I. Renewable Energy in Vietnam – an overview
Vietnam is considered as one of the countries most affected by climate change, with erosion occurring in low-lying areas and saltwater intrusion affecting vast swarths of the Mekong Delta (the country’s breadbasket). As such, its energy policies reflect an acute awareness of its predicament and future needs. On this basis, Vietnam’s Power Development Plan 8 (“PDP 8”) is the critical framework shaping Vietnam’s energy future. Emphasis is placed with renewable energy front and center as a means to enhance the country’s energy security, sustainability, and ensuring continued economic growth.
The main thrust of PDP 8 is that it provides a clear investment goal and framework that guides both the public and private sector stakeholders in its effort to accelerate the development of renewable energy.
Key PDP 8 initiatives for renewable energy:
- PDP 8 states explicitly that Vietnam will require approximately USD134 billion of funding by 2030 for new power plants and grid infrastructure. This will require significant investments whether through public private partnerships, or from domestic or foreign sources.
- Under PDP 8 the goal is to have renewable energy comprising 50% of Vietnam’s energy mix by 2050, while at the same time phasing out all coal-fired plants. Renewable energy sources for electricity generation are intended to make up 30.9% - 39.2% by 2030, aiming to reach 47%, as per Vietnam’s commitment in the Just Energy Transition Partnership Programme (JETP).
- By 2030 there should be two focused zones specific for renewable energy related business, renewable energy services and renewable energy equipment manufacturing.
- Solar and wind power, onshore and offshore, continue to be encouraged and accelerated.
- Biomass energy, especially from wood pellets to drive the development of forest plantation and wood processing industries in Vietnam, is prioritized with the aim to reach 2.27 GW of power generation by 2030.
The Ministry of Industry and Trade submitted the implementation plan for PDP 8 to the Prime Minister on 12 July 2023 and is currently under review.
While it took many years for PDP 8 to be approved, it came at the appropriate time when the global trend is moving towards sustainable and eco-conscious energy generation. Vietnam, like many other countries, is facing challenges of air pollution, climate change, and environmental degradation. Without doubt, 2023 has been the hottest year on record with wildfires raging in many parts of the world. The expectation is that subsequent years will break new heat records (with more climate-related destruction to follow, including flooding). Renewable energy sources, such as solar, wind, hydropower, and biomass, produce little to no greenhouse gas emissions and have a significantly lower environmental footprint compared to fossil fuels.
By aligning with the global movement, Vietnam can fulfill its international commitments, such as COP26, enhance its green status on the international stage, and attract investments and partnerships from environmentally conscious investors and stakeholders. ESG remains the prevailing theme and major consideration for investors and will likely be so for the long term. The “race to the bottom” business model of years past no long hold cache with sophisticated investors who hold a strategic and long-term vision, understanding that supporting the host country and its communities to develop in a healthy and sustainable way will yield greater dividends (financial or otherwise) long term.
Moreover, energy security and economic growth are overarching considerations for the Vietnamese Government, which aims to make Vietnam the preferred investment destination as the United States and the European Union continue to “de-couple” and “de-risk” from China. While foreign direct investment will bring financial and social-economic benefits, it will prove a challenge to Vietnam’s overstretched and overburdened energy infrastructure. The prolong drought in the first half of 2023 meant that many hydropower plants in Northern Vietnam were not able to operate, resulting in blackouts and rolling brownouts. Many industrial parks in the North lost power with manufacturing tenants unable to operate. These incidents, while rare in Vietnam, demonstrate that the country will need to develop a more resilient energy mix and upgrade its energy infrastructure to meet future needs and challenges.
Indeed, for every 1% of GDP growth, Vietnam’s energy production must increase by 1.3%. This means that if Vietnam is targeting between 7 or 8% GDP growth per year going forward, its energy production must increase by a corresponding 9 to 10%, respectively.
II. New development trends
While solar and wind remain mainstays of the renewable energy movement, other innovative renewable energy sources are attracting both investor attention and government support.
- Biomass energy from wood pellets
Biomass energy is certainly not a new type of renewable energy, nonetheless it remains controversial whether biomass energy from wood pellets is considered green energy. However, in Vietnam we have witnessed thriving demand for wood pellets for biomass power plants and the surrounding ASPAC markets in recent years, especially in the context of Vietnam’s commitments to sustainable development and expanding the use of green energy.
(i) Increase in wood pellets export
While there is certainly growth in the domestic market, the export number for wood pellets is more impressive. 2022 witnessed a healthy increase in the export of wood pellets totaling 4.88 trillion metric tons with a total value reaching close to USD800 million, 96% of which went to South Korea and Japan as reported by Forest Trends and VIFOREST. While the global economy faces headwinds during the first half of 2023 (which will likely persist through the end of the year), the demand for wooden pellets remains robust, attracting investors from the region, especially Japan.
(ii) Investors are considering forest plantation investment to secure supply of wood pellets
Beside the capital flow going into building wooden pellets factories to meet export demand, we have also observed a more prudent approach by investors. In order to secure the supply source and quality of raw materials for their biomass power plants, investors are investing in forest plantations producing wooden pellets. Short-life cycle trees like acacia are preferred while forest plantation areas are scattered throughout the nation from Kien Giang, Ca Mau in the Mekong Delta to Binh Dinh, Quang Ngai in the Central and Yen Bai, Tuyen Quang in the North of Vietnam. A small part of the raw materials harvested from these forest plantations are supplied to the local and foreign owned biomass power plants in Vietnam, while most are exported to the home country of the investors for their own biomass power plants.
(a) Opportunities and challenges
One of the major challenges when investing in forest plantation is that the majority of forest in Vietnam is under the management of State-owned enterprises (SOEs). The forests are also exploited by individuals and household businesses that are not well equipped to develop and harvest it to meet international sustainability standards for a long-term supply of certified quality raw materials. This was commented by the Ministry of Agriculture and Rural Development of Vietnam (MARD) in a recent meeting with Japanese investors. In order to ensure that the forest is sustainably maintained and harvested, a cooperation structure between government agencies and foreign investors should be discussed. This will open a channel for foreign investors to come in with their technologies and ESG infrastructure for a more efficient collaboration.
A cooperation structure will also bring the best incentive structure for both parties, government and foreign investors, and would need to be carefully crafted as the investment term could last decades. This is important, especially when involving land use rights in forest plantation projects. The procedures are often complicated while the legal framework is not always clear, particularly in dealings with foreign investment in forest plantation which has not been dealt with often, if at all, in the past.
(b) Government initiatives
Acknowledging this new trend and the difficulties facing it, the Vietnamese Government is taking proactive steps to encourage foreign investors and facilitate investments in both forest plantation and wooden pellets for the generation of biomass energy. This is part of the initiative under PDP 8, specifically:
- National Zoning Plan on sustainable forestry development with a vision to 2030 will be issued soon;
- Restructuring plan of the management and exploitation of forest by SOE aiming to enhance efficiency, which could open up private sector investment, is currently being drafted; and
- Forest granted with certificates from forest certification systems, such as American Tree Farm System (ATFS), the Forest Stewardship Council (FSC), the Sustainable Forestry Initiative (SFI) are strongly encouraged and supported.
2. A new energy source – green ammonia
Green ammonia and green hydrogen are arguably the most viable sustainable alternatives to fossil fuels and have a critical role to play in decarbonizing the economy. Vietnam is one of the three signatory countries to the JETP and has committed to achieve net zero transition by 2050.
Green ammonia is a key lynchpin to the decarbonization roadmap envisioned by the Government. PDP 8 envisages gradual cofiring of mature coal-fired assets with green ammonia and biomass for reducing the carbon footprint. As per the current net zero transition trajectory, the entire coal fired fleet of 26-32 GW is expected to operate completely on biomass and/or green ammonia by 2050.
Vietnam is blessed with excellent natural resources and a long coastline. There is also potential of generating over 600 GW though offshore wind with the combined potential of onshore wind and solar estimated to be over 1100 GW. PDP 8 envisages harnessing a part of this massive renewable energy potential to produce green ammonia. In addition to catering to domestic demand, green ammonia can also be exported. Given Vietnam’s unique geographical location and proximity to key demand centers such as Singapore, Japan, and South Korea, Vietnam has potential to serve as an energy hub catering to the energy needs of the key regional economies.
Infrastructure projects including green ammonia by their very nature are capital intensive. Given limited state resources, private participation shall be crucial in unlocking the full potential of the sector. Regulatory guidance and clear policy framework will be essential in securing investor interest in the sector. A balanced market design facilitating domestic offtake is crucial in ensuring domestic energy security and enabling private sector participation.
Vietnam has all the right ingredients to become a leader in sustainable fuel generation in the region. With the right strategy, green ammonia will not only assist Vietnam in achieving its own net zero objectives but will also help other regional economies in decarbonizing their energy value chain, thus making world a better and a greener place to live.
III. Concluding thoughts
PDP 8 plays a leading role in the effort to make Vietnam an attractive investment destination. It strives to enhance Vietnam’s energy security with a greater emphasis on sustainable economic growth.
Under the roadmap provided under PDP 8, plus the abundance of (untapped) sources for renewable energy generation, Vietnam continues its vanguard position as an important energy supplier for the ever-increasing demands for clean and renewable energy. While solar and wind energy maintain their dominance, new innovative technologies, such as green ammonia, have the ability to generate economically viable energy sources, thereby diversifying our energy mix and minimizing our reliance on traditional and polluting fossil fuels.
If you have any questions or require any additional information , please contact Tran Duy Binh, or Ngo Nguyen Phuong Dung, Mishra Kumar Sameer or the usual KPMG contact that you deal with at KPMG Law in Vietnam.
This alert is for general information only and is not a substitute for legal advice.