Renewables have the potential to become the lowest-cost option for Vietnam to meet its energy needs. Antonio Castellano, partner at global management consultants McKinsey&Company, told VIR how the country could meet the growing demand at lost cost on the sidelines of last week’s Vietnam Power Development Summit 2019.

The future for renewables in Asia looks quite bright. Developing countries lead the way in terms of adding to renewable energy capacity. What are the current opportunities for Vietnam to attract investment in this sector?

The future could be quite bright, but I think at the moment it is lagging behind the market in Asia. 

That is why we released a whitepaper exploring an alternative pathway for Vietnam’s energy future, that evaluates how Vietnam could meet the growing energy demand at the lowest cost, with the best opportunities for capital formation, the least impact on public budgets, and with the least risk.

So for opportunities in Vietnam to attract foreign direct investment (FDI) in renewables, there is growing demand and need for huge capacity, and the power sector will become a major area to attract FDI in Vietnam. 

Meanwhile, financiers are interested in this sector, but we require transparency and feasibility. Vietnam’s current power plan requires investment of roughly $150 billion by 2030 in additional generation assets and grid infrastructure.

Our reviews of data and interviews with industry experts suggest that, even without factoring in externals, renewables have become the cheapest form of new power generation in the country on a levelised cost of electricity (LCOE). 

The trend is fuelled by Vietnam’s remarkable natural endowments of solar and wind power combined with a significant drop in capital costs of solar and wind over the past five years (75 per cent decrease in solar costs and a 30 per cent fall in the cost of wind), which has made the LCOE for new renewables cheaper than traditional thermal generation.

Turning the economy green can boost growth, but what are the challenges ahead in order to do this, and what lessons can Vietnam learn?

Achieving a green economy means fostering economic growth and development while ensuring that natural assets continue to provide the resources and environmental services on which our well-being relies.

There is no silver bullet that will solve Vietnam’s energy challenges. The ability to meet rapidly growing demand while keeping costs low will depend on the creation of financial and regulatory infrastructure that makes the market attractive to capable developers.

In addition, planners should explore demand-side reduction and load-control measures, imports through interconnection with China and Laos, and opportunities to make natural gas a more important part of the energy mix.

To make a market for renewables that is attractive enough to encourage developers to build projects to meet electricity needs, the government could consider steps including power purchase agreements (PPAs), transparency, upgrading transmissions, and a mix power mast plan.

As current PPAs come as a “take it or leave it” option, it pushes more risks for developers. PPA is a key factor in opening the door to capital investment at the level needed to build a mature renewables industry in Vietnam.

Building a cheaper, cleaner and more secure energy future for Vietnam will not happen overnight. Other markets further along in development of renewable power greatly benefitted from the support of the government. 

Without exception, governments played a critical role in jump-starting the market, generally through legislation or a public commitment. In addition, governments often help to accelerate investment through strong incentives and a well-planned, transparent project-approval process.

How does Industry 4.0 help to create value for renewable energy?

The technology is opening a number of opportunities. Renewables, distributed generation, and smart grids demand new capabilities and are triggering new business models and regulatory frameworks. Data collection and exchange are growing exponentially, creating digital threats but also valuable opportunities.

The utility of the future will be a fully digital system. This means today’s utilities face a digital transformation of their business. This can begin with quick moves to improve efficiency and expand customer base.

Alongside this, startups are pushing the boundaries of innovation across all elements of Industry 4.0, therefore it is important how to incorporate work with them to unlock renewable energy potential.

VIR