Vietnam Has a Long Way to Go on Decarbonization

Late last year, Vietnam became one of the few countries to sign a Just Energy Transition Partnership (JETP) with the International Partners Group (IPG), made up of the European Union, the United Kingdom, the United States, Japan, Germany, France, Italy, Canada, Denmark, and Norway. The multi-billion dollar deal is an essential step towards the Communist Party of Vietnam (CPV) goal of achieving net-zero carbon emissions by 2050. Still, despite initiatives like JETP, Vietnam needs significantly more investment to reach this ambitious goal. which also requires reforms to its regulatory process.

Carbon emissions disproportionately affect Vietnam. The World Bank has classified It is one of the five countries most likely to be affected by climate change, as rising sea levels and extreme heat put areas along its 3,200-kilometre coastline at risk. We are already seeing the impact on Vietnam’s economy: according to the World Bank initial calculationsclimate change-related costs reduced Vietnam’s GDP by 3.2 percent in 2020. Projecting to 2050, it predicts a reduction of 12 to 14.5 percent of its GDP.

Despite these risks, Vietnam has markedly increased its carbon emissions. In 1991, Vietnam’s carbon emission in tons was 21.38 million; in 2019, this number leap to 341 million.

In large part, this increase is due to the country’s increasing reliance on coal. coal currently constitutes about half of Vietnam’s energy portfolio, with hydropower comprising 30 percent, followed by natural gas (14 percent) and non-hydro renewables (5 percent). Overall, Vietnam used 53.53 million tons of coal in 2021, an increase from 38.77 million tons in 2015.

Vietnam’s dependence on coal is a supply and demand problem resulting from its phenomenal economic growth and the increased energy consumption required to sustain that growth. Vietnam’s economy reached a turning point when the CPV embarked on market-oriented economic reforms (doi moi) in 1986. The results were amazing; in 1985, the in general Vietnam’s GDP was $14.09 billion; by 2021, it increased to $366.14 billion. vietnam has emerged of the COVID-19 pandemic with continued strong economic growth and notable investments in its manufacturing sector. Consequently, the Ministry of Industry and Commerce foretold in 2018 that energy demand would increase annually by 8 percent until 2030.

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JETP is essential if Vietnam wants to increase renewable energy sources to meet this demand. At least initially, it played a role in Vietnam’s reduced coal use projections. When setting its 2030 energy targets at the most recent G-7 meeting, the government’s plan increased its use of coal from its current 24 gigawatts (GW) of installed capacity to 36 GW in 2030 and plans to build 11 new coal-fired power plants. However, after IPG announced JETP, Vietnam cut its projected peak coal use to 30 GW in 2030 and said it would get 47 percent of its power from renewable sources by the same year.

However, Vietnam requires more investment if it wants to achieve net-zero carbon emissions within the time frame set by the government. In 2022, the consulting group McKinsey launched a report which estimated that Vietnam would require an annual investment of $30 billion to meet the goal of net zero emissions by 2050, an amount equivalent to about 10 percent of its current GDP. The current financing arrives overwhelmingly from domestic sources: 58 percent of renewable energy projects are developed by Vietnamese companies, and only 12 percent were developed without a Vietnamese partner.

This long-term hurdle adds to unpredictable short-term impacts affecting Vietnam’s ability to invest in renewable energy. Take, for example, the recent credit crunch, which threatened the country’s credit-dependent renewable industry, or the Russian invasion of Ukraine, which strongly influenced energy markets and prices. Furthermore, despite its relative success in withstanding the consequences of the global pandemic, the CPV has had to divert resources from renewable investment.

To reach net zero by 2050, the CPV must attract foreign investment, which requires reforms to its cumbersome regulatory structure. for example, your power purchase agreement puts most of the risk on those developing renewable energy projects. He forbids these developers to provide energy directly to the companies while also lacking a “take or pay” obligation, a government guarantee, or a procedural remedy. As positive data, the Ministry of Industry and Commerce recently Announced a Direct Power Purchase Agreement pilot program that will allow companies to purchase a limited amount of electricity directly from developers.

Equally problematic is the fact that the Vietnamese government does not do enough to encourage initial investment. In 2018, the government introduced a successful FIT program for projects built before November 2021 (later extended to 2023). The success of the program was evident in the tens of billions of dollars of investment it encouraged. Since its expiration, the Ministry has proposed a transition to an auction-based process that Mayer Brown report predicts the internal rate of return for developers will fall by 10 to 11 percent.

In general, Vietnam has taken important steps to reduce its dependence on fossil fuels, including joining JETP. Still, Vietnam needs significant foreign funding to meet these ambitious goals, which requires regulatory reforms to encourage foreign investment.

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