gas 12.7 14.6 20.9 grew by about 11% per year during 1996-2004. Total 35.8 40.8 46.2 The share of GDP of industry, which is a EVN generated 33.7 34.8 40.1 relatively electricity-intensive sector, increased Purchased by EVN 2.1 6.0 6.1 from 22.6% in 1995 to 30.8% in 2004, while the share of agriculture fell from 26.2% to 20.3%. Source: EVN. 1. All figures in this chapter are from EVN's statistical series including only production and sale from capacity on the network. Other sources of power generation totaled some 0.6 TWh in 2004. 11 Table 4: Electricity Sales Growth by Type of User (1995-2004 Terawatt Hours Percentage of Total 1995 2000 2004 1995 2000 2004 Industry & Construction 4.6 9.1 17.9 41.0 41.0 45.0 Agriculturea/ 0.6 0.4 0.6 6.0 2.0 1.0 Residences 4.9 11.0 17.7 44.0 49.0 45.0 Commerce/other 1.1 1.9 3.5 9.0 8.0 9.0 Total 11.2 22.4 39.7 100.0 100.0 100.0 a/ Methods for collecting and calculating statistics for agriculture appear to have changed during the period. Source: EVN Moreover, the types of light industry which are use, especially air conditioners, begins to take growing fast in Vietnam-food and beverage hold among middle-income groups. processing, textiles, light chemicals, and light consumer durable goods-often tend to increase Policy and institutional framework power use per unit value added as development proceeds, due to increasing automation, In conformity with Vietnam's socialist market packaging and (for food, beverages and textiles) economy, public ownership dominates the energy increased use of cooling. Industrial electricity sector, but increasingly, market forces are being demand growth increased especially fast brought to bear and private sector participation is during the last few years (e.g., 18.5% p.a. during expanding. Since 1995, energy sector operations 2001-2004), and is expected to continue to be a have been organized into three General key demand driver. Companies, which are among the largest The sharp, steady increases in residential companies in Vietnam: PetroVietnam, Vinacomin electricity demand follow both an increase in (formerly Vinacoal) and Electricity of Vietnam. household access and addition of loads other Key legislation on the energy sector than the basic lighting load. With both includes the Petroleum Law (1993) and its increases in the urban population and the Implementing Decree (1996); and the new success in rural electrification about 30 million Electricity Law (2004), followed by Decrees 105 new people were added as power users from and 106 (2005), which have to do with 1995 to 2004, representing some 37% of the total implementation of the Electricity Law. Key population. Probably even more influential on government decrees include Decree 55 (2003, demand growth, however, given the low establishing the functions, tasks, powers and consumption levels of new household organizational structure of the Ministry of customers, has been growth in household Industry), Decree 45 (2001, on electricity appliance ownership, as disposable incomes operations and use), Decree 48 (2000, defining have grown from very little in the mid-1990s. the policy and regulatory framework for the Even so, the current average consumption of upstream oil and gas sectors) As discussed in about 20 kWh/month per person among later parts of this chapter, the new Electricity residential electricity users is low, and certain to Law aims at development of a new framework increase, as power use grows from nascent for the regulation and operation of the power levels in the countryside and as heavy appliance sector in the coming years. 12 for environmental regulation; Government Policy and Regulation The State Bank of Vietnam (SBV), which is Responsibilities responsible for allocation of foreign exchange, The Ministry of Industry (MOI) has first-line and, as such, is the counterpart for international policy and supervisory responsibilities for the donor lending, and a key agency for energy sector, both as the 'line ministry' and as implementing guarantees for foreign exchange the ministry with oversight responsibility for convertibility; and state-owned companies. MOI is responsible for Provincial Peoples' Committees (PPCs), supervising implementation of government which have integrated government oversight policy, and recommending and drafting major responsibility for local government, including policy reforms for government adoption. MOI all government functions delegated by the is responsible for review and submission for central government. Prime Minister approval of master investment plans for the sector and all major investment Power sector structure and ownership projects. Although these often require review and approval from other agencies as well, EVN is the vertically integrated power utility including the Ministry of Planning and charged with development, management and Investment (MPI) and the Prime Minister's operation of the state's electric power industry office, MOI is the government window for the assets. With the passage of Vietnam's Electricity energy companies. MOI reviews and Law, however, the country is just now recommends retail price adjustments for embarking on a long-term program to approval by the Prime Minister. Of the major restructure the power industry, which will energy subsectors, MOI has been particularly fundamentally alter EVN, the legal, ownership, involved in the oversight of the electric power and management structure of the industry, and subsector. how the industry is regulated by Government. In addition to the Government Office of the The sections below describe the situation as of Prime Minister, other key government agencies 2005, whereas the strategy for the future, and a for the power sector include: number of key trade-offs and choices, are The Ministry of Planning and Investment described later. (MPI), which is responsible for the preparation EVN is organized as a General Company, of the country's overall economic development with a series of wholly owned subsidiaries. plans, and review and provision of EVN owns and operates state-owned power recommendations to the Prime Minister for all plants built to date, and is taking projects using public funds or other resources; shareholding stakes in a number of The Ministry of Finance (MoF), which, in independent power plants (IPPs). Key addition to its broad role overseeing financial subsidiaries include seven regional Power matters for the Government and the budget, Companies (PCs), which are in charge of arranges Government guarantees for export power transmission and distribution from 110 credits, and provides, through its Development KV downwards. The three largest PCs are Assistance Fund (DAF), public sector loans to PC1 (northern Vietnam), PC2 (southern qualified users; Vietnam), and PC3 (central Vietnam), while The Ministry of Natural Resources and the remaining four manage the power Environment (MONRE), which is responsible distribution systems in Hanoi, Ho Chi Minh 13 City, Hai Phong and Dong Nai. The PCs IPP capacity totaled some 620 MW in 2002, each maintain their own financial accounts, accounting for just 7% of installed capacity although these are also consolidated in EVN's connected to the system, this has grown sharply overall accounts. Other key entities under the to over 2400 MW in 2004 with the EVN umbrella include four Power commissioning of the gas-based Phu My 2.2 and Transmission Companies, four Power Phu My 3 units, accounting for almost 22% of Engineering Consulting Companies, the system capacity. IPPs may be wholly owned by National Load Dispatch Center, and a number foreign, private firms, by domestic firms, or in of equipment manufacturing companies. various joint-venture arrangements, including Especially compared to many other state- with EVN. Vinacomin and PetroVietnam are owned companies in Vietnam, EVN has been developing several IPPs, both wholly owned or successful in establishing a corporate as joint ventures with EVN. Small hydro plants culture and commercial orientation, also are being developed by local firms, for particularly in recent years. EVN's financial connection with the main grid and sale of accounts are strictly separate from the electricity through power purchase agreements Government budget, and EVN receives no to EVN. Government budget subsidy support for In the countryside, local communities own investment or its operations, with the and operate the low-voltage electricity exception of certain grants for a few distribution systems in most areas. The basic multipurpose hydropower projects' approach adopted for rural electrification in resettlement. The company is now facing Vietnam has been for EVN's PCs to develop the only commercial terms for borrowings, medium-voltage network, and for local except for (i) concessional loans for rural communities to develop the low-voltage system electrification (e.g., from IDA), and (ii) DAF (although EVN has undertaken this role for loans for resettlement costs and locally about one-fifth of Vietnam's communes). manufactured equipment, carrying interest Provincial People's Committees have oversight rates 2-3% lower than commercial rates. for rural electrification in their provinces, and EVN was able to steadily maintain provide substantial financial support for the profitability through 2004, covering all of its local share of investment. Until 2004, local costs, including depreciation and financing power distribution was handled by informal costs, from internally generated revenues. Commune Electricity Groups or other informal EVN's generation and network development entities in about two-thirds of Vietnam's plans, and all major investment projects, must be electrified communes. According to approved by the Government. MOI also is Government regulations, however, all of these currently responsible for executing bidding and entities are now required to convert to formal contracting procedures for large IPPs. The retail legal entities, such as cooperatives or joint-stock electricity tariff is also tightly regulated by the companies. Developed initially at cooperative Government, with adjustments recommended by or commune levels in most cases, but also as MOI requiring approval by the Prime Minister. district-level joint stock companies in some Vietnam maintains a unified national tariff. cases even at this stage, these companies need to State policy has increasingly encouraged consolidate and expand, in order to develop development of independent power generation over time into important commercial actors in by investors outside the EVN system. Whereas the overall power system.2 14 Investment needs reviewed at all Government levels the end of 2005. Demand from projections prepared With electricity demand increasing unabatedly, during the summer of 2005, however, suggest a Vietnam is facing sharp increases in power base case growth in power generation to 113 sector investment requirements. Whereas TWh in 2010, up from 46.2 TWh in 2004-a Vietnam's original Fifth Power Master growth rate of 16% per year, compared to the Development Plan foresaw an increase in 12.4% per year originally planned. This growth power generation averaging 13.4% per year rate implies a further continuation of a power during 2001-2010, to power a continued demand/GDP growth elasticity of about 2.0. economic growth rate of around 7.5% per year, Industrial load growth is expected to be power generation actually grew by 14.9% p.a. particularly strong. During 2011-2015, recent during 2001-2004, as demand grew faster than base-case forecasts point to a slow down in expected. EVN revised its development plans power demand growth to 11% per year, upwards in 2003, foreseeing shortfalls in followed by 9.1% per year during 2015-2020. capacity, but even so, the country still found Total power sector investment requirements itself seriously short of capacity in 2005, with to meet demand will exceed US$3 billion per needs for large scale, involuntary load year during the latter half of this decade; shedding. representing levels which are triple those at the In the new Sixth Power Master Development outset of the decade, and an immense challenge Plan, covering 2005-2015, with a view towards for the country. As shown in Table 6, EVN's 2020, it is forecast that sector development and substantial investments in generation, all of the investment requirements through the balance of country's transmission development, urban the decade will be substantially higher than distribution and a portion of rural low-voltage originally projected (see Table 5). The new Plan distribution, will total $2.4-2.5 billion per year remains under preparation, and drafts will be (in constant terms), just to meet original Fifth Table 5. Power Sector Demand Growth (2004-2020) 2004 2010 2015 2020 2004-2010 Growth Rate (% p.a) Fifth Power Master Plan Total Sales (TWh) 39.7 81.2 113.8 12.7 Generation Requirement (TWh) 46.2 98.0 129.8 12.4 Capacity Requirement (MW) 11,197 20,636 30,892 10.7 Updated EVN Estimates (2004) Generation Requirement (TWh) 46.2 98.0 228.0 13.4 Capacity Requirement (MW) 11,197 24,447 42,000 13,9 Source: Fifth Power Master Development Plan (2000-2010); EVN Estimates. 2. IDA's Second Rural Energy Project provides a major program of support for the development of new Local Distribution Utilities in the countryside. 15 Power Master Plan load estimates, which are hydropower, and rely much more on IPP now clearly unrealistically low. Transmission development of thermal power. As a result, it is investments will continue to be substantial in hoped that IPPs will account for over one-half 2006, as EVN seeks to complete the backbone of of total incremental power production during the system, before tapering off some towards 2005-2010. the end of the decade. EVN's distribution Issues relating to financing of EVN's investments are expected to increase just investments, and the fostering of greater IPP modestly (although rural investments outside investment, are discussed in further detail EVN are likely to increase substantially). below. Particularly critical, however, EVN's investment forecast foresees a tapering off in Sector performance investment in generation, despite heavy growth, with a dramatic shift to greater reliance Performance of Vietnam's power industry, on power purchased from IPPs (see Table 7). managed primarily by EVN, has been quite Whereas purchased power accounted for just good during recent years. The industry 13.6% of total power production in 2004, basically kept pace during the last decade with Vietnam aims to increase purchases from IPPs extraordinary increases in demand, maintaining to account for about a third of power basic service for its customers most of the time. production on the system by 2010. EVN's seeks EVN has maintained strong financial viability to focus its generation investment primarily in while keeping costs to consumers at quite low Table 6. EVN Investment Requirements (2004-2010)a/ 2004 2005 2006 2007 2008 2009 2010 Generation 711 1229 1544 1961 1869 1818 1917 Transmission 275 306 239 161 104 113 121 Distribution 381 331 402 412 421 397 398 Total b/ 1367 1866 2185 2534 2394 2328 2436 a/ Based on Fifth Power Master Development Plan requirements, which are not clearly insufficient. IPP investment requirements are excluded. b/ Numbers may not add due to rounding. Source: EVN and World Bank estimates (2005 IAS model). Table 7. Planned Increasing Role of Purchased Electricity (TWh) 2004-2010 2004 2005 2006 2007 2008 2009 2010 Power Purchased EVN 6.3 11.9 14.2 18.4 23.2 25.3 30.3 EVN 39.9 41.5 45.5 48.3 51.3 57.9 62.7 Total b/ 46.2 53.4 59.7 66.7 74.5 83.2 93.0 Source: EVN estimates (2005 IAS model). 16 levels by international standards. Dramatic public investment support to match local increases in rural access and steady reductions community funds in transmission and distribution losses have been particularly notable achievements. The Quality of Electricity Service challenge for the future is clearly to meet the rapidly expanding demands of the economy Widespread anecdotal evidence points to and population, with minimum disruption, substantial improvements in the quality of hopefully with further improvements in service electricity service over the last ten years, with quality and without unreasonable increases in basic service for most customers in urban or costs to consumers. peri-urban areas becoming noticeably more reliable. However, there is a basic lack of systematic statistical monitoring of service Access to Electricity Service interruptions and voltage drops, by service area Access to electricity in rural areas has increased and customer voltage level. This shortcoming dramatically during 1996-2004, marking one of needs to be rectified, to develop benchmarks, the most successful recent rural electrification comparative performance indices between programs in the world. As shown in Figure 2, service areas and categories, and monitorable the number of rural households with access to programs for improvement. The new electricity has increased from 50.7% in 1996 to Electricity Regulatory Authority of Vietnam 88.0% in 2004. Rural household access rates are (ERAV) will need to monitor such data as a expected to further increase during the next basic regulatory tool. While there may have several years, although achievement of access been general improvement in recent years, it among the final 5% of rural households will not also is clear further improvement is needed. In be easy. The success of Vietnam's program lies the World Bank's recent Investment Climate especially with the commitment of the Survey for Vietnam, 19% of all manufacturing Government to rural electrification, and the firms surveyed, although connected to the definition and systematic implementation of electricity grid, still described electricity supply national plans as a matter of priority, with as a major or severe constraint for their 17 business. This was due in many cases to facilities and technology are relatively old, and complaints about the electricity prices units are relatively small. In 2004, the average charged. However, in almost half of the firms heat rate for coal-fired units was 458 grams of listing electricity supply as a constraint, a core standard coal equivalent per gross kWh (e.g., reason listed was insufficiently reliable with two plants in the 500-700 gmCE/kWh service from the grid. Surveyed firms range. Similar issues exist with some of the reported an average of 12 power outages or older oil-fired plant. Plans have been made to surges per year, and, in the case of small and renovate or retire older, inefficient units, once medium-sized firms, sales losses of 2-3% due reserve margins allow. to outages. This points to a need for a major and systematic effort to properly monitor Retail Power Price Levels service quality, and for improvement in service provision. Excluding value-added tax, the average revenue from the tariff was VND800 per kWh in 2004 (US5.1 cents/kWh). Including the 10% System Efficiency V.A.T., the weighted average retail price was As shown in Table 2 previously, transmission US 5.6 cents per kWh. This is lower than the and distribution losses in EVN's system have average retail price today in most countries. fallen steadily over the last decade to 12.2% in The financial position of EVN has remained 2004. This is not an unreasonable level for a sound with this unit revenue level during the system such as Vietnam's at its current stage of last few years through 2004, covering all of its development, especially given the heavy role of direct and indirect costs, but this level will low-voltage residential consumers, but there is prove insufficient for the future. room for further improvement. In the future, Vietnam's power tariff is sophisticated in the ERAV must also monitor these efficiency structure, with rates varying by voltage level indicators carefully against various and consumer type, and offering time-of-day benchmarks.3 rates for major consumers (see Annex 1). Urban Management of consumer accounts residential rates increase progressively with receivable has been exceptionally effective for a increasing consumption. Rural rates are cross- developing country, with accounts receivable in subsidized by other consumers. Both average 2003 equivalent to only about 17 days of sales. urban residential rates and rural residential Non-technical losses, including theft, are low rates are modestly compared to many countries. cross-subsidized by higher rates for Fuel efficiency in thermal power generation industry, commerce, and foreign is highly plant specific. New, large-scale establishments. combined-cycle natural gas based power plants Concern is often expressed in Vietnam that incorporate world-class technology and provide electricity rates for industrial production are high fuel efficiency. With the exception of the high, compared to rates in other countries, Pha Lai 2 plant, however, existing coal-fired undermining competitiveness. In reality, power plant efficiencies are poor, as the however, the current average industrial rates of 3. Particular care is needed to maintain consistency in defining the boundaries of the system to be monitored, including the statistical treatment of rural low-voltage systems. 18 US 5.4-6.2 cents/kWh, including V.A.T., are not cents/kWh, with recent increases in Chinese high by general international standards. In domestic coal prices, and even reach more than China, for example, electricity rates for US 12 cents/kWh in some export-oriented industries in coastal provinces are now US 7-10 regions 19 Section Two Main Power Sector issues and Study Recommendations Optimizing power sector investments demand. During the dry season, top priority must be assigned to ensuring sufficient water Overcoming Shortages supply for basic livelihood and agriculture at the 1920 MW Hoa Binh Hydropower station. In Meeting the rapidly growing demand for 2005, with exceptionally low water levels in the electric power is the paramount challenge for reservoir due to drought, water flows for power Vietnam's power industry. Key drivers of the production had to be halted. With insufficient country's economic growth-especially options to pick up the slack, rolling load manufacturing and commercial and service shedding was required in northern Vietnam for industries-are highly dependent upon power weeks, including in Hanoi. supply. Reliable electricity service is essential Power shortages are likely to continue in for light industries to remain competitive with 2006 and 2007, especially in the dry season. similar industries in neighboring countries. Quick measures to help alleviate the problem Electricity has also become an expected, basic include addition of gas turbine generating element in the livelihood of most people, and capacity, which can be constructed relatively an essential part of increasing standards of quickly, and aggressive promotion of living. Costs to the economy of insufficient demand-side management (DSM) measures. power supply from the grid are estimated to be Imports of electricity from China also are some $0.50/kWh where small-scale auto- likely to be increased substantially over the generation is an option, and are well over that next few years. Current plans call for addition where production is actually lost due to lack of of four oil-fired 37 MW gas turbine units in power. northern Vietnam, and larger additions of gas The power shortages experienced in May- turbines in the south, which can utilize either July of 2005 clearly reinforced a priority focus oil or natural gas. In the north, the new gas on meeting demand throughout Vietnam's turbines will remain expensive to run, once power industry, with highly visible national new, larger capacity gas, coal or hydro attention. The capacity shortfall was estimated resources is finally brought on stream, and at some 800-1300 MW during peak load. The will most likely be used for emergency peak shortage was caused by coincidence of severe load service. In southern Vietnam, it is drought conditions, reducing hydropower important to integrate the new gas turbines production, with a paper-thin reserve margin in eventually into the future combined cycle the overall system, due to an inability to natural-gas-based power complexes, to gain develop new capacity over a short time to meet optimal efficiency over the long run. On the the higher-than-expected surges in power DSM side, there is potential to reduce system 21 requirements by some 600-800MW over the Vietnam's Power Sector Expansion Program next few years, through energy efficiency and load management measures, but this will During the latter part of 2005, Vietnam has been require aggressive efforts to put the engaged in a major power sector expansion institutional and program capacity in place. planning exercise. The draft Sixth Power Aside from these measures, however, the key Master Development Plan (2006-2015, with a is to develop new capacity, through efficient view to 2025) is now under review by the development of new generating plant, Government. The effort is being coordinated construction of transmission lines for with similar master planning exercises for the imported power, and steady investments in coal and petroleum industries, for the first time the power network to deliver power to all under the purview of the Ministry of consumers. Industry. Based on the increased base-case demand forecasts developed over the year, projecting electricity demand growth of 16% p.a. during 2006-2010, 11% p.a. during 2011- 2015 and 9.1% p.a. during 2016-2020, the power industry expansion foreseen is a massive challenge for the country. Power system capacity will need to double in only five years. During 2011-2020, system capacity will need to increase by 2.5 times again. This huge expansion will test the planning, financing, organization and construction limits of the power industry as never before. On the planning side, the basic institutional arrangements, analytical capacity and analytical tools being used are fundamentally sound. In its review of the major work being undertaken, the Bank team has recommended (a) a strengthening of the economic and sensitivity analysis in the planning exercise, especially relating to assessment of the balance between coal-fired and gas-fired thermal power generation, and (b) increased explicit attention to demand-side management (DSM) investments and benefits.4 In addition it also would be useful to explore more sophisticated Vietnam is facing a need of massive power system modeling options appropriate for hydropower expansion projects. 4. Further details were provided in a note by the Bank's Vietnam Energy Team to MOI, EVN and the Institute of Energy, "Suggestions on Economic and Sensitivity Analysis for Preparation of Vietnam's Sixth Power Development Plan" (November 11, 2005). 22 On the network side, a basic, stronger planning issue, which is highly sensitive to transmission backbone for Vietnam's system, future relative fuel price and supply planned under the Fifth Master Plan will be expectations. During the next few years, completed during the next few years, including decisions on launching specific power plant the second north-south 500 KV line, and the two construction projects are clear: all power plants 500-KV urban rings. With the size of the which have available domestic coal or gas expansion envisaged, however, basic planning supply will be needed as soon as possible to must now proceed for further transmission meet the pressure of rapid demand growth expansion over the longer term. On the Over the longer term, however, definition of distribution side, steady investment is required optimal balances requires careful attention, also to expand and upgrade systems to meet tied with the country's coal export and gas increasing load and minimize losses by exploration policies. The main parameters of replacing outdated, inefficient and overloaded this balancing issue include the following: substation equipment, lines and transformers. Both exploitable domestic coal supplies and Losses in outdated and overloaded rural offshore gas supplies entail supply systems are often over 20%. constraints. The availability of domestic More than two-thirds of the investment for coal for the power industry is capped by system expansion will be needed for expansion domestic resource limits, given current of power generation. The previous Master Plan technology, and export levels. Expansion of called for development with a blend of roughly gas supply requires not only field and 40% hydropower, 40% gas-fired thermal power, pipeline development, but also further and 20% coal-fired thermal power. In the more exploration and firming up of reserves if rapid growth anticipated under the Sixth Power supplies of over 14 billion cubic meters Master Plan, the focus on strong development (bcm) per year are to be provided for power of the country's hydropower resources will be generation. retained. However, the share of coal-fired Thermal power generation using imported power generation may increase to take up a coal is expected to be the most cost effective large portion of the accelerated growth, option once the main options for generation although this is always subject to the extent of from domestic coal and gas have been new discoveries and development of offshore exploited. However generation from gas. Although the economic viability of imported coal is expected to be significantly hydropower projects are highly site-specific, the more expensive, in both financial and hydro projects under consideration in Vietnam economic terms, than the other options, at generally provide lower cost power than the least until strong diminishing returns begin average costs of new thermal power through to prevail in domestic coal mine operations.5 much of the load curve. Thus, the country's At current domestic coal prices, set with a overall strategy is to develop existing view towards production costs, power hydropower resources relatively quickly. generation from domestic coal is Assessment of best balances between coal and significantly less expensive than combined- gas-fired power, however, is a key long-term cycle gas-based power generation at 5. An exception may be if coal-fired power plants are developed in the south, in which case costs of imported coal and domestic coal (shipped from north to south) may be similar, in economic terms. 23 capacity factors exceeding 50-60%. electric power demand is particularly hard However, in economic terms, considered during periods of fast economic growth. from the perspective of the country as a Demand scenarios should be quite different whole, the value of domestic coal used for from each other (e.g. 3-4% p.a., in this case)-the power generation is higher than its current purpose is not only to forecast the most price, as it can be exported for more money, probable scenarios, but also to understand how which would accrue to Vietnam.6 In the schedule of investment would change under economic terms, then, combined-cycle faster or slower growth. power generation from offshore gas at The basic framework and main issues for recently contracted gas prices is quite each of the generating subsectors are outlined competitive with generation from domestic below. coal. The most cost effective option depends largely upon the evolving fuel costs (in Coal-Fired Power Generation economic terms) relevant for specific projects. Hence, the Bank team's Thermal power plants fueled with domestically recommendation to pursue careful produced anthracite will continue to provide a economic and sensitivity analysis in the key base-load power source for northern planning exercise. Vietnam. Coal is currently supplied exclusively While conclusions on the best specific by Vinacomin, the general corporation holding scheduling of investment projects must await all of the state's assets in the coal industry. Coal completion of the Master Plan, two broad sold for power generation totaled about 4.3 conclusions concerning the coal and gas-fueled million tons in 2004, accounting for some 22% of generation balance can be drawn from the Vinacomin's 20 million tons of sales, while parameters above: (a) Aggressive further Vinacomin's exports totaled 7.5 million tons promotion of exploration and firming up of and other domestic users purchased 8.2 million natural gas resources, and continued gas field tons. Production can increase strongly in development, is a key priority for the country's current coal fields, and a major new coal mining power development, to ensure least-cost operation is planned at Mong Duong. generation, and (b) Far more than in the past, Production in 2010 is expected to reach 35-40 sanctioning of major specific power investment million tons. Further increases in production projects in the future must include updated beyond 2010 are expected to be moderate, review of both emerging overall fuel supply unless viable methods can be developed to availability and the latest relative coal and gas exploit coal under the Red River Basin. supply costs (including opportunity costs of Average production costs are expected to rise. exports foregone), as the optimal mix between The highest quality anthracite produced is these two is very sensitive to these parameters. beneficiated, achieving calorific values of 7200- The Bank team also has recommended that 8500 kilocalories per kilogram, and then sensitivity analysis also be conducted with exported as metallurgical coal at high market different demand growth assumptions, prices. Supply to the power industry is of far especially on the lower side. Assessment of lower quality, with calorific values in the 3500- 6. Over the short term, the government may wish to consider its regulatory position vis-a-vis the coal sector before undertaking any reforms to price coal at export parity levels (see paras. 51-52) 24 5500 kcal/kg range. Similar to "white coals" Vinacomin undertaking all sales at standard produced in central and southwestern China, prices, and then transferring funds to collieries the high-ash anthracite used domestically may to cover costs. To improve efficiency, and be difficult to ignite, but it is acceptable for ensure that prices are aligned with reasonable power generation if boiler adjustments are costs, major reforms will be required to allow made and, often, starter fuel is used. greater autonomy and proper market incentives With the country's coal resources limited, to bear at the mine level. Inevitably yielding the Government's strategy is to cap export winners and losers, such a reform is not a levels strictly, in favor of expanding domestic simple undertaking, but necessary over the supply-essentially to postpone the expected medium term if the coal industry is to meet its eventual need for coal imports. The high performance potential. Barring such reform, quality anthracite fetches a premium price on the Government can undertake more in-depth the international market. The low and mid- review of actual production costs, in an attempt range quality anthracite, however, must be sold to at least provide greater clarity to the domestic at a major discount. In mid-2005, Vietnamese coal pricing issue. anthracite of some 5000 kcal/kg was being sold Vinacomin and others advocate a gradual at US$29-33/t, f.o.b. to Japanese and Chinese increase in the coal price charged domestically customers, compared to the US$50-53/t, f.o.b. until prices reach CIF import parity levels, paid for Australian coal of 6500 kcal/kg. adjusted for quality. In the medium term, it is Issues confronting the coal-fired thermal in the country's best interest to allow coal prices power subsector include coal pricing, power to move to import parity levels, which best plant siting, and environmental concerns. reflect economic costs. However, this is best Future domestic coal pricing is uncertain, achieved through development of a true and additional clarity on how coal prices will domestic coal market, with competition move is important for the power industry, as between a meaningful number of domestic the optimal role of coal-fired plant is quite suppliers. If pricing policy remains one where sensitive to fuel prices. Vinacomin sold coal to the Government sets prices, it is not advisable to EVN in 2004 at the Government regulated price fix coal prices at import parity levels until (a) a of $22/ton, which is well under international strong, independent review of production costs prices, adjusted for quality. Although and efficiency incentives is completed, (b) a Vinacomin reports that this price is below transparent and clear way of estimating the average production costs, the price appears economic rent which will accrue to Vinacomin quite high as a cost-based price to the Bank is developed and agreed, and (c) clear study team, given the role of several large open agreement is reached in the Government as to pit mines and prices and costs for similar coal in how such rents will be collected and used. China. However, reasonable production costs Concerning power plant siting, the bulk of are very difficult to assess, as (a) there are wide the new coal-fired power plants will continue to disparities in unit costs between collieries, such be in northern Vietnam. However, there are that efficient producers provide heavy cross plans to develop a major coal-fired power subsidies to high-cost, inefficient producers, facility in central Vietnam to provide base-load and (b) there is little incentive for efficiency, as power there, using a blend of trans-shipped individual collieries are not operated with domestic and imported coal. The ongoing least- transparent, independent accounts, with cost expansion plan study will need to review 25 these plans, and other potential plans for coal- side, development of IPPs with investors based power outside of the north, from the independent of EVN is essential for a large perspective of the integrated power portion of the power generation capacity, due transmission and generation system. to EVN's limited financing capacity. IPP Coal-fired power generation carries a investors may include the gas developers, but substantial disadvantage globally in terms of other investors are needed as well. EVN greenhouse gas emissions. In terms of local represents the purchaser of the final electricity pollution, Vietnamese air pollution emission product. Finally, the Government (aside from standards are now quite strict, such that new its ownership position of PetroVietnam and plants will be required to install sophisticated EVN), must play key roles, both sanctioning pollution control equipment to meet them. the specific development arrangements, but Even so, the overall impact of large new power also providing some type of partial risk plants on ambient air quality must be reviewed coverage on the electricity sale arrangements in some cases, as in the tourist areas of Quang to outside investors. Ninh Province, because coal deposits and hence Vietnam's offshore gas is earmarked at this power plant siting may be concentrated to such point for a series of onshore, large-scale gas an extent that ambient air quality still suffers, utilization complexes, which, aside from several even if emissions standards are met. nitrogen fertilizer plants, are focused on power generation. Other, smaller-scale utilization Gas-fired Power Generation loads are not expected to materialize in sufficient concentration over the medium term Development of large-scale power generation to warrant network development for such uses. using Vietnam's offshore natural gas resources With the exception of the planned requires alignment of the interests of a series of interconnection of a new complex at Nhon institutional actors, and both major upfront Trach with the existing Phu My complex, the financing and long-term commitments. gas utilization complexes also are not PetroVietnam Gas Corporation (PVGC), interconnected, with each basically relying on PetroVietnam's subsidiary charged with different gas resources. Thus, the development natural gas operations, is a central entity, of each complex requires negotiation of holding the Government's shares in field separate satisfactory arrangements for a full production facilities, retaining the sole rights field development, pipeline transmission and in most cases to buy offshore gas and sell gas power generation facility chain. to end-users, and charged with gas Gas supply prospects are summarized in transmission system development, although Table 8. Gas supplies are expected to grow this may be in cooperation with international from some 6.6 billion cubic meters (bcm) companies. Upstream, gas exploration and expected in 2005 to 10-12 bcm in 2010 and at development is undertaken in joint venture or least some 14 bcm in 2015. The main fields production sharing arrangements between include the following: PVGC and international petroleum companies, Cuu Long Basin. Located to the southeast including concessions held with British of Vietnam's coast, petroleum production in Petroleum (BP) and KNOC in the Nam Con this basin began in 1995. Associated gas Son field, and with Chevron (formerly Unocal) from Vietnam's main current oil fields in in the Malay Basin. On the power generation this basin, is supplied onshore through the 26 Bach Ho pipeline. Currently connected Chevron. Whereas Vietnam's 50% share of associated gas supplies are declining, but the 2.8 bcm of associated gas in PM3 is some additional gas can be captured that is currently sold to Malaysia, PV is now currently being flared. In addition there is a developing a 300 km pipeline to bring that most promising discovery of non-associated 1.4 bcm onshore at Ca Mau for use in gas at Su Tu Trang in the Cuu Long Basin, Vietnam, to be completed by December relatively close to shore, that is currently 2006. Use of gas from the Chevron blocks being appraised. If reserves are sufficient will require construction of a new 400 km (e.g. some 40 bcm or more), this gas may be pipeline. Supply potential from currently brought onshore to Binh Thuang Province proven reserves in the Chevron blocks is via a new pipeline. assessed at some 4 bcm per year, sufficient Nam Con Son Basin. Also located to the for the full O Mon power generation southeast of Vietnam's coast, but further complex offshore, Nam Con Son is the supply source The gas utilization complexes under for the Phu My complex. Production from development or on the medium-term horizon fields contracted mainly with BP and KNOC include: is expected to rise steadily, until constrained Phu My and neighboring areas. This area by the 7 bcm carrying capacity of the includes the Ba Ria and Tra Noc power existing pipeline. Although the capacity of facilities, totaling 484 MW owned by EVN, and the pipeline might be stretched somewhat with 0.78 billion cubic meters (bcm) of annual through additional compression, gas demand from Cuu Long associated gas development above 7-8 bcm per year will reserves. It also includes the large new Phu My require new pipeline development. complex, totaling 3893 MW at the end of 2005, SW Basin. This basin includes two major with an annual power generation gas demand project developments: the PM3 from Nam Con Son of about 4.3 bcm. The Phu development in the Joint Development Area My complex includes Phu My 1 (1107 MW of Vietnam and Malaysia, and blocks with owned by EVN), Phu My 2.1 (896 MW owned by EVN), Phu My 2.2 (720 MW owned by EdF), Phu My 3 (720 MW owned by BP), and Phu My 4 (450 Table 8: Prospective Natural Gas Supply in Vietnam MW, owned by EVN). A urea plant (billion cubic meters per year) supplied with Cuu Long gas is also 2010 2015 located at Phu My. International Cuu Long donor finance played an important Bach Ho pipeline 1-2 2 role in development of EVN's plants. New pipeline 0-3 Closer to Ho Chi Minh City, 447 MW Nam Con Son of new thermal capacity is also Existing pipeline 7-8 7-8 planned by EVN at Hiep Phuoc and Southwest DM3 PV pipeline 1.4 1.4 Ve Den, eventually to use gas. Pipeline for Chevron fields 0-3 2-4 Ca Mau. 720 MW of combined- Total 10-12 12-18 cycle independent power plant Gas from other fields & new discoveries 5-10 capacity is under development by Source: Bank team estimates based on various sources. PetroVietnam to become operational 27 in 2006-2007, together with fertilizer production The optimal share of gas-based power facilities, as part of this new industrial area. A generation relative to other options in second power plant is also planned. Gas will Vietnam is ultimately quite sensitive to the come from the SW Basin. contracted gas prices. Gas prices, in turn, O Mon. The O Mon complex is planned for are sensitive to the firmness and scale of development with gas under contract with off-take commitments. Hence, Chevron in the SW Basin. Four power plants development of firm, large-scale and are envisaged, totaling 2700 MW, with gas sufficiently long-term commitments would demand of about 3.3 bcm per year. O Mon 1 is seem to be required to achieve competitive in advanced development stages as a 600 MW gas-based electricity prices. steam unit being developed by EVN with JBIC Participation of EVN in most of the power financing, which can burn oil until gas is plant ownership is not feasible, even with available. Unocal (now Chevron) had borrowed resources, due to EVN's financing expressed interest in partnering with EVN for constraints. Outside IPP investment, in another of the plants. Financing for the balance addition to investment from gas developers, is being sought. Original plans were to is likely to be required in each major complex. commission the first unit in 2007. However, The PM3-Ca Mau development, involving without firmer commitments for the full development of the required pipeline and two development, to offset the upfront field and power plants solely by PetroVietnam, needs to pipeline development costs, Unocal had not be supervised closely by the Government to been able to offer attractive prices and ensure efficiency and lowest possible costs. contractual terms for the gas. In mid 2005, the Assignment of the full-chain development to gas development remained on hold, pending a PV may have some organizational advantages, solution which could satisfy all of the key given the urgent need for new power parties. generation capacity, but also carries potential Nhon Trach. Located about 60 km from the serious disadvantages due to absence of Phu My complex, initial plans for this facility competition. The Bank team recommends that included four power plants, for commissioning the Government monitor all aspects of this during 2010-2015, totaling 2640 MW and project closely, including (a) separate review of requiring some 3.3 bcm of gas per year. Gas each cost center in the integrated project- supply has been planned from Nam Con Son, including well-head gas supply cost and via a pipeline extension from Phu My. internal pricing, pipeline development and However, gas supplies are now less certain, and operation costs and internal pricing, and power development of the full complex would plant development and operation costs and certainly require new offshore pipeline capacity internal pricing; and (b) ensuring that above current 7 bcm level. procurement for all contracts proceeds in a fully The cases of O Mon and Nhon Trach transparent manner, using competition to the demonstrate the challenge of aligning interests maximum extent. Such close, transparent and balancing risks to realize these technically supervision is also important to provide some and economically attractive developments. comfort for other, needed investors that the Solutions require both increasing clarity on the Government seeks to maintain a level playing specifics of the following issues, as well as field for gas-based power generation results-oriented dialogue between the parties: developments in Vietnam. 28 On the gas exploration and development River, upstream from Hoa Binh, including side, it is critical for the longer term for Vietnam Son La (2400 MW) and Lai Chau (1100 MW). to maintain an attractive framework for Once completed, this cascade of three large international companies to continue exploration plants on the Da River will total over 5400 and firming up reserves, as much potential MW. Aside from this integrated remains unexplored. In the current high-oil development, the balance of Vietnam's price environment, international companies hydropower program focuses on 30 medium- have a variety of investment options to choose sized projects (generally 100-350 MW each), from. Areas for the Government to review and scores of small hydro (under 30 MW). include (a) simplification of fiscal terms and These projects are dispersed over nine major sharpening of their competitiveness, including river basins in northern, central and southern for deep water areas, (b) continuing efforts to Vietnam. Fourteen new medium-sized plants expand and clarify gas marketing were listed as under construction in early opportunities, and (c) development of a clear 2005 (with construction of all but one initiated regulatory framework for pipeline investment in 2003 and 2004), totaling 3170 MW. Plans and operation. are being drawn up for an additional 16 medium-sized plants, totaling a further 2775 Hydropower Development MW, for which EVN would like to begin construction as soon as possible. Vietnam is embarking on an ambitious plan to Son La is a key national project, for which develop the bulk of its high-potential preliminary construction work has hydropower resources over the next decade. commenced. Power generating units are Hydro capacity in 2004 stood at 4227 MW, expected to come on line during 2012-2015. with Hoa Binh (1920 MW) and Yali (720 MW) The project is intended as a key new source of accounting for 60% of the total. Future plans economic electricity, and will also benefit call for two additional large plants on the Da operations at Hoa Binh. However, there are also substantial risks, as for any construction project of this magnitude. A particularly big challenge is the effective resettlement of some 70,000 people. The Government has set high standards and a solid, modern policy framework for the resettlement program, and committed over $650 million for the program, which is quite high compared to budgets per resettler in other large projects in the region. Nevertheless, to ensure that the funding achieves sustainable positive Vietnam is embarking on an ambitious plan to develop high-potential results for the affected people, hydropower resources to meet power demand 29 implementation will require greater attention An especially important area for additional to livelihood development, effective planning work is to further improve detailed planning and design at local levels, and stronger and implementation of reservoir resettlement management both centrally and locally. programs, and alignment of environmental With goals to provide almost 6000 MW over assessment work to better inform project the medium term, Vietnam's program to design and to sharpen focus on key issues and develop its many medium-sized hydro sites will their mitigation. Vietnam has made provide a core contribution to the overall power substantial progress during the last five years development program in each of the three in upgrading its reservoir resettlement and geographic regions. Particular advantages environmental assessment practices. Current include development of a source of domestic policies provide a reasonably well structured renewable energy divorced from international set of legal and regulatory requirements. energy price and security risks, and benefits Financial commitments for resettlement work from associated water control in many cases. in new projects are now substantial. The Although economics vary by site, costs are primary issue concerns needs to strengthen generally quite competitive with the thermal implementation to achieve the best results. power options in Vietnam. The challenge will Analysis, planning, organization, execution be in effective implementation-to maintain and, especially, follow-up often lack depth as quality project development under the pressure capacities for this specialized work are thin, for speed to meet every-climbing load growth. especially at local levels. Staff and local International assistance is needed in this experts often lack experience and subsector of the power industry more than any understanding of best practices. The most other, to enable Vietnam to benefit from difficult issues-including restoration of international experience. As international livelihoods for ethnic minorities which may be agencies have been reticent to support major affected by reservoir development, for hydropower developments in recent years, example-are complex in every country, and practitioners in Vietnam have been relatively require concerted efforts in consultation with isolated, and now need gain from the rich recent local people throughout implementation. development experience elsewhere, as Given plans to develop many projects over the Vietnam's hydropower development program medium-term, strong efforts are necessary to accelerates. integrate knowledge from elsewhere and to One area for strengthening in Vietnam's build local capacities to achieve results which hydropower development program includes are sustainable over the long term. hydro subsector planning, plant siting and With costs almost completely consisting of design, and reservoir and power plant upfront capital, and relatively long project operating practices. Planning and operational gestation periods, EVN's plan to concentrate its improvements could be made to best optimize own financing and borrowings particularly on between complex choices and trade-offs to: (a) the hydro sector makes sense, leaving more maximize multiple water control benefits; (b) substantial portions of the thermal power minimize adverse impacts, including negative investment requirement to potential IPP social impacts and negative downstream investors. Once operational, however, there is impacts; and (c) maximize the value of electric potential to sell off hydro capacity to investors, power within the overall power system. as EVN has been pursuing for some older plant. 30 Opportunities also exist for independent power strengthen and accelerate these efforts. Load production in small hydro facilities, and, over management programs and energy efficiency time, to explore innovative approaches to blend promotion and investment programs are independent financing sources into project proven means to address capacity constraints packages. which are far less expensive than new capacity. Such efforts also can yield results relatively Other Means to Meet Capacity quickly in some cases, but do require Requirements sophisticated institutional development which has proved challenging in most countries. Vietnam's renewable energy development As discussed with MOI and EVN in late program is growing, and can provide an 2005, the Bank team recommends that the DSM increasing contribution in the future. effort be strengthened through: (a) Development has focused especially on off-grid development of a DSM chapter in the Sixth power supply, in isolated areas, but small hydro Power Development Master Plan, to assess and facilities, in particular, can also provide an establish the role of DSM in helping to meet the important source of renewable energy to the country's future power service needs, (b) the grid. Wind power generation may also provide establishment of a formal DSM Center within a small contribution. EVN, to provide an expanded institutional and Vietnam plans to develop nuclear energy human resource base to mobilize capacity over the long term. implementation of a scaled-up DSM program, Interconnections with neighboring countries (c) development and implementation of a are expected to become increasingly important. plan for a dramatic scale-up in EVN's energy- Discussions with power companies in southern efficient lighting programs, including China during 2005 seek to result in increases in substitution of compact fluorescent lamps for power imports from China to some 400 MW incandescent lamps, and popularization of over the near term. Vietnam is also investing in more efficient fluorescent tube lamps, and (d) hydro facilities in Laos, with arrangements to continued, and yet stronger efforts by MOI to buy back the bulk of the power produced. catalyze a new energy efficiency business Vietnam has undertaken to sell some 200 MW of industry in Vietnam, which can play a power to Cambodia. Especially over the substantial role in achieving energy efficiency medium term, potential exists to substantially gains in the future, especially in the increase the beneficial role of such commercial building sector, but also in interconnections, through development of a industry. In addition, ongoing load surveys Greater Mekong System (GMS), which could and analysis, coupled with expansion in time- involve large-scale transfers between Vietnam, of-use metering, can provide the foundation Thailand, China, Laos and Cambodia. for improved load management efforts based Both MOI and EVN have developed on time-of-use pricing. Using the load demand-side management (DSM) and energy research strategically, time-of-day sensitive efficiency programs in recent years, in part pricing regimes and continued metering through Bank and GEF support. With the investments can provide a framework for severe shortages experienced in 2005, and customers to respond to pricing signals on the continued pressure for more electricity service, costs of service, and adjust consumption the Government and EVN are moving to accordingly. 31 Financing investments joint-venture IPP power plants, and (2) various power investment surcharges were added onto As discussed above, annual power sector retail electricity tariffs, directly raising more investment requirements during 2006-2010 are funds from consumers specifically for new over $3 billion per year. In developing power capacity. strategies to mobilize this level of finance, two Vietnam's case has distinct differences, but basic starting points are clear: the same two basic categories of solution are EVN cannot even come close to meeting this required: (1) IPPs must carry a large portion of requirement from its own resources or the investment requirement (albeit with greater massive borrowings, especially without use of foreign capital than in the case of China, further increases in unit sales revenues. where almost all IPP investors were domestic), EVN has maintained profitability each year and (2) average electricity prices must be since its inception in 1995, and has retained increased, to directly raise more capital from a sound financial position, at least until the consumers for investment in the aggressive shortages of summer 2005. However, the capacity expansion. These are discussed in size of the sector investment requirement is more detail below. no match for the company's borrowing capacity. EVN's Contributions to Investment The Government is neither willing nor able to pick up the bill. Having basically With net profitability, self-financing ratios of 50- eliminated subsidies to the sector, the 60%, debt-service coverage ratios of 3-5, and Government would like to reduce its debt:equity ratios of 1.0-1.4 in the three financial liability exposure in the sector, not increase years of 2002, 2003 and 2004, EVN might seem it. One way or another, directly or well positioned within its current financial indirectly, consumers will need to pay the framework to shoulder most of the coming cost of the power system expansion. The investment program. Unfortunately, nothing task of the Government and power industry could be further from the truth - the company's is to implement the expansion program as revenue stream is no match for the sharp efficiently as possible, to keep the costs as escalation in investment needed now to put reasonable and affordable as possible for capacity on the system for the future. consumers. Financial projections completed by the Bank Chinese state-owned power companies and EVN in early 2005 include major increases faced a similar situation in the latter half of the in investments by EVN compared to 2002-2004, 1980s and into much of the 1990s. Demand was rising to $2.4-2.5 billion during 2007-2010 (see rising so fast that the power industry had Table 6 shown previously). EVN's investments trouble to keep up, and even though the are financed with EVN's own resources plus financial position of the power companies was heavy borrowing, through ODA and export fundamentally sound, the investment needs far credit facilities, and various commercial surpassed their capacity. The problem was sources. Even so, these investment levels are solved in two basic ways: (1) the power-starved conservative, in that they are built around industrial consumers, and the local government earlier demand forecasts, and assumed that entities supporting them, pooled resources over one-half of the new, incremental electricity together to construct large numbers of new, to be generated during 2005-2010 will be 32 purchased from outside of EVN. The forecasts made to follow PetroVietnam with issuance of also assume that some $600 million will be international bonds. Ultimately, however, raised by EVN through sale of existing power borrowing is borrowing, regardless of the system assets to other investors through its source, and EVN will reach its limits very equitization program. The forecasts are also quickly unless revenue is increased sharply (or overly conservative in that the increases in costs there is a major injection of equity, which is caused by the shortages-including power unlikely). It is also critical to consider that if purchases and power generation with high fuel EVN's financial ratios fall below the generally costs in lieu of hydro from plants with basically recognized prudent limits, it will be no operating costs-are not yet included. increasingly expensive, if not impossible, to Even without allowing for certain increases borrow funds from independent sources. in costs, EVN's basic position becomes Forecasts completed by the Bank and EVN untenable very quickly, unless additional in early 2005 concluded that prices would need revenue is obtained. Key ratios depicting to increase by a minimum of some 11% in 2007 investment and borrowing capacity plummet. and 10% in 2010, on average, for EVN to meet The self financing ratio falls to 20% in 2007, and the now conservative investment requirements then steadily to just 5% in 2010. EVN's debt: depicted in the Fifth Power Master Plan. With equity ratio climbs steadily to 2.4 in 2007, and EVN subsequently reporting substantial losses reaches 3.9 by 2010. As shown in Figure 3, debt due to the summer power shortages and the service costs from mounting debt quickly expectation of increases in operating costs absorb EVN's cash for self-financing; even with from efforts to stem further expected increasing sales, cash for investment financing shortages, price increases are now required as falls precipitously in absolute terms. Equally soon as possible, and clearly at higher levels. alarming, the heavy borrowing for investment Following revisions in forecasts to reflect brings debt: equity ratios to levels which would higher growth in demand, higher generating rate the company as clearly not creditworthy in costs due to needs to add more expensive any independent financial assessment. sources of power to meet load, and Although funds from its equitization consequential updates in analysis of EVN's program can defray a small portion of the borrowing capacity, a tariff increase must be borrowing requirement, EVN is gearing up for implemented before the situation worsens. big increases in its borrowing from all sources Preparations and reviews in the Government to meet its portion of the sector's investment for a substantial tariff increase were under way requirement, including increased official in early 2006. Clearly, substantial retail price development assistance (ODA) borrowings, increases will need to be implemented as soon export-credit financing, and expanded use of as possible, as a basic and key measure to local commercial bank finance (if local banks ensure that future power demand is met. can arrange more capital for the long-term loans required). Borrowings from the DAF have been Securing Investment Independent limited to resettlement and local equipment from EVN expenditures, but EVN is seeking to expand DAF borrowings beyond this scope. EVN Clearly, dramatic increases in power sector successfully issued about $13 million in investment from outside EVN will be domestic bonds in 2004, and plans are being required to meet overall sector investment 33 requirements. As depicted in Table 7, EVN ventures, proved to be an effective means to will need to purchase more than one-half of develop power generation quickly and the incremental power required during 2005- reasonably efficiently in China during the late 2010 from independent sources, mainly 1980s and 1990s. However, the Chinese case independent power plants. The most has been marked by large numbers of different important source of independent investment types of public investing entities, with quite is through development of various types of varied sources of capital and often supervised IPPs. In addition, however, independent by Government entities well removed from investment could play a substantial role in the Government entities supervising the distribution sector, if divestiture of EVN's purchasing public power utilities (e.g. local assets in distribution were strategically governments as opposed to central planned to provide conditions under which government). Many public investors shareholders would be interested in investing represented major power users, either directly in distribution system expansion and or indirectly. upgrading. In the case of Vietnam, public entities with Independent Power Producers (IPPs). resources and interest for major power Vietnam is pursuing a full range of IPP generation investments are few, and are, for the arrangements, in its efforts to meet the huge and most part, limited to the state-owned fuel rapid increases in power demand. IPP supply companies or large construction arrangements for new power plants include (a) companies. While IPP development by such BOT or BOO ventures wholly owned by other companies may succeed in putting new plant public-owned Vietnamese entities, (b) joint- on the system quickly, the built-in potential for venture BOT/BOO arrangements, involving insufficient transparency and inefficiency may EVN investment with other parties (local public result in unfairly high costs to consumers, or foreign), and (c) BOT arrangements wholly unless rigorous attention is given by the owned by foreign parties, either public or Government and new ERAV to seek to resolve private. In addition, new joint-stock company potential issues. Key issues include (a) IPPs are being created from EVN's partial potential, actual or perceived unfair divestiture of existing power plants under its competition of power plants involving equitization program. This aggressive IPP PetroVietnam and Vinacomin, as the country's development runs in parallel with the fuel supply companies, with other independent Government's effort to gradually restructure power plants, in terms of fuel supply costs and and unbundle the power industry, as dictated priority, and, potentially, in terms of dispatch in the new Electricity Law. In general, the priority assigned by another public entity which Government seeks to pursue all manner of IPPs, may be under pressure to favor large public as quickly as possible, in its efforts to get new entities; (b) inefficiencies and potentially high plant quickly on the system. costs associated from direct negotiation, as Investment of other domestic public entities opposed to competition, for award of power in new IPPs, either as sole investors or in joint purchase agreements, and (c) expansion of 8 . MOI has requested assistance from the World Bank for these efforts, in part with support from PPIAF. The Bank has planned a substantial assistance program for this in 2006. 34 Notes: 1) An updated picture of post-2005-shortage investments, revenues and costs, and tariff requirements (available when EVN 2005 financial statements are completed and fully reviewed) will show different quantities, but yield the same conclusion, most likely even more strikingly. 2) All scenarios assume VND 9.2 billion is raised by EVN through equitizations during 2005-2009. 3) 2007 and 2010 assumed weighted average tariff increases are 11% in current terms in each year. these companies away from their core business, assets will need at some point in the future to be into areas where they have little prior held by entities not involved in any way in experience. power transmission or distribution, to avoid EVN's involvement in large joint venture conflicts of interest when the power market IPPs may help project development now in eventually begins operation. some cases. However, it must also be New IPPs wholly owned by foreign or recognized that management of these new private firms are expected to be the biggest area of development over the medium term, amounting to several thousands of new megawatts of BOT IPP capacity. The process of competitive bidding and closure of BOT IPP arrangements for the Phu My complex provides a platform of prior experience. Yet, progress in closing new BOT IPP deals with foreign firms has been stymied since the successful arrangements for Phu My were concluded. Prominent issues have included coordination of gas field, pipeline and gas-fueled power plant development, and desires by many in the Government to avoid or more The signing ceremony of development credit for Vietnam strictly constrain the scope of 35 Government guarantees. By the end of 2005, power purchase agreements, with however, the urgency of unblocking these consideration of the planned eventual constraints was clear to the Government, development of a power market, to enable which wishes to proceed aggressively. What is flexibility for integration into the market, required is an agreed framework through where possible. which a series of new IPPs can be brought on The World Bank strongly recommends that line to meet burgeoning demand. MOI seeks competition be used wherever possible in to (a) review approaches to provision of awarding IPP power purchase agreements. guarantees, to provide concrete solutions In country after country, and project after which can be acceptable to investors in the project, prices and terms awarded through competitive international market of today, but competitive bidding have been shown to also provide a pathway for limiting provide lower costs than negotiated deals. As Government exposure in favor of increasing in Vietnam, power utilities, public officials, reliance on Vietnamese corporate assurances and especially potential power providers and credit-worthiness; (b) develop a standard often argue that there is insufficient time to framework of competitive bidding for a full proceed with competitive bidding. Often, new batch of IPP projects, using Phu My 2.2 however, this is due to lack of planning documentation as a foundation, developing and/or lack of proper incentives to minimize several initial transactions using the costs. Vietnam's power consumers will be the framework, and then hopefully rolling out the ones to suffer from higher than justifiable framework for a series of additional costs, unless competitive bidding is strongly transactions, and (c) move to coordination gas favored over negotiated contracting. In cases field/transmission/power generation where negotiated contracts proceed, clear development issues, especially for the O Mon and transparent information should be field, but also for others as well. In addition, it provided to the public on costs and contract also is important to review details in proposed details. If power providers are public entities, detailed and accurate reporting of all aspects of equipment contracting, construction contracting, and power plant operation affecting costs should be openly reported to all relevant government agencies, and made public where possible. If power providers are also fuel suppliers, the ERAV and other government supervising authorities should insist on clear, separate and transparent accounting of fuel supply costs (and how that relates to other fuels supply cost arrangements), as well Phu My 2.2 - one successful example of IPP development in Vietnam as electricity generation costs. 36 Sector restructuring, equitization and Current Plans for Equitization in the Power the development of a power maket Sector With the passage of the new Electricity Law, "Equitization" in the Vietnamese context means Vietnam has embarked on an ambitious long- to transform a wholly state-owned enterprise term program to completely restructure its into a shareholding company. The basic power sector by discarding its current objective, as being pursued in Vietnam, is to vertically-integrated electrical utility system restructure state-owned monopolies such as in favor of a competitive power market. The EVN into shareholding companies, or a series of objective of the reform is both to improve shareholding companies, including additional efficiency through competition in the power investors, to create more market-oriented industry, to minimize costs to consumers, companies which are more separate from and to expand the mobilization of investment government. In a sense, the enterprise reform and managerial resources from outside of the goals of this effort are common to many current, state-operated system. As spelled "corporatization" reforms pursued in other out in the initial 2005 Road Map for the countries. The objective is not "privatization" reform, the full process may span 20 years per se - those holding shares may be public from beginning to end. However, critical investors as well as private ones. In the power strategic choices will need to be made over sector, the equitization program involves the next 1-2 years, and major restructuring splitting various subsidiary entities from EVN, will need to be completed before 2009, to to form new shareholding companies. Current adhere to the plan. government policy requires EVN to maintain at The passage of the Electricity Law represents least 51% of the shares of the new "equitized" a key milestone for Vietnam's power industry, companies. The prevailing model is to offer a built through national consensus, and creating a minority block of shares in a subsidiary legal foundation for development of a company of EVN undergoing equitization to commercial, market-oriented sector (see Box 1). common investors, usually in many small It is important to move steadily on the shares. comprehensive and far-sweeping agenda, or EVN is under strong pressure from the else the benefits will be postponed too far into Government to accelerate equitization as the future. However, the current pressure on quickly as possible. By the summer of 2005, the power industry of increasing demand and pilots had been undertaken in both generation looming further shortages provides an and distribution. Two hydropower plants especially challenging environment for such (Song Hinh with 70 MW and Vinh Son with 66 reforms, and dictates caution in approaching MW) formerly wholly owned by EVN were fast radical restructuring of a system which is equitized into one company. Also in March currently functioning decently. The transition 2005, one provincial-level power distribution to a new structure needs to be undertaken subsidiary of EVN - the Khanh Hoa Company - smoothly to avoid disturbances or inefficiencies was equitized. In late 2005, shares in the Pha in the effort to attract much needed new Lai thermal power plant were offered for sale to investment. The tension between these two the public, including foreign investors. Plans concerns shapes current debate and reform exist to equitize all of the existing power plants planning. of EVN, except for the large, multi-purpose 37 hydro plants, during the next three years. In strength and their efficiency as distribution addition, there are plans to proceed further with operators and retailers) is perceived by equitization in power distribution, through private investors as sound and sustainable. further equitization of Vietnam's 64 provincial- The scale (e.g., market share) and consumer level power distribution subsidiaries. mix of each equitized distribution company The process of equitization is a useful reform needs to be sufficient for strong financial for the country, especially as a step to develop viability and sufficient scale economy. An more commercially-oriented companies. additional issue, given the long duration of However, the process of equitization in the PPAs, is to create conditions that give power sector carries major long-term predictability to distribution revenues (retail consequences in terms of the structure of the tariffs and recovery of generation / bulk industry, which need to be carefully considered purchase costs) to ensure investors that the in the light of needs for mobilizing independent payment chain includes a pass-through of investment and the overall power sector reform PPA costs outside their control. as dictated in the Electricity Law. The size, state The size, structure and operational scope of share, and characteristics of the shareholding newly formed shareholding companies need companies to be formed are especially to be most conducive for the development of important: the power market under the planned Financial goals for equitization should reform. Companies need to be strong include both creation of companies with enough to be active market participants, clear conditions for financial viability over able to compete with others, but should not the short and long term, and maximization wield excessive control over the market. As of the proceeds of divestiture to the state. the sector and market structure changes, In addition, most divestiture programs in distribution companies will be the drivers in the power industry in other countries have attracting new generation investment and sought strategic shareholders which are thus protecting end consumers reliability of strong enough to shoulder new supply. To be able to contract in a market investments in system upgrading and framework, companies must not only be expansion and introduce modern financially viable, but also have substantial management and efficiency financial strength, scale (market share) and improvements. Maximizing divestiture operational and commercial capacity to proceeds, and especially attraction of make long-term contracting credible and quality investors with incentives and generation companies willing to sell at capacity to undertake major investments reasonable prices. A distribution company will require revisiting policies on majority perceived to have financial problems would state ownership. Attraction of active probably face a premium in the prices at investors usually requires sale of majority which generation is willing to sell. share ownership. Given the long-term implications and The goal of reducing government importance for the country, Government guarantees and liabilities in contracting for authorities are undertaking a review of the new generation can best be achieved if the experience of the pilot equitization efforts of payment capability of the equitized EVN to date, and optimal strategies for further distribution companies (the financial proceeding with equitization reform developed, 38 given realities on the ground and experience Vietnam, operation of the competitive market achieved. The purpose of pilot efforts is to for generation will involve: (i) power allow experience to be gained in a limited scope generation companies, selling into the system, and evaluated, to then design a best informed largely through contracts, but also into a spot broader implementation strategy and minimize market; (ii) development of one transmission the risk of failure or undesired outcomes. company, integrating the current four; (iii) Particular attention needs to be given to development of the National Load Dispatch equitization strategies in the power distribution System into the System Operator; (iv) sector. It is clear that many of Vietnam's power assignment of responsibilities to undertake the companies with predominantly rural loads are Single Buyer function, involving contracting in a poor position to maintain financial strength with all bulk suppliers and selling to all bulk if made independent from more profitable load purchasers; and (v) development of a Market centers. For the planned power industry reform Operator to administer and settle the market to succeed, distribution companies must be spot transactions. The Road Map does not call strong and creditworthy to contract successfully for distribution companies to be involved in the with large power generators. market during Phase I, but the plan notes that it will be important for them to increase their 2005 Electricity Market Road Map commercial orientation, acquire trading and contracting know how, and develop as proper The Electricity Law calls for development of the companies. electricity market through implementation of The first step for Phase 1, to commence as three phases - the first phase focusing on soon as possible, is the creation of an internal, competition in generation, the second phase "trial" market within the current EVN system. adding competition for bulk supplies including The internal market will involve current supply to big customers, and the final phase generating plants owned by EVN, or joint-stock involving competition at the retail level. The generating companies where EVN owns the Law leaves the timing, and design of the phased dominant share. Key aspects include the approach to the Government. In July 2005, MOI transparent legal and financial definition of the completed an initial, detailed road map on how power plants as separate entities, definition of to proceed. Figure 4 provides a schematic of the market design and rules, clarification of legal basic plan. and regulatory issues, and gaining experience Phase I in the current Road Map involves among the parties on market operation establishment and operation of a competitive mechanics. Based on this experience, and with market for power supply from existing and new the addition of the institutional reforms power generators, to be purchased in bulk by necessary to allow real market operation, one Single Buyer. The Single Buyer will then competition between these existing power provide power to the distribution companies plants and other generators would commence and large-scale end-users. The generation at the end of Phase 1 market is planned to begin in 2009, with Development of wholesale competition is operation under the Single Buyer model for envisaged in Phase 2 by moving from the about five years. The basic Single Buyer model Single Buyer model to a market with multiple envisaged is similar to the model implemented bulk buyers and sellers. Distribution in China beginning in 2002. As designed in companies and large consumers directly 39 BOX 1: Vietnam's New Electricity Law Vietnam's National Assembly passed the country's center; (vii) the power market's transaction first Electricity Law on December 3, 2004, following a administrator; and (viii) electricity consumers. The drafting process of several years. The Law became rights and obligations of these different parties are effective on July 1, 2005. Its primary scope and key specified. Electricity may be bought and sold through provisions are summarized below. time-bound contracts between purchasers and sellers, Listed tenets of state electricity development policy or through a spot market overseen by the power include: (i) to develop the power sector based on market administrator. The Law outlines the basic optimal development of all sources to satisfy scope, payment framework, and metering increasing demand; (ii) to establish and develop a requirements for the time-bound contracts, but spot power market on the principle of transparency, market arrangements are left open for future scoping. fairness and healthy competition, while maintaining a Electricity tariff policy provisions include State monopoly in power transmission, national load instructions to gradually reduce and eliminate the dispatch, and construction and operation of certain cross-subsidy of residential prices by prices for large-scale power plants which have key socio- (industrial) production, and provision for self- economic, defense and/or security roles; and (iii) to determination of electricity sale and purchase prices in apply advanced technology and science, to improve the power market within the electricity framework and efficiency in energy consumption, to protect the tariff stipulated by the State. The retail electricity tariff environment, and to promote new and renewable shall be approved by the Prime Minister. The new energy resources. Electricity Regulatory Agency will assist the Minister of National power development plans will continue Industry to propose the electricity retail tariff. The to be formulated for each 10-year period, but also pricing framework for the entities in the power market including a notional view towards the next 10 year will be appraised by the Regulatory Agency, and period. MOI will organize the formulation of the approved by the Minister of Industry. Plans, utilizing funds from the central budget, for Licensing for various activities in the sector remain Prime Minister approval. Power investment projects the responsibility of the Ministry of Industry, where the must be included in the Plans, unless special national power system is involved, and the exceptions are granted. responsibility of Provincial People's Committees for Support is provided for electricity savings small-scale activities. The Law includes provisions for measures, including preferential tax treatment for the protection of electricity equipment and works, and relevant products and investment, implementation of for safety. The Law stipulates that State support is to demand-side management programs, provisions be provided for rural power operators where power enabling implementation of efficiency standards for investment and operation is considered financially electrical equipment, endorsement of time-of-use unviable and for rural household connections where pricing, encouragement of power factor standards, subsidies are needed to conform with social policies. and energy auditing provisions. Investment incentives, The Law provides for the establishment of the new preferential pricing and preferential taxes will be Electricity Regulatory Agency, which will assist the provided for development of new and renewable Minister of Industry to undertake his assigned energy resources, regulated by MoF. electricity regulation functions. Key areas of Agency The power market is to be established through focus listed in the Law are to assist the Minister to: (i) sequential development of three levels or phases: (i) establish regulations on the operation of a competitive a competitive power generation market; (ii) a power market and guidelines for implementation; (ii) competitive market in bulk power; and (iii) a review and recommend solutions concerning overall competitive retail power market. The Law does not sector supply and demand; (iii) oversee and approve provide details on these, but assigns responsibility to licenses; (iv) oversee connection and supply the Prime Minister to set the road map for suspension or interruption policies; (v) review and development, and the conditions and timing for implement electricity pricing frameworks and provide proceeding through the phased program. The power retail pricing proposals to the Government; (vi) market will eventually include: (i) power generation supervise power system development in accordance units; (ii) power transmission units; (iii) power with approved plans; (vii) check execution of distribution units; (iv) bulk power selling units; (v) approved electricity tariff policies; and (viii) adjudicate power retailing units; (vi) the national load dispatch complaints and appeals rising in the power market. 40 connected and supplied from the localities, and with a gradual approach. A transmission system will become threshold will define the consumers that will independent players in the market, have the freedom to choose from whom and contracting with generating companies (and how to buy electricity. Depending on results other bulk suppliers or regional imports as and development, the threshold will may be allowed) for bulk power supply. The gradually be reduced until achieving full current plan is to move to this stage around retail competition. 2014, initially with a pilot effort, with limited geographic coverage. Key Implications of the Reform Phase 3 will involve competition for retail customers, who will have access to different With the passage of the Electricity Law, and supply companies. This is tentatively discussions on the Road Map, the planned to commence around 2022, implications of the development of a true beginning with a pilot effort in several power market for the sector as a whole are 41 gradually becoming clear, but perhaps not yet prices; (iii) the degree of success in to all parties. Four points are worthy of maintaining development according to special emphasis: least-cost plans, despite the pressure of EVN will need to be broken up into truly power shortages; (iv) the degree of success separate corporations. The existing model in shifting demand for high-cost peak of EVN as the holding company for all of the periods to lower cost off-peak periods; and state's assets in the power sector cannot be (v) the degree of success in realizing retained if true competition is to be achieved efficiency gains in the power network and among existing and new generators, and dispatch systems, being retained for now later, in wholesale and retail supply. The under EVN. market requires independence among Current and prospective power shortages players, to avoid perceived conflicts of provide additional challenges for the interest or potential collusion. If reform. Introduction of competition during commercial, independent generators are times of shortage will tend to drive up asked to compete with state-owned prices, which may necessitate specific generators, they must be convinced that measures to minimize excessive rent- those generators maintain no special seeking behavior. With the current plan to interests with the buyers or they will not focus on an internal "trial" market in the trust the system. near-term, this may not be a major problem Reductions in costs to consumers should when it comes to introduction of the true not be expected soon. International market. In addition, if properly designed, experience shows that the main gains of the power of consumer choice can be an competition will only be realized when efficient means to allocate shortage and/or large consumers and distribution to overcome it. In China in the late 1980s companies are able to contract directly with and early 1990s, the willingness of large power generators in a competitive consumers to pay higher "second-track" environment. The big benefits from prices or make other types of contributions competition come from the power of for new power plant investments, in consumer choice. Although it would be exchange for guaranteed power in time of useful to consider introduction of shortage, was the most important single competition for bulk power supply to factor in overcoming national power distribution companies and large shortages. consumers earlier than planned in the Road Other types of problems may arise if assets Map (e.g. 2014), large amounts of careful which are uneconomic over the long-term are preparation work need to be completed developed as state-owned assets in the near- prior to introducing such a market. For the term to meet urgent needs for power in time of near-term, therefore, costs to consumers can shortage. When the shortage is overcome, be expected to increase modestly, and the headaches will arise as these new assets will most important factors influencing how have trouble competing in the market. much the cost of electricity supply will go Increased predictability and flexibility in up are likely to be (i) the degree of success retail electricity pricing will need to be in using competitive bidding for IPP introduced over time. With the contracts, (ii) the extent of increases in fuel introduction of a true competitive market 42 for generation, and even more so with the and issues concerning the structure of the development of competition for bulk power industry and roles of the different actors supplies, flexibility must be built into the are major and difficult issues which must be system for setting the retail tariff. Where clarified so that key decisions can be made. prices for power supply coming into the Success may often also require large-scale and system rise and fall following market effective communication program to help forces, but end-user prices are inflexibly consumers and the general public to fixed, the utilities in the middle are in a understand the objectives and process of the position where they may be either reform. squeezed into bankruptcy or gain undue ERAV must be developed and its profits. (International experience has relationships with all other actors clarified: if examples of both.) the credibility of the Regulator is not well established, it will be difficult for the reform to Some Suggestions and Key Strategic proceed effectively. Trying to cut corners Choices during the preparation phase is dangerous, and rarely beneficial in the long run. However, Serious consideration should be given to eventually the point must come when a major allowing contracting between generators and shift has to be made between existing command large consumers and/or distribution companies and control approaches and reliance on the earlier in the reform phasing than currently market-ultimately the choice must be made planned. The basic goal of the reform is to clearly for one or the other. Once preparation is improve efficiency through market competition, in place, and the country is ready to proceed and the driver of market competition is with a power market, the Bank team suggests consumer choice. The main benefits of the that the reform then be rolled out quickly, reform can be expected only when large including allowances for direct contracting consumers and distribution companies can between producers and users. contract directly with power producers. In Several key choices which are important to addition, there are shortcomings from use of a review and debate in the near term, involving Single Buyer system for a substantial period of strategic consequences, include: time alone. As shown in China's recent How should Vietnam's power distribution sector experience, vested interests and pricing be organized in the future? With the program imbalances may be created in a Single Buyer to equitize companies in the country's system which then become barriers to further distribution sector beginning, it is now reform. Introduction of at least some direct critical to consider the best future large user-generator contracts during Phase I organization of Vietnam's distribution could help ensure that the reform is kept on sector for the medium and long term. This track, and that the ultimate, main benefits can includes the future roles of the PCs, the be kept in sight. provincial power service companies, and The preparatory phase for the reform, rural distribution companies. For the involving all of the activities currently included reform to succeed, including attraction of in the Road Map, is essential for success, and generation investment with minimal will require time. Implementation details must Government guarantees, strong, financially be worked out in advance of implementation, viable distribution companies must be in 43 place. This is an important topic to begin to It is essential to balance both the need to address seriously in 2006. attract private investment for new How should the state's assets in the sector be generation capacity, and the need to move organized? The main state-owned entities steadily and smoothly towards the power needed for operation of the competitive market. IPP investors must have sufficient market for generation include (a) entities medium term security of cash flow in order charged with managing state assets in to obtain project financing. New PPAs generation, (b) the transmission company, must accommodate these concerns. In (c) the System Operator, (d) the Market addition, it is important to protect the Administrator, (e) the (temporary) Single security of Vietnam's power supply and to Buyer, and (f) the distribution companies. ensure adequate reserve margins in a These may be structured and grouped in a system that is partly based on hydro plant variety of ways. However, in the Bank and subject to risk of drought. Lessons team's opinion, entities charged with from international experience show that it managing the state's assets in generation is possible to mitigate the concerns of IPP must be completely divorced from the other investors and financiers, and ensure entities, to ensure a level playing field. The sufficient supply security, through careful simplest alternative to visualize is to power market design. For example, organize the generation assets into a emphasis may be given initially to covering number of state-owned Generating load primarily with contracts, and limiting Companies. As noted in the 2006 Road spot trading to a small share of the market. Map, a good general principle is to ensure Not only must these choices, and others, be that no single company holds more than carefully studied, but it also is clear that 25% of total generation assets, to enable different stakeholders will have different views competition. Concerning the other entities, on the best ways to manage the consequences of a number of them may be merged together, the choices. Care must be taken to ensure that but different configurations have different the genuine interests of the consumers - for advantages and disadvantages over the whom reforms are planned - are not lost to the longer term, and should be studied vested interests of powerful stakeholders. carefully, and decided prior to equitization. How will IPP projects and contracts be procured Economic regulation of the power and managed over the medium term? Securing sector thousands of megawatts of new IPP capacity, with outside capital, is of The Electricity Law provides for the paramount importance to the sector, and establishment of ERAV which will assist the implementation of the reform in the near Minister of Industry to discharge all of the term must facilitate this. It is important to regulatory functions necessary for the make it very clear exactly who will maintain functioning of the electricity industry and responsibility for contracting with IPPs, and market. A working group developed the basic how these contracts will be managed, both organizational setup, staffing plans, and work now and in the future - uncertainty about scope during the first half of 2005, and ERAV future changes to undetermined entities is was subsequently established by a Decision of not helpful. the Prime Minister later in 2005. 44 As described in Box 1, the scope of work provided through fees charged for issuing assigned by the Law to ERAV includes the licenses and in the dispatch of its regulatory standard tasks expected of such a regulatory functions. It would be best if relevant agency. However, ERAV is not independent licenses and especially regulatory decisions from the Government, in that the Minister of could be issued under the letterhead of Industry presides over it. In addition, ERAV, with an indication of ministerial approval of retail tariffs remains the approval affixed somewhere in the prerogative of the Prime Minister. With these document, to comply with legal caveats, which many argue are advisable requirements. The necessary relationships under current conditions in Vietnam, ERAV between ERAV and various MOI can and should become a key player in the departments should also be developed as power sector henceforward, and is well arms-length relationships. positioned to provide the objective, technically Definition and publication of a clear work robust guidance and oversight which will be program. To signal the role of ERAV in the required. Two important factors which will coming months, and to set the priorities for define the degree of success of the new agency regulatory attention, ERAV should publish include (i) its ability to establish itself as an a work program. The program should objective institution, charged with identify the tasks, and particularly the implementation of the country's laws, with a licenses and regulations to be issued, and an mandate recognized by all of the relevant associated timetable for perhaps the next 18 parties, and operating as an agency separate months. Such a work program could be from MOI's regular business and departments, regularly updated. and (ii) establishment of clear technical Staff training and development is a key competence in addressing the complex issues and high priority task. With experience in surrounding regulation of the sector. Keeping Vietnam limited, ERAV is unlikely to be able this in mind, the following are to recruit staff with operational regulatory recommendations for ERAV as it moves into experience. Training is therefore especially its first year of operation: important, and needs to be well planned ERAV should be established as a distinct from the outside. Technical excellence is an identity separate from the executive essential part of establishing a solid departments of MOI. To discharge its reputation with players in the industry. functions effectively, ERAV must be Clear arrangements for information recognized by the various market players as collection and monitoring need to be the sole agency responsible for the agreed with power industry participants. Government's regulatory oversight of the Information from sector entities is a basic industry and market. If ERAV develops requirement for the work of a regulator. For without a distinct identity and strong ERAV to implement the tasks required of it degree of independence, market players by the Law and the Prime Minister's will consider MOI as the regulatory agency, Decision, large amounts of timely and and ERAV as just one more MOI accurate data must be sent regularly, in department. It is therefore recommended appropriate formats, by the various power that ERAV's funding should become sector entities in the country. ERAV needs separate from that of MOI, and is best to develop the basic requirements, templates 45 and timetables, and these need to be between coal and gas-fired generation coordinated with the entities for effective plant, especially using fuel price implementation. Clear consequences for assumptions reflecting true costs to the lack of provision of timely, complete, country, (b) analysis on the implications of accurate and not misleading information slower demand growth for power plant must also be established. construction scheduling, and (c) analysis of Powers of enforcement need to be defined. the role of DSM . This work was already Current legal provisions are not clear as to under way in late 2005. how enforcement of regulatory decisions ii) Average retail power price levels must be will be ensured. This issue needs to be increased to cover increased costs addressed as a matter of urgency, or ERAV resulting from generation capacity may not be taken seriously. Requirements shortages and hydropower production include needs for ERAV to be legally shortfalls, and, especially, needs to authorized to order operators in the sector to expand revenues for power sector submit such information necessary for the investment. Increases would best be execution of its duties. concentrated especially on the residential Mechanisms for dispute resolution need to consumption categories. be defined. Adjudication of disputes within iii) A standard competitive bidding the power sector is one of the functions framework for a full new batch of BOT IPP assigned to ERAV in the Law. Provisions projects needs to be developed, and need to be made for further action in the applied to several pilot transactions. event that ERAV is not able to solve some Following analysis and consensus disputes to the satisfaction of the both building, the framework should include an parties, and regarding appeals of ERAV acceptable approach to provision of decisions. government guarantees, integration of IPPs into the future power market, and Sumary of recommendations PPA design. The Bank team attaches high priority to this work, beginning in the first Recommendations to the Government and half of 2006. EVN for action are included in the iv) Active efforts need to be made to discussions above, and summarized briefly coordinate the actors and interests involved below for convenience. Paragraph in new gas field-pipeline-power plant references refer back to discussion in the development, including for O Mon, to main text. Recommendations pertaining to allow the development of new gas-based action during 2006 and early 2007 are listed power generation facilities to proceed as under "short term recommendations." quickly as possible. The Government should also closely monitor thermal power Short-term Recommendations projects owned by fuel suppliers, insisting on separate fuel and power sales i) As Vietnam's comprehensive Sixth Power accounting. Development Master Plan is finalized, v) Government authorities should review the analysis should include (a) analysis experience of EVN's pilot equitization relevant to the sensitivity of the mix efforts so far, and develop optimal 46 strategies for further proceeding with the details of the restructuring of EVN's equitization in the power industry, various holdings, to best accommodate the especially in the distribution sector. This long-term interests of the power industry should take into consideration needs to and its reform. The development of develop financially strong and suitable, synchronized power industry creditworthy new shareholding companies, structural reforms, implementation details, and to provide the best building blocks for and clear understandings of procedures the development of the future power and expectations between participants is market. essential during the preparatory phase, vi) As ERAV is beginning its first year of which requires suitable time and strong operation, major efforts must be effort. EVN and ERAV coordination and undertaken to develop staff, operational cooperation in Phase 1 is important, procedures, the short and medium-term including in the establishment and work program, clarify the relationships operation of the trial market. between ERAV and other entities, and ii) Vietnam's equitization program in the develop and agree on reporting and power industry should be developed in information systems. International harmony with plans for power sector assistance is being organized. reform and development of the power vii) Efforts need to be launched to review and market. Consideration should also be given improve the implementation of to how to maximize returns to the state hydroelectric power projects, especially from divestiture and attract investors concerning resettlement and environmental capable of shouldering major new management. International assistance is investments. being organized. iii) Once a suitable framework for competitive viii)Vietnam's DSM efforts need to be greatly bidding for BOT IPPs is developed, it is expanded, as a least-cost means to provide critical for this framework to be rolled out additional power services through greater for a full series of new projects over the efficiency, including a major effort to medium term. include operationally-oriented institutional iv) Once Vietnam's Sixth Power Development capacity within EVN's system. Master Plan is finalized, it remains important for the Government to re-review Longer Term Recommendations relative costs and priorities, especially between coal and gas-based plant, prior to i) Vietnam's plans to unbundle the power sanctioning major new generation industry and develop a power market are a developments, to ensure least-cost most worthwhile endeavor, aimed at development from the country's improving efficiency through competition. perspective. Periodic reviews also must In reference to the current Road Map, direct consider assessment of existing PPA contracting between generators and large commitments, and their impact on the consumers and/or distribution companies system and relationship with actual, rather might best be considered earlier in the than projected, evolving demand, to ensure reform. Increased advanced planning and that new commitments are most consensus building are needed, concerning appropriate. It also would be worthwhile 47 to develop more sophisticated modeling required, an attractive framework for options appropriate for hydropower international companies to continue projects. exploration and firming up reserves. v) Electricity retail tariffs need to be reviewed vii) Strong Government support is required to regularly by the Government, and adjusted ensure that ERAV can develop its role and periodically to ensure not only power credibility in the market, with a position sector financial viability, but also that distinct from the general MOI, with strong sufficient revenue can be mobilized for new and capable staffing, with clear authority, investment. In addition, the Government and with sufficient budgetary resources needs to consider greater flexibility in through enforceable funding mechanisms. setting retail tariffs, allowing tariffs to vary viii)Options exist for increasing beneficial power in different localities based on the cost of exchanges between Vietnam and supply, and, eventually, following market neighboring countries through development forces, as required under a proper power of the Greater Mekong Subregion (GMS), market system, while also allowing for which are in Vietnam's interest and deserve socially sensitive power pricing where strategic attention and support. justified for low income households. ix) The Government needs to undertake a vi) Gas-based power generation careful review of domestic coal pricing development will require continued options, and, in lieu of a reform of the coordination between the various coal industry to allow development of industrial actors and the Government to competitive market between domestic meet the needs of the country. In coal suppliers, develop a clear set of coal addition, it is critical for Vietnam to pricing regulations which are transparent maintain, through revisions where and meet the country's interests. 48 Annex 1 Vietnam: Retail Electricity Tariff (effective from September 2002, excluding VAT) VND/kWh a/ Main Categories b/ Peak Load Off Peak Bid Average Industry > 110 kV 1325 425 785 22 kV-110 kV 1370 445 815 6 kV-22 kV 1430 480 860 < 6 kV 1480 505 895 Commercial > 6 kV 2190 790 1350 < 6 kV 2300 815 1410 Agriculture > 6 kV 950 240 600 < 6 kV 1000 250 630 Urban Residential First 100 kWh/month 550 Next 50 kWh/month 900 Next 50 kWh/month 1210 Next 100 kWh/month 1340 Over 301 kWh/month 1400 Rural, excluding Agriculture Direct residential connection 390 Other direct connection 730 Collective meter for residences 570-580 Collective meter for other 770 a/ June 2005 exchange rate = VND15,856 / US$1.00. b/ Addition categories include urban water & sewage, by voltage and time of day; administration, by voltage; and foreign establishments by type, voltage and time of day. Source: September 20, 2002 Government Decree. 49